- Maegma Steel enters the ring. The Edge Weekly has reported that privately-held Maegma Steel ' linked to Tunku Datuk Yaacob Tunku Abdullah ' is at the final stages of setting up an integrated steel mill in Manjung, Perak after a five-year delay. If it kicks off, the plant would be the second after Eastern Steel ' an integrated steel mill that is jointly-owned by Hiap Teck Ventures (55%) and Chinese companies, Shougang (40%) and Chinaco (5%). The estimated cost of Maegma's plant is US$1.5bil at an annual capacity of 1.5 million tonnes. By contrast, Eastern Steel's plant in Kemaman, Terengganu is to cost some RM3.8bil (licensed production: 5 million tonnes) and may include an iron ore mine at Bukit Besi (~80km away from Kemaman). Phases 1 & 2 would have a combined capacity of 2.2 million tonnes of slab at ~RM1.7bil. 

Maegma's new facility would combine all three stages of steel-making, i.e. (i) raw iron production using the direct reduction process; (ii) steel-making in a melt shop with an electric arc furnace & ladle furnace; and (iii) production of hot-rolled coil (HRC) that is widely used in the flat steel industry. With most of the key inputs (e.g. electricity, iron supply) virtually sorted out, Maegma will likely conclude a natural gas supply contract with Petronas by month-end. 

- Targeting HRC market for high-end flat steel products. Unlike Eastern Steel which is targeting the ASEAN slab market, Maegma focuses on the domestic HRC market that is dominated by the Lion Group's Megasteel ' currently the sole local HRC maker and major player within the mid-stream & downstream segments. We gather that Megasteel's plant in Banting, Selangor costs RM3.2bil. At present, most of the local flat steel users ' the Melewar Group including ' have to secure their supplies of HRC through Megasteel or pay import duties. The only exceptions are if there were no local availability for a specific range or if the product is to be used for re-exports. 

Specifically, Maegma's primary focus is on producing high-end flat steel segment that supplies to the automotive and electrical & electronics industries, whereby its HRC could serve as an input for these downstream steel products. Furthermore, Maegma highlights that Malaysia imports around 1 million tonnes of HRC against its planned capacity of 1.5 million tonnes ' and reckons that local consumption could reach that level by 2016 when its plant is ready. Interestingly, Tunku Yaacob's listed steel units ' i.e. Melewar Industrial Group and Mycron Steel ' consume a combined 350,000 tonnes p,a. alone, and is set to expand to 500,000 tonnes. Hence, the Maegma plant's HRC would fit nicely into the group's overall plans to reduce input cost through import substitution with in-housed produced HRC feedstock.    

- Strong technical partners, strategic location. We note that Japan's JFE Corp has a technical pact with Mycron Steel (~55%-owned by Tunku Yaacob). In addition, China's Anshan Steel, together with Gindalbie Metals, has set up an iron ore pellet plant in China to process ore from Australia. We gather that Mycron was instrumental in bringing Anshan to Gindalbie back in 2007, where the latter is now a major shareholder in Gindalbie (36% stake). Further, Maegma's plant at Tg.Hantu is strategically located only 20km away from Brazilian mining giant Vale's mega iron ore distribution centre/pellet plant.

- Funding plan. Maegma aims to raise US$900mil out of the US$1.5bil required via European banks, backed by export credit guarantees from Germany. The balance is to come from:- (i) commercial debt from regional banks (US$100mil); (ii) private equity/international banks (US$320mil); and (iii) Tunku Yaacob & partners (US$180mil). Tunku Yaacob and local partners will have majority control in Maegma at 55%, with foreigners making up to 45%. Financial close is targeted by year-end.

- Maintain OVERWEIGHT. While the Maegma project seems to have been revitalised, it remains to be seen if it would take off eventually ' in particular the funds required. For now, we prefer Ann Joo Resources for traction to the steel sector ' whereby its mini-blast furnace is already up and running. Our other top pick within the sector is Lion Industries.