Thursday, September 22, 2011

LionCor ... Sep11

After turning down the Lion Group’s request for safeguards, the government is now considering proposals to provide alternative assistance to the group’s steel manufacturing unit, Megasteel Sdn Bhd, as a bolster against competition from imported hot- rolled coils (HRC).

The minister explained that the government was unable to grant Megasteel’s request for an additional 35% import tariff on HRCs as it would have big implications on upstream and downstream activities as well as steel-consuming industries like construction.

Lion group boss Tan Sri William Cheng is considering moving his steel manufacturing operations to Indonesia, which imposes a 48% duty on HRC imports to safeguard its local industry. Cheng reiterated his dissatisfaction over what he maintains is unfair competition from imported HRCs from the region that jeopardised Megasteel Sdn Bhd’s steel operations.

He is agreeable to a ceiling price for locally manufactured HRC if the government is concerned that the Lion group is “making too much profit” or behaving like a monopoly.

The tycoon’s remark about moving his steel manufacturing business out of Malaysia was met with scepticism by industry observers, who point out that the move would be a mammoth and expensive endeavour to undertake.

Currently, Cheng is undertaking a RM3.2 billion blast furnace project that will be able to produce about 2.07 million tonnes of liquid hot metal a year, of which 1.57 million tonnes can be converted to slab for sale on the open market.

Megasteel, a unit of the Lion group’s flagship Lion Corp Bhd, is the country’s sole manufacturer of flat steel products producing hot rolled and cold rolled coils.

Lion Corp owns 79% equity interest in Megasteel and another Lion group listed entity, Lion Diversified Bhd, holds the remaining 21% stake.

Former international trade and industry minister Tan Sri Rafidah Aziz is the chairman of Megasteel.

To recap, in May Megasteel filed a safeguard petition to seek an additional 35% import duty on HRC which would bring the total duty payable on HRC up to 60%. Megasteel claimed that rising HRC imports in recent years had harmed the local steel industry and it pointed out that imports of HRC had been growing at faster pace.

Megasteel posted a net profit of RM98 million on revenue of RM3.53 billion for FY10 ended June 30. Its balance sheet shows a deficit of RM146.5 million on its reserves which could be due to accumulated losses.

In late August 2011 however, the ministry of international trade and industry announced it had terminated its investigation on imports of HRC, thus bringing an end to Megasteel’s petition.

Megasteel’s request for safeguards proved to be controversial and divided the steel industry. Foreign HRC exporters and local downstream steel players, including several with Japanese investors, were against the petition. Market observers opined that any move to impose additional import duty on HRCs could cast a shadow on the wellbeing and competitiveness of the entire iron and steel industry.

Some observers pointed out that granting the safeguards to Megasteel would effectively afford “protection” to foreign parties via their equity interest in the Lion group’s assets.

The Lion group confirmed reports that it is in preliminary talks for a prospective strategic partnership, but no concrete decision has been made. The Lion group’s steel assets, including Megasteel and Amsteel Mills Sdn Bhd, have attracted the interest of foreign suitors. Some of the names that have cropped up include Taiwan’s largest steel producer China Steel Corp and China’s second largest steelmaker Baosteel Group Corp.

Going Froward … There is a potential spillover effect from its subsidiary Megasteel’s financial difficulty. 

Lion Corp’s subsidiary Megasteel is not in the best of shape owing to internal weaknesses, weak demand in the flat steel market and high raw material costs. It also has a highly-geared balance sheet.

The prospects of a foreign partner coming into Lion Group are diminishing given that corporations are likely to turn more cautious on acquisitions due to the uncertainty in the global economy. Hence, industry observers are now more neutral about the potential entry of a foreign partner.

There is an increased risk that Lion Corp may be unable to meet the interest and principal payment obligations due to weak operating environment. In the absence of a foreign partner, Lion Corp might need to restructure its debt payment again. LionCorp holds a 25%-stake in Lion Industries. Thus, any restructuring plan by Lion Corp could potentially involve the sale of this equity stake.

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