Steel Sector - Middle ground solution sought Overweight

kiasutrader

Publish date: Tue, 10 Jul 2012, 09:45 AM

- The Edge FinancialDaily reports that following the recommendations of the Boston Consulting Group (BCG), Megasteel has been given a one-year timeframe to put its house in order. This follows a briefing by BCG for representatives of both the Malaysia Iron & Steel Federation (MISIF) and Malaysia Steel Association (MSA) on the findings of the report.

- Based on the BCG report, Megasteel will have a dateline of mid-2013 to register positive cash flows by forging strategic collaborations with foreign partners and enhancing its operational efficiencies. If the conditions are met, we gather that Megasteel would be allowed to receive protection from the government for up to two years.

- We had written previously that the Ministry of International Trade and Industry (MITI) had in February commissioned BCG to come up with a comprehensive study to enhance the competitiveness of Malaysia's RM40bil steel industry.

- Central to this study is to find a solution to resolve the differences in opinions between Lion Corp's Megasteel and the downstream producers on the protection accorded to the latter. The Edge FinancialDaily report indicated that industry players have claimed that the hot-rolled coil (HRC) produced by Megasteel is not priced competitively, and allegedly carry some quality issues.

- Megasteel has countered that it has incurred losses despite its monopolistic position within the HRC segment ' as illegal imports of flat steel continues to seep into the Malaysian market. The problem has been compounded by the rising influx of boron-added cheap steel imports from China, which are brought in by traders/stockists under alloy tariff coders that are duty-exempted.

- We understand that the parties concerned have until the end of this week to provide their feedback to MITI, following which a report with recommendations would be submitted to the National Economic Advisory Council by July 23.

- While the local flat steel industry may collapse if the protection accorded to Megasteel continues, an immediate pull-out of the protection may cause serious financial implications to Megasteel and the banking industry ' we believe. Hence, we reckon that what the government aims to seek a middle-ground solution to this impasse ' where it is imperative that Megasteel improves on its quality and expertise by roping in a strategic foreign partner.

- Earlier press reports had alluded to the Lion Group having had talks with at least three parties ' namely China's Baosteel Group and Fosun International, as well as Taiwan-based China Steel Corp. But, we believe that negotiations have since stalled pending the outcome of the BCG report. On the government's end, there would be more monitoring of tax-exempted imports of flat steel to ensure those made by Megasteel are not allowed in.

- While it is too early to turn constructive, we believe the restructuring efforts are mainly aimed at strengthening the competitiveness of local flat steel players. Hence, we prefer long steel players ' Ann Joo Resources and Lion Industries ' for direct exposure to an expected pick-up in domestic demand, particularly when the MRT project goes full swing by 2013.

Source: AmeSecurities

ANNJOO (6556)LIONIND (4235)

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