STEEL

STEEL
23 July 2012

Southern Steel enters flat steel game

Sector report
Mak Hoy Ken mak-hoy-ken@ambankgroup.com 603 2036 2294
Rationale for report: Sector update

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The Edge Weekly reported over the weekend that Southern Steel is poised to enter the fray as one of the rising number of flat steel plants that are being mooted in Malaysia. According to the report, Southern Steel had six months ago received the nod from the Malaysian Industrial Development Authority (MIDA) to set up the flat steel plant within the premises of its existing long-steel plant in Prai, Penang. From our preliminary findings, this new plant is set to commence operations by the third quarter of 2013. Prior to this, two other prominent industry players have separately announced ambitious projects to set up integrated steel mills that would utilise the blast furnace technology.

Maegma Steel a company controlled by Negeri royalty Tunku Datuk Yaacob Tunku Abdullah recently signed a gas supply agreement (GSA) with Petronas Gas for some 60 million standard cu ft of natural gas to fuel its upcoming steel mill at Tg. Hantu, Lumut, located only 20km away from Vales iron ore distribution centre. Construction works are set to start next July before it is fully operational by June 2015. When completed, the plant would be able to produce 3 million tonnes of steel and hot rolled coils (HRC) annually. Over in Terengganu, Eastern Steel a JV between Hiap Teck Ventures and Chinas Shougang group and Chinaco Investment Pte Ltd has already kick-started the construction of its RM1.8bil integrated facility. Stage 1 of Phase 1 (RM750mil) will be completed by mid-2013 with an annual production capacity of 700,000 tonnes. Stage 2 will cost an additional RM1.05bil for 1.5 million tonnes. The emergence of both Maegma Steel and Eastern Steel is set to challenge the long-standing monopoly that the Lion Groups Megasteel has over the countrys HRC needs. This comes amid a deadline of two to three years for Megasteel to reverse its loss-making flat steel operations as a result of a study by the Boston Consulting Group (BCG) that was tasked with improving the competitiveness of the domestic flat steel industry. In defence, Megasteel has reportedly come out to claim the support of ~60% of the local flat steel downstream industry thus refuting earlier concerns about the quality of its products. With Southern Steels entry, it would further complicate Megasteels ability to turn its business around. While exact details are still fluid at this juncture, Southern Steel aims to introduce a greenfield plant that incorporates a new compact strip production (thin slab caster), hot-stripped mill and skin pass mill, and integrate it into its existing steel-making process. Ideally, this new venture is supposed to provide the flexibility for Southern Steel to produce long or flat steel products according to market demand. But, we are unsure about the viability of Southern Steels end-product (i.e. HRC) given that it would likely still utilise scrap as feedstock from its existing Electric Arc Furnace (EAF) steel-making plant. Then, there is the continued threat of boronadded imports, especially from China. For this, we prefer to stick to long-steel players for leverage to an expected uptick in construction spending from 2H12 onwards including the Sg.Buloh-Kajang MRT line. Our top picks are Ann Joo Resources and Lion Industries.
The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd

AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group)

Benny Chew Managing Director

PP12246/05/2013 (030095)

STEEL

23 July 2012

CHART 1: SG.BULOH-KAJANG MRT LINE

Source: www.transit.my, AmResearch

AmResearch Sdn Bhd