LionCor ... Jul11

By the end of July 2011, the Ministry of International Trade and Industry will make a decision on an issue dogging the steel industry – the protection given to Megasteel Sdn Bhd.

Megasteel, the sole producer of HRC or flat steel is seeking additional duties on imported HRC to deter imports while the downstream iron and steel players want the duties removed.

Miti’s deision will likely have a far reaching impact and affect more than the iron and steel industry. It will also put an end to the impasse that has been plaguing the industry since 2010, and which gas caused a split.

Megasteel wants the government to impose an additional 35% duty on imported HRC, on top of the existing 25%, bringing the import tax on HRC to 60%. This, is expected had not gone well with the downstream players.

This new import duty, if imposed, is effectively a protection mechanism for Megasteel. Currently, the downstream players are required to acquire their flat steel products from Megasteel and can only source for the material elsewhere or import if their required specifications for flat steel are not manufactured by Megasteel.

Megasteel has done reasonably well, financially. It had non current assets amounting to rm2.8 billion and current assets worth rm1.71 billion. On the other side, it had current liabilities amounting to rm3.28 billion and non current borrowings of rm785 million.

The high debt levels are due to Megasteel spending rm3.2 billion to step up its flat steel plant in Banting. The investments started at the height of the financial crisis in 1998 and the Lion Group, which owns Megasteel strived to complete the plant despite facing a serious debt crisis.

Because of the hug capital investments, Megasteel sought and is still seeking production in the form of duties for imports of HRC.

The downstream players said that Megasteel should strive for greater efficiency rather than seek continued protection.

The going has been tough for the downstream players as the tax on imported HRC adversely affects pricing, causing local exports of steel products to become uncompetitive. They claim that prices of flat steel by Megasteel are higher than imports.

Coupled with higher gas and electricity costs, the downstream players are feeling the strain. Their lobby for government to deny Megasteel further hikes in duties is supported by other players in the industry.

If Megasteel Sdn Bhd’s petition is approved, many industry players especially the downstream players will suffer as they have to pay a hefty import duty of 60% for HRC. Ultimately, most industries including construction will be affected and higher costs will be passed down to consumers.

Industry players say Miti is under pressure to make a decision. On one hand is Lion Gorup’ who has invested in Malaysia’s steel industry both in long and flat products. On the other are the downstream players some of which have political clout as well.