- The Edge Financial Daily quoted Lion Corp executive chairman Tan Sri William Cheng as indicating that the local steel industry has estimated debts of RM13bil or more, as the influx of imported steel products continues to undermine the profitability of industry players.

- A key challenge plaguing local steelmakers is the lack of government support and protection that triggered a rise in cheap imported steel products coming into Malaysia.

- For instance, exports of Malaysian hot-rolled coils (HRC) to Indonesia are taxed at ~48%. Conversely, there are no taxes levied on Indonesian HRC coming into Malaysia. Similarly, a 26% levy is imposed for the export of Malaysian HRC products to Thailand while there are no tax for imports from Thailand.

- As a result, Malaysia’s import of steel products have doubled from three million tonnes to 6.5 mil tonnes in the past three years. Conversely, the production of local steel products have actually dropped to just three million tonnes from five million tonnes during the same period. This implies that some 68% of Malaysia’s steel requirements are satisfied through imports.

- To highlight the gravity of this growing issue, Cheng had in The Edge Financial Daily report, raised the possibility of the Lion Group relocating its steel manufacturing plant in Banting to Indonesia if there is no intervention by the local authorities to stem this protracted issue.

- This latest development reinforces our view that key government policy changes could be pivotal to reignite the local steel industry. In our sector update yesterday, we had highlighted that apart from seeing prospective M&A activities between local and foreign steel players to produce higherend products, the actual execution and implementation of select measures to curb the rising influx of cheap steel imports is required to lift the domestic steel sector.

- To be fair, there have been some nascent moves by the Malaysian government to provide some form of protection for the local steel players. This would include anti-dumping duties of 3%-25% that are imposed on steel wire rods from certain countries effective 20 February 2014. Nevertheless, execution and the follow-up of more concrete measures are crucial in a tough operating environment, we believe.

- All said, Ann Joo Resources remains as our top pick to leverage on any tangible pick-up to the steel sector. Furthermore, we believe that the weight of dumping of cheap Chinese imports is leaning more towards flat rather than long steel products. As it is, the improving efficiencies and flexible input mix at its blast furnace put the group in a better position to weather any incremental increases in costs. Lion Industries remains as a HOLD.

Source: AmeSecurities