Local steel sector consolidation begins to take shape
Malaysia Steel Institute sees more mergers going forward
THE much-needed consolidation in the ailing steel sector in Malaysia has begun to take shape.
Many local steel millers have started to refocus on their business models and strategies in view of the tougher challenges ahead.
Top steel miller Lion Group is said to be the first to undertake such an exercise since the middle of last year.
This was followed by YKGI Holdings Bhd and NS Bluescope (Malaysia) Sdn Bhd, which have consolidated their coated steel products business in April this year.
Most recent is the partnership between two steel giants, Ann Joo Resources Bhd and Southern Steel Bhd, which have inked an MOU to combine their steel bars and billets businesses via a soon-to-be established joint-venture (JV) company with the ultimate aim to go for a listing on Bursa Malaysia.
Another industry-led initiative to boost the competitiveness of the local steel sector is the Rm5bil investment commitment by upstream players under Malaysia Steel Association led by its president, Tan Sri William Cheng of Lion Group.
In the coming months, Malaysia Steel Institute (MSI) foresees a few more consolidation exercises among the local iron and steel players in an effort to remain competitive.
According to Malaysian Iron and Steel Industry Federation (MISIF) immediate past president Tan Sri Soh Thian Lai, the association had proposed for a consolidation in the Rm41bil local steel sector and also, seeking for more incentives from the government some four years ago.
“Consolidation is certainly the way forward for local steel companies to remain profitable and competitive be it via horizontal integration or vertical integration and/or a combination of both horizontal and vertical integration.
“Most important is to ensure the local steel industry stays healthy and has the capability to produce high-quality steel products,” Soh told Starbizweek recently.
He points out that steel players must look at improving the skills of their workforce, introducing the industry’s 4.0 set-ups in processes such as smart technology and smart manufacturing.
“At the same time, steel millers must try to avoid increasing their outputs that could lead to overcapacity and price that will distort the best intentions of the current consolidation efforts,” adds Soh, who is also the Federation of Malaysian Manufacturers (FMM) president.
The right move
He describe the latest the partnership between two MISIF members, Ann Joo and Southern Steel to combine their long steel products businesses as “the right move in the right direction” given the volatile steel conditions in Malaysia amid the uncertainty in the global steel market outlook.
“The partnership is also expected to generate better profits and a win-win cooperation by having economies-of-scale as well as higher yield and productivity,” says Soh.
He adds that the move will also reduce the potential price war among upstream players with better price stabilisation, and has the competitive edge for export markets.
Since the local steel industry is policy-driven, he suggests that the government and upstream steel companies come up with a more conducive ecosystem and a long-term master plan for the industry.
“The government should stop from issuing manufacturing license to new steel investments in Malaysia, especially from China and, or any foreign direct investments (FDIS) to invest in high-tech and high value-added steel investments.
“Instead, the long steel products manufacturers here should focus on upgrading their equipment to produce more high quality non-construction materials such as for industrial application used in the automotive, engineering and fabrication, electrical and electronics, transport, aerospace in an effort to move away from the red-sea construction based long steel products,” explains Soh.
Meanwhile, MSI chief executive officer Jarrod Lim Keng Yow points out that the partnership between Southern Steel and Ann Joo is prominent as the combined installed capacity will translate into 2.3 million tonnes for long steel products.
“This will be among the largest capacity for long steel products manufacturers in Malaysia thus creating a significant market voice,” he adds.
The adoption of consolidation strategy will help steel players to strengthen their current position to meet future expectation.
Through a JV company to be set up, Lim foresees that both Ann Joo and Southern Steel would be able to maximise strength in technology and products as well as each new market segments.
There will also be continuation of adopting new technology such as Industry 4.0.
Lim also expects positive catalysts such as new mega construction and infrastructure projects will help to drive the domestic steel demand, particularly for long steel products moving forward.
The long products such as rebar and steel wire rod are products that are competitive and in high demand in the local construction sector.
On the other hand, local players in the long term will need to further improve on their competitiveness in order to export regionally.
Stiff competition
“Currently, the influx of cheap imports and steel dumping into Malaysia are compounding the struggles of the local steel player due to price competition.
“Additionally, rising cost of doing business which outpaced their revenue growth also makes players deemed as uncompetitive,” says Lim.
On the global front, the escalated trade tension between the US and China has created large gaps between the two countries’ positions , where a possible deal before end of 2019 is not expected.
This uncertainty is causing businesses to postpone investment decisions, consequently hurting consumption.
When contacted by Starbizweek, both Ann Joo Group managing director Datuk Lim Hong Thye and Southern Steel Group CEO Chow Chong Long have refrained from making new statement as “the partnership deal is still at an MOU stage and has yet to be fully materialised.”
Ann Joo, which is a top steel miller with the biggest market capitalisation at Rm649.5mil, however, is no stranger to a consolidation exercise.
Back in 2001, Ann Joo group had taken over Malayawata Steel Bhd.
Lim was quoted as saying “instead of building a mini mill in Pulau Indah, we took over Malayawata and consolidated it with our mill with the objective to create a more productive and cost-effective steel mills .
“The focus should be on competitiveness in terms of lowering production cost and not just production size,” he adds.
Underweight call
Aminvest Research in its recent investment highlights had an “underweight” call on Ann Joo-southern Steel Rm1.65bil partnership deal.
It says the core operating units of Ann Joo and Southern Steel are being valued at Rm907.5mil and Rm742.5mil respectively, and therefore Ann Joo and Southern Steel will be granted a stake of 55% and 45% in the JV company accordingly.
The research unit noted that the rationale of this deal struck by the two major long steel players in Malaysia is to create a vertically integrated entity with upstream iron making capability such as hot metals and pig irons through Ann Joo’s blast furnace (BF) technology), and downstream products such as bar and wire rods through Ann Joo and Southern steel electric arc furnace (EAF) and rolling mills.
In addition, the merger will also bring about greater operational efficiency, synergy and cost savings.
“We believe over the immediate to short term, the deal is, at best, is only neutral to Ann Joo.
“On one hand, the deal will bring about scale of economies while on the other hand, by virtue of a 55% stake in the combined entity, Ann Joo will have to bear the losses from Southern Steel’s operations,” says Aminvest Research.
Southern Steel posted net losses of Rm34.85mil in the fourth quarter ended June 30, 2019 compared with a net profit of Rm35.20mil a year ago.
As for Ann Joo, in the second quarter ended June 30, 2019, it posted net losses of Rm37.75mil compared with a net profit of Rm20.70mil a year ago.
Assuming Southern Steel’s losses are to sustain, Ann Joo is expected to make Rm54.3mil net profit in FY20F based on Aminvest Research’s existing forecasts.
The research unit also assume that the merged entity will derive synergies and cost savings amounting to about Rm104mil or about 2% of the combined turnover.
Based on Aminvest estimates, Ann Joo’s FY20F will likely be eroded by about 60% from Rm54.3mil to Rm21.6mil.
Over the longer term, assuming Ann Joo is able to help turn around Southern Steel, there could be a higher chance that the merged entity could do better, adds the research unit.
At the close yesterday, Ann Joo’s share price was down one sen at RM1.16 while Southern Steel lost three sen at 88 sen.