Saturday July 28, 2012
Putting the steel in Megasteel
By HANIM ADNAN
LION Group is finally seeing light at the end of the tunnel in efforts to turn around its loss-making unit - hot-rolled coils (HRC) producer Megasteel Sdn Bhd, which was badly affected by the influx of cheaper imported products into the country
According to its chairman and chief executive officer Tan Sri William Cheng, the group is confident that the recommendations by the Boston Consulting Group (BCG), based on its comprehensive domestic steel sector report, will enable the Government to impose tighter measures as well as plug in the loopholes and leakages in the strategic RM40bil steel sector.
“We are now preparing our feedback on the BCG report to the Government and fine-tuning it with some additional measures to ensure the long-term competitiveness of the steel business,” he adds.
The BCG was hired by the International Trade and Industry (MITI) Ministry last February to undertake an indepth study on the domestic steel sector, including the plight of Megasteel, and the study was completed in late June.
For the financial year ended June 30, 2011, Megasteel recorded a net loss of RM223.7mil on the back of RM2.8bil in revenue.
Also, during the period under review, Megasteel had short-term debt commitments of RM2.99bil while its long-term borrowings stood at RM457.5mil.
Cheng says Megasteel hopes to return to profitability when it reaches the ideal production capacity of 200,000 tonnes of HRC per month or 2.4 million tonnes per year compared with 80,000 tonnes per month currently.
“It will definitely be a key test to produce this amount, which we used to produce during 2007-2008,” he adds.
However, he stresses that for this to materialise, the Government will need to further tighten the duty exemption on imported steel goods and enforce stricter duty exemption processes.
Hopefully by then, there will be a fair playing field without the current rampant dumping of imported steel products into the country.
Of Megasteel's HRC capacity at 3.2 million tonnes annually, the current utilisation is 1.2 million tonnes or less than 40% capacity.
On the corporate side, Cheng says Megasteel has also hired a merchant bank to look into its restructuring plan.
“We have several foreign investors from South Korea, China and Taiwan keen on taking up some stakes in Megasteel but then again, these investors wanted to see a clearer steel policy by the Government before partnering with Megasteel,” explains Cheng.
Generally, the foreign investors are mostly impressed with Megasteel as well as the local steel sector value chain from the upstream iron and steel making to the downstream activities in rolling mills, production of long and flat steel products.
Cheng also elaborates that the rationale to sell Megasteel's stake to foreign parties was to benefit from their know-how and transfer of technology to enhance the group's steel operations as well as for funding purposes and the expansion of its steel business.
“Since Lion Group aims to be the largest steel player in the Asean region, we need to tap into the global expertise technical know-how via strategic alliances with foreign parties,” he says, adding that the group is also looking at enhancing its steel-making quality via improving the upstream side with blast furnace, coke oven, sintering plant and auxilliaries.
On the issue of its 12-year HRC monopoly will soon end following two new entrants coming onstream, Cheng says: “We are most happy and welcome more players into the sector.
“In fact, it is tough being the sole HRC player in the country.
All this while, just imagine we need to cater to various sizes of steel grades as required by the customers even though the order is very small in quantity.
“If there are more local HRC producers then the business will be spread out and all will be able to share the pie,” he adds.
Cheng also believes that flat steel product players involved in the manufacturing of HRC, cold-rolled coils (CRC), coated sheets, steel plates, pipes and tubes whose businesses are badly affected by cheaper imports will be able to stand united in seeking the Government's assistance to looking into their plight.
On the steel market growth, he is confident that it will continue to grow and “Megasteel is not too worried over the possibility of an oversupply situation.”
Global steel demand is projected to increase in line with the growing world population and more importantly, when the developing nations in the Asean region continues to progress.
“We did a study in 1992 whether Lion Group should invest in the steel business in China.
“At that time, China's steel output was only 54 million tonnes but now some 20 years later it has increased many folds to 650 million tonnes.”
Currently, Asean has about 580 million population and expected to grow to about 900 million in the next 20 years.
“As the Asean nations continues to develop, there will be a big potential for steel to grow into the respective countries.
The per capita steel consumption in Asean is only 94kg currently. Compared with the per capita steel consumption of 1,000 kg in major steel producing countries like Korea and Taiwan, there is huge potential to increase the per capital steel consumption in Asean countries thereby boosting the demand for steel in this region.
“More importantly, countries with natural mineral resources like iron ore and coal (the raw materials in steel making) will have more advantage compared with the others.
“This is most significant for both Malaysia and Indonesia,” adds Cheng.
Currently, many steel players need to import their main raw materials from Brazil and Australia.
Some 10 years ago, the iron ore FOB price is about US$20 per tonne but currently, the average iron ore price is traded at US$160 per tonne.
Therefore, steel companies in Malaysia must quickly seize the opportunity to secure iron ore mining concessions with the mineral rich state governments such as Kelantan, Pahang and Trengganu.
Last year, Malaysia exported about 5.7 million tonnes of iron ore while the domestic steel industry consumed about 7.5 million tonnes of iron ore annually.
“Megasteel has also started talks with the state governments in East Malaysia to seek iron ore mining concession,” says Cheng who express confidence in securing the concession.
The group is hoping to supply the iron ore to its RM3bil 2,580 cu m blast furnace the first of its kind in Malaysia which is now 40% completed.
Meanwhile, many detractors have posed the question whether the domestic steel sector, specifically Megasteel, can still be saved?
“The answer is yes,” says Lion Group steel division marketing director Lai Chin Yang.
“The Government firstly will need to contain the heavy flow of cheaper steel imports into the country.
“These imports are affecting all flat steel producers not just Megasteel, which are suffering losses right now.
“There need to be a will from the authority to arrest the situation and protect the livelihood of the domestic steel players,” adds Lai.
In Malaysia, the apparent total flat products consumption such as HRC, CRC, coated sheets, steel plates, pipes and tubes is about four million tonnes annually. Imports of these flat products is about three million tonnes.
“The question is why do we need to import especially when local flat producers can supply about 80% or 2.4 million tonnes of the items?” asks Lai.
He reiterates that Malaysia need to protect its strategic steel sector and must take similar steps like Indonesia, the Philippines and India which are actively putting safeguard measures to protect their steel industry.
The current safeguard proceedings in Asia include India (33), Indonesia (11) and the Philippines (9).
Indonesia has filed anti-dumping on HRC from Malaysia and six other countries while Thailand has also made a similar move on HRC from 16 countries including Malaysia.
Lai says: “Just imagine why Japan is so protective over its rice industry, even though they can easily source cheaper rice from Thailand?”
He adds: “Similarly, Malaysia needs to protect its strategic steel sector which provides 150,000 jobs. Otherwise we will lose our manufacturing expertise to China in time to come.
The recent public outrage in USA over reports that the uniforms of their Olympic athletes were made in China has made the US realise the folly of neglecting their manufacturing sector and they have taken steps to protect it.”
Malaysia too really needs to protect its own steel sector by allowing it to stay competitive.
The advantages of having a local steel industry include providing supply of essential raw materials for construction, infrastructural development and downstream manufacturing as well as ensure supply in times of shortages.
More importantly, as the country industrialises, the demand for steel will shift from long products (steel bars and wire rods) to flat products (HRC, CRC) , which are required for a more diverse range of uses with high value-added content.