‘No white knight coming for Megasteel without govt’s shield’

by **Cals** Tue 03 May 2016, 23:55

‘No white knight coming for Megasteel without govt’s shield’

By Tan Siew Mung / The Edge Financial Daily | May 3, 2016 : 9:45 AM MYT

This article first appeared in The Edge Financial Daily, on May 3, 2016.

KUALA LUMPUR: As Megasteel Sdn Bhd, the country’s biggest hot-rolled coil (HRCs) producer and Lion Corp Bhd’s 79%-owned unit, sinks further into losses year after year, and is up to its ears in debt, some may get the impression that Tan Sri William Cheng was not doing anything or not doing enough to solve the problems of the steel unit.

But Cheng, the Lion Corp chairman and managing director, told The Edge Financial Daily in a recent interview that the only way to save the beleaguered steel entity is to invite an investor to inject new funds into the company.

And so, he has been talking with over 10 foreign parties in Asia alone — mainly from India, Japan, Korea and China — to find a white knight to help solve Megasteel’s woes.

However, most of the talks have remained just that: talks — as the numbers in the country’s steel industry just cannot convince them that their coming in will gain them any competitive advantage, said Cheng.

“We are still talking with some foreign parties. The fact is, if the Malaysian government does not protect the steel industry, foreigners will not be willing to invest in an industry that is not profitable when the steel manufacturing costs here are higher than China, amid an influx of cheap Chinese steel imports,” Cheng said.

If not for that, he said the potential investors have no problem in entering the Malaysian steel market, which is reminiscent of what he said since 2013.

“They also have positive feedback about us as we have good facilities and cost structure. The problem is just that we are losing competitiveness against China when the government refuses to offer protection,” he reiterated.

He also noted that Malaysia’s steel manufacturing costs used to be one of the lowest in the Southeast Asian region. But today, hikes in electricity and gas tariffs have increased steel production costs in Malaysia.

Due to rising production costs, he indicated that the group is now using furnace or coal to produce steel. Hopefully, this can lower production costs, he said.

But no matter what’s said and done, he insisted that government protection remains the only way to stop steel makers from bleeding further.

In many countries, he said, citing the United States, India, Indonesia, Thailand, and some in Europe, governments still impose protection measures to support the steel industry.

“Steel makers have experienced a downturn for six years now. Indeed, even Chinese steel makers are also making losses and need to sustain the business via side incomes,” he said.

On what has the government’s feedback been to the industry, he said, the government does not think the group “is injured”. “I don’t understand. We are making more than a billion losses a year, and we can’t even capture a market share of 10% or 20,000 tonnes of steel per month,” Cheng highlighted.

He also dismissed speculation that Megasteel, which had suffered RM1.24 billion in losses in the three years between 2012 and 2014 due to excessive cheap imports from China, benefits from a respectable margin.

Lion Corp, which slipped into Practice Note 17 status in November 2013, saw its accumulated net losses for the half year ended Dec 31, 2015 (1HFY16) widen to RM294.03 million, compared with RM209.24 million in the previous year. The group’s revenue for the period also halved to RM524.93 million, from RM1.08 billion a year ago.

The group attributed its poor financial performance to lower selling price and sales volume, coupled with the onslaught of steel imports at dumping prices. The performance was further dampened by a foreign exchange loss of RM59 million, as a result of the weakening of the ringgit against the US dollar.

Lion Corp, used to trade for as much as RM37.30 (April 22, 1996), is worth only 4.5 sen today, with a market capitalisation of RM59.23 million. It hit its record low of three sen on July 14, 2015.

Cheng, however, expects the group’s net losses this year to improve a bit following the recent steel price rally. “Overall, the steel market sentiment will be better this year as some products will provide us better margins,” Cheng added. As for recent reports about him disposing of his land, Cheng explained that the “cash out” has nothing to do with his steel business.

It was reported by The Edge weekly in November and December last year, citing sources, that Cheng seemed to be on an asset divestment trail as he disposed of a 296-acre (120ha) land in Bandar Mahkota Banting, and is also looking for a buyer for his Tiara Melaka Golf & Country Club, a 27-hole golf course and clubhouse that sits on some 336 acres of land in Mukim Bukit Katil.

“That is my private business. It is for my family and has nothing to do with my public listed business,” he stressed, adding that he feels safe to conserve more cash amid current challenging economic conditions.

“We may consider buying it back in the future,” he said, but did not elaborate.