Steel Sector (1) - Southern Steel enters flat steel game OVERWEIGHT

• 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 Vale’s 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 China’s 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 Group’s Megasteel has over the country’s 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 Steel’s entry, it would further complicate Megasteel’s 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 orflat steel products according to market demand. But, we are unsure about the viability of Southern Steel’s 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 boron added 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.      

Source: AmeSecurities