After a tough three-year period that saw steel mills go belly up, Ann Joo’s Lim reveals why his company emerges stronger

TO say that the steel industry has gone through a bloodbath in the last five years is an understatement.

The industry was served with a shock when the country’s largest hot rolled coil steel plant, Megasteel Sdn Bhd, ceased operations last year. Two other major plants, including Perwaja Steel, shut down. And the industry is still on consolidation mode.

For more than three years, the beleaguered steel sector has been rocked by an oversupply of cheap imports, especially from China, pushing many local companies into dire straits.

Unprofitable steel plants stopped operations, while the bigger players saw their losses growing. Some had their bonds downgraded to junk status.

Amid this disaster, Ann Joo Resources Bhd has come out looking stronger than ever, while many of the steel players are still not out of the woods yet. It is one of only two steel mills that are running at full capacity. The other is Malaysia Steel Works (KL) Bhd.

Ann Joo’s profit margins have suffered significantly in the last five years. The company even went into losses in 2012 and 2015. However, last year, the margins started to improve.

Ann Joo returned to the black in the first nine months ended Sept 30, 2016, posting a net profit of RM128mil on the back of RM1.4bil in revenue. Margins were 9.2% for the period, its best showing in the last five years. Ann Joo’s group managing director Datuk Lim Hong Thye, who steered the 70-year-old company ahead of the curve in the tough operating conditions, attributes its survival to the group’s investment in 2008.

 

 

Strategic industry: Lim says steel is never a sunset industry.

At that time, Ann Joo forked out RM600mil to build a blast furnace that was capable of integrating with its electric arc furnace (EAF). The hybrid feature of its blast furnace-EAF paved the way for it to reduce its cost of producing steel products.

“The key success factor to Ann Joo’s fast recovery is because we have a different technology that allows us to operate in a low-cost structure. Our hybrid technology has given us the advantage of being more cost-efficient with the flexibility to adjust our raw material sources and energy saving in our production,” he tells StarBizWeek .

It took Lim more than eight years to plan and construct the blast furnace project. The blast furnace with the hybrid feature was Lim’s brainchild and was mooted in 2008. But the project only took off in 2011.

Ann Joo, which started as a scrap metal dealer in 1946, feels that the superior technology of its hybrid blast furnace-EAF allowed for it to compete efficiently. One of the features of Ann Joo’s integrated blast furnace-EAF is that it allows for flexibility in the feedstock, unlike others. Hence, Ann Joo is able to either use iron ore or scrap metal as feedstock – something that could not be done in the past.

Apart from flexibility in feedstock, Ann Joo’s hybrid blast furnace-EAF allows for lower logistics cost, consumes less electricity and requires lesser natural gas to operate.

“The flexibility in feedstock allows us to switch materials. For instance, at present, scrap metal is more expensive than iron ore, so we opt for iron ore to manage our cost,” says Lim.

Ann Joo has also benefited from the closure of at least three major steel plants and production cuts by many players over the last three years due to competition from China’s steel products.

“The steel millers were hurt by the influx of cheap imports ... they will need time to get back on their feet,” Lim says.

“Because several plants shut down their operations recently, scrap in Malaysia is cheaper than the imported ones,” he adds.

“Previously, we imported 60% of raw materials. Now, I’m using 100% local scrap and iron ore for our production, and this is a huge saving on our logistics cost as well,” he says.

For the steel industry, Lim says about 90% of its operational cost comes from a combination of raw materials, fuel and electricity, as well as logistics.

He feels that most steel millers fail to see the importance of being located in the right place to reduce the logistics cost.

“There are many manufacturing plants that cannot operate efficiently because they are located in the wrong place. This is happening in China where they have closed down and relocated to places that are closer to the ports,” he says.

Lim says that unlike other steel millers that are dependent on cheap sources of energy to stay competitive, Ann Joo is more reliant on coking coal for its production.

“Should there be an increase in the gas tariff, the impact would be minimal to Ann Joo,” explains Lim.

Taking a contrarian view

“Steel is never a sunset industry,” says Lim, while stressing that it is actually a strategic industry, especially in developing countries.

He recalls the time when Ann Joo purchased an interest in Malayawata Steel Bhd in 2001.

“A banker with a foreign bank asked me why I was taking over a company that was in a sunset industry. But I told him that any major structure evolves around steel and the alternative materials are more expensive ... so it is not a sunset industry.

“For an economy to grow, major development such as infrastructure projects and factories need to be built, and steel is the main component,” he elaborates.

Lim, 41, is the third generation of Ann Joo’s founding Lim family to be involved in the business. He became the president of Ann Joo Steel Bhd, formerly known as Malayawata, in 2004 and progressively turned the company into one of the top steel companies in Malaysia.

In subsequent years, Ann Joo Resources finally took over Malayawata in 2007 after two attempts. The plant, which has a steel-making capacity of 700,000 tonnes per annum, was renamed Ann Joo Steel.

Ann Joo’s plants are operating at almost full capacity. However, the company will not embark on any major expansions yet.

“There is still room for higher production in our existing plant ... we are talking about a 10% increase in capacity purely from productivity improvement,” he says.

Currently, Ann Joo has the capacity to produce 800,000 tonnes of steel products including billets, bars and wire rods, and 500,000 tonnes of hot metal, including pig iron.

On Ann Joo’s expansion plans, Lim says that it would all depend on the consolidation process of the industry.

“We need to invest this year and expand. But we have not firmed up any plans yet,” he says, while adding that the company is open to participation from foreign parties.

In the next two years, he says Ann Joo’s focus will be on construction steel such as rebars and wire rods to ride the infrastructure boom arising from projects such as the Mass Rapid Transit rail project.

Lim says that Ann Joo is targeting to be the leading steel company that provides one-stop steel solutions to large infrastructure projects, as well as moving into higher quality steel producers that include flat products. Currently, the company’s trading arm is supplying such products.

The improvement in Ann Joo’s earnings is reflected in the company’s share price, which has risen more than 250% since a year ago. Lim says the company has been on a roadshow since last May, as it sees that the steel industry is starting to turn around.

However, its short-term debt has raised some concerns among analysts.

The company’s short-term debt as at Sept 30, 2016, stood at RM897mil, which is 35% lower than RM1.3bil in the same period in 2015.

Lim describes the company’s gearing ratio of below one times as “manageable”.

“Our debt level is no longer a big concern, definitely there is some mismatch in funding. I foresee we are going to generate a stronger cash flow, and will pare down the debt moving forward.”

His confidence stems from Ann Joo’s improved earnings before interest, tax, depreciation and amortisation (Ebitda). In the first nine months of last year, Ann Joo’s Ebitda was RM208.3mil, a stark improvement compared with negative cashflow in 2015.

The past three years have been tough for the steel industry that suffered from over-investment and competition from cheap steel imports.

The situation was further accentuated with lower demand for steel last year, as many construction projects were still in the early stages of planning and there was a slowdown in the launches of new property development projects.

“We expect the demand for steel to come back in the second half of the year, especially from infrastructure projects,” says Lim.

He says that the local steel players are able to compete against the cheap imports from China even without the “safeguard duties” imposed on imported steel.

Lim reckons that the Malaysian steel industry needs to be more efficient to strengthen its position to compete in the international market.

“The Malaysian steel industry is concentrated on a few types of steel. A lot of steel would still needed to be imported. One of the objectives of consolidation is to create financially strong entities able to operate under low-cost effectively. It’s not just about having capacity,” he says.

Source: http://www.thestar.com.my/business/business-news/2017/01/21/ann-joos-baptism-of-fire/