TheStar

THE fate of Tan Sri William Cheng’s Lion Group steel operations seem to be stuck in limbo.

Two of its listed subsidiaries – Lion Corp Bhd and Lion Diversified Holdings Bhd – have already been classified as Practice Note (PN17) companies, heavily saddled with huge defaults in payments.

Its two other steel-related subsidiaries are Lion Industries Corp Bhd and Lion Forest Industries Bhd.

For Lion Corp, its failure to seek further extension to submit its regularisation plan to Bursa will see the counter de-listed on Wednesday after being a publicly traded company for 35 years.

With the problems of the group’s steel operations in focus, that will not help the prospects of PN17 company Lion Diversified Holdings.

Over the course of more than five years, all the steel units of Lion Group have been severely affected by the global steel price slump and stiff competition from cheaper imported steel from China flooding the market selling below the production cost of many local steel millers.

Under its regularisation plan, Lion Group tried to woo several potential investors particularly from China to invest in its steel business units but efforts remain futile.

Megasteel woes

As of to date, no white knight has come forward to rescue the ailing company.

Lion Corp’s problems stems from it 79% stake in Megasteel Sdn Bhd, Malaysia’s first integrated steel miller which produces flat steel products like hot-rolled coils (HRC) and cold-rolled coils (CRC).

Megasteel is also an associate company of Lion Diversified, via its 21.11% stake. Lion Diversified produces direct reduced iron (DRI) which is a substitute raw material for scrap to make high grade steel at its plant in Banting.

The dire conditions of Megasteel have turned for the worse with no fresh orders in the first eight months of this year.

This caused the shut down of the RM3.2bil steel plant in Banting effective on Aug 30.

The price slump and the flood of cheap steel from China pressured Megasteel’s finances and ultimately a default on a banker’s acceptance payment on Sept 23, 2015 in respect of a working capital facility.

This default created a domino effect to cross default provisions under the loan documents for its other facilities, which amounted to some RM3.02bil.

As at Dec 31 last year, Megasteel had racked up RM2.43bil in accumulated losses.

For Lion Diversified, the indefinite closure of Megasteel also spells bad news for its business as the bulk of its DRI products are supplied to the Banting plant.

Lion Diversified group has also been suffering losses for several years given the rampant importation of steel products into Malaysia at dumping prices which caused it to miss the payment of the bonds and working capital facilities.

Last year, it reported defaults totalling RM37.75mil by three subsidiaries: Excel Step Investments Ltd for its bonds, Graimpi Sdn Bhd under a letter of credit facility and Lion DRI Sdn Bhd on payment for working capital facilities.

Lion Diversified points out that the defaults could give rise to an event of default by virtue of the cross default provision under the loan documents in respect of working capital facility agreements with a total combined limit of about RM109.4mil and term loan facility agreement with principal amount due of about RM14.6mil.

Based on its 2015 annual report, Lion Diversified had total borrowings of RM470.32mil for the year ended June 30, 2015 and cash and bank balances of RM311.6mil as of June 30.

Long steel demand

Despite the gloomy state of Lion Group’s flat steel products, the prospects of long steel products under its unit Lion Industries Corp is expected to be brighter in the final quarter of this year.

Industry sources say Amsteel Mills Sdn Bhd in Klang and Antara Steel Mills Sdn Bhd in Johor are still operating at 50% production capacity.

Both mills are producing long steel products such as billets, bars and wire rods for construction and manufacturing requirements.

According to Kenanga Research, local long steel products steel millers could be looking at an improved earnings following the recently implemented safeguard measures on long products coupled with China’s initiative to cut down on overcapacity of steel.

“We believe that local steel prices will be more stable and likely trend upwards in financial year 2017,” adds Kenanga in its latest sector update yesterday.

The recent safeguard measures on wire rods and rebars at a rate of 13.9% and 13.4% will benefit local millers as imports, especially from China will be pricier entering Malaysia.

This would lead to thinner trading margins for local importers causing them to reduce the volume of imports – leading to reduced supply of Chinese steel in local market which is positive for local millers as Chinese steel prices are no longer competitive as before.

Furthermore, local demand for long steel products will also remain.

“We are anticipating upcoming infrastructure projects ie Pan Borneo, MRT2, MRT3, SUKE, DASH, EKVE, BRTs and mega developments such as BBCC, KL118, TRX and Bandar Malaysia to spur demand within the construction steel sector,” says Kenanga Research, adding that demand for steel products in the local market is expected to stay robust.

With the newly implemented safeguard measure, Kenanga Research also believe it is highly unlikely for local steel rebar prices to see low of RM1,450 per tonne again as China steel players will have to export steel at prices even lower than 2015, which had about US$10bil of losses in the overall steel industry in China.

As of end September, local steel rebar prices were trading at a range of between RM1,700 and RM1,850 per tonne.

At the close yesterday, both Lion Corp and Lion Diversified were unchanged at 1.5 sen and 3.5 sen while Lion Industries and Lion Forest Industries fell one sen each to settle at 43.5 sen and 48 sen respectively.