SSteel What’s Up? … dated July2012

Its has joined the ranks of those seeking to build flat steel plants inMalaysia, an area that has been largely controlled by Tan Sri WilliamCheng’s Lion goup.

The company obtained the approval of the MIDA about six months ago (Jan2012) to set up a flat steel plant on the premises of its long steel plant in Penang.

The flat steel is slated to come onstream by the third quarter of 2013that has been the domain of Megasteel Sdn Bhd.

Southern Steel could be the second player to enter the flat steelsegment that has been the domain of Megasteel Sdn Bhd.

Two other steel players – Tunku Datuk Yaacob Abdullah’sMaegma Steel Sdn Bhd and Tan Sri David Law’s Hiap Teck Venture Bhd– are looking at breaking Megasteel’s monopoly. Maegma is planningto set up an integrated plant in Lumut while Hiap Teck has already broke groundfor a rm1.8 billion integrated steel plant in Kemaman.

Southern Steel could prove to be a strong competitor to Megasteelbecause it has a strong balance sheet and would be able to put up the plantquickly. This could add to the pressure faced by Mesgateel, which has beengiven a deadline of between 24 and 36 months to turn around its loss makingflat steel operation.

The deadline is the result of a study by a consulting group, which hasbeen tasked with coming up with a solution to improve the competitiveness ofthe flat steel industry in Malaysia.The industry is protected to a certain extent to allow Megasteel to recoup itsinvestment of more than rm2.3 billion made over the last 10 years.

Downstream players have complained that Megasteel’s products havequality issues and are not priced competitively. Megasteel, in turn, says itsplant is only 30% utilized because flat steel imports are hampering its sales.

The question is,how will Megasteel stop the bleeding if Southern Steel comes onstream to competeagainst it? Things will only get worse when Maegma and Eastern Steel comeonstream.

Southern Steel confirms to set up a flat steel plant.

At present, long steel products, which are generally used in theconstruction industry, are the mainstay of Southern Steel. But its entry intoflat steel could pose a serious threat to Megasteel.

The benefits of the new flat steel plant could be numerous, but themost significant would likely be Southern Steel unlocking excess steelmakingcapacity, increasing overall plant efficiency and reducing operating costs.

Southern Steel will also have the flexibility to produce either long orflat steel products allowing it to mitigate significant risk in what has beenprominently a volatile past three years (200-2012) for the steel industry.

In a nutshell, the plant will result in higher profits for SouthernSteel and fairly priced HRC for the industry.

Quek’s 60% owned HL Bank is also known to play an important rolein financing steel players, which could nudge them into acquiring SouthernSteel’s flat steel products.

Then there is the question of which company Quek will bring in asSouthern Steel’s partner. A partner is essential as Southern Steel willneed the expertise.

At end 2010 the QUek controlled Signaland Sdn Bhd bought out NatsteelAsia Ltd’s 27% stake in Southern Steel for rm2.05 per share on a total ofrm233 million. This triggered a MGO as Quek already held more than 40% inSouthern Steel. At present, Quek owns 71.9% stake of Southern Steel.