On behalf of the Board of Directors, I am pleased to present the Annual Report of Mycron Steel Berhad and its group of companies ("the Group") for the financial year ended 30 June 2014.

FINANCIAL RESULTS

For the financial year under review, the Group achieved total sales revenue of RM448 million compared to RM513 million the preceding year, representing a decrease of 13%. Similarly sales tonnage of Cold Rolled Coil ("CRC") steel sheets decreased to 186,000 tonnes, compared to 202,000 tonnes the previous year. The decrease of 16,000 tonnes or 8% was the result of very challenging conditions domestically.

Given that the total production capacity is 260,000 tonnes per annum, the production volume of 186,000 tonnes represented a utilisation rate of 71.5%, compared to the rather high 79.6% achieved in the previous financial year. The reduction in sales revenue due to lower sales tonnage coupled with an impairment loss of RM6.4 million on the revaluation of plant and equipment, resulted in the Group recording a Loss After Tax of RM9 million, compared to a Profit After Tax of RM7 million the previous year.


DIVIDEND

Given the poorer performance achieved during the year under review, the cash position of the Group remains tight. The Directors therefore do not recommend the payment of any Dividend for the financial year ended 30 June 2014.

OPERATING REVIEW

Table 1 shows the quarter by quarter performance of the CRC division for the financial year ended 30 June 2014.

The 1st quarter for the financial year ended 30 June 2014, is the seasonal lowest quarter due to the downstream industry-wide shut down for the Hari Raya holidays which had a shorter working month. The quarter started with a reduction in sales revenue of 8% to RM112 million and delivery tonnage of 2% to 45,815 tonnes, compared to the preceding quarter.

The 2nd financial quarter having a longer working period naturally saw revenues increasing by 10.4% to RM124 million and sales tonnage by 12.5% to 51,530 tonnes.

For the 3rd financial quarter, revenues dropped by 9.0% to RM113 million, while sales tonnage dropped by 8.8% to 46,992 tonnes. During this quarter, the domestic steel industry entered into a depressed state as a result of heavy competition amongst the domestic CRC producers, triggered by the dumping strategy of one competitor. This resulted in depressed domestic prices for CRC.

For the 4th financial quarter, dumping activities from China caused a further depression market prices, and Mycron's revenue dropped further by 12.5% to RM99 million, with sales tonnage dropping by 11.4% to 41,653 tonnes.

The first half of the calendar year witnessed a full blown depressed market for CRC, in an over supplied market, made worse by an increase in legitimate and illegitimate CRC imports into the country.

DOMESTIC CRC INDUSTRY STRUCTURE

The base raw material used for the production of Cold Rolled Coil ("CRC") steel sheets is Hot Rolled Coil ("HRC") steel sheets. In general, CRC manufacturers produce two main types of products, namely:

  1. Scrap Based CRC (made from Scrap Based HRC)
  2. Iron Ore Based CRC (made from Iron Ore Based HRC)

In general, the lower quality Scrap Based CRC is used by downstream manufacturers, in the steel tube and furniture industry. The higher quality Iron Ore Based CRC, is used by downstream manufacturers for producing steel drums for the petroleum and palm oil sectors, the automotive industry for making inner auto components, the roofing sheet galvanizers and the electronic and electrical appliances manufacturers to produce white goods, such as fridges, television, rice cookers, microwaves, etc.

Currently, there are 5 CRC domestic manufacturers, producing a mix supply of Scrap Based and Iron Ore Based CRC, with estimated capacity and utilisation rates, as shown in Table 2.



As reported earlier, the dumping of imported CRC steel into the country has affected the domestic industry significantly, as witnessed by the fall in the industry's capacity utilisation rate to only 30%, from the previous year's utilisation rate of 32%.

DOMESTIC FLAT STEEL PRODUCT INDUSTRY SUMMARY

It will be noted from Table 3 that the domestic consumption of flat steel, had grown from 5.91 million tonnes in 2012 to 6.52 million tonnes in 2013, an increase of 10.3%. Of particular interest is the stagnation in the consumption of CRC at 1.56 million.


Despite this zero growth in CRC consumption, imports of such materials into the country continued to grow at a rate of 11.2% for CRC; refer to Table 4 for details. We are certain that 2014's statistics will show a worsening situation with further increases of imports of CRC and CRC related products.

CRC related products are essentially CRC material with various colour and metallic coatings, and/or with minor metallurgical variations. Of importance is the large increase in imported CRC related products, especially from China, and in particular, CRC with boron additive, which are registered as alloy steel, to circumvent the duty of 20% for, imported steel products.

For 2013, Malaysia's total CRC consumption was 1.56 million tonnes, with 0.85 million tonnes, or 54.4%, being imported, a seriously lopsided balance of trade for the nation, especially in view of the extremely low domestic CRC manufacturing capacity utilisation, of only 30%. The domestic CRC industry has been lobbying the government to check this unhealthy practice of indiscriminate duty-free importing of CRC, via anti-dumping safe guard measures, but have yet to see any significant action by the government to protect its domestic CRC industry.


For the year 2013, the domestic flat steel and, in particular, the CRC industry faced challenging times. Table 5 provides details of the production, import, export and consumption for flat steel products in Malaysia for 2013.

Although it may be argued that for the Hot Rolled Coil ("HRC") imports into the country is also significant, at 50% of domestic consumption, it should be noted that all imports of such materials, are restricted to "Iron Ore Based" HRC, which is currently not being manufactured domestically.

On the other hand, much of the CRC and CRC related products, such as colour and metal coated CRC, being manufactured in the country are high quality materials that can easily substitute imports of such materials. Domestic manufacturers of CRC (producing 0.82 million tonnes in 2013) and CRC related products (producing 1.00 million tonnes in 2013) certainly have the production capacity to import substitute, the substantial inflow of foreign material, of 0.85 million tonnes CRC and 0.86 million tonnes of CRC related products; if they were provided the same level of anti-dumping protection, their Thai and Indonesian counterparts receive.

LONG-TERM OUTLOOK

Following the outcome of the study of the steel industry in Malaysia by the Boston Consulting Group in 2012, several measures to address the issues facing the domestic steel industry were undertaken by the Ministry of International Trade and Industry ("MITI") with the participation of various associations/ agencies/ authorities/ departments through the Malaysia Steel Council ("MSC"), the MSC Technical Committee and the five working groups.

However, the landscape of the global steel industry is constantly changing. The global excess in steelmaking capacity remains a major concern. On one hand, the global steel demand growth is slowing down. Yet on the other hand, investments in new steel plants are increasing around the world. Global supply has surpassed demand growth and there has been no effective response to the massive prevailing overcapacity situation.

Raw materials and finished steel prices have been on a falling trend, with iron ore dropping to US$80 per tonne from US$100 just months ago. Chinese steel producers have been "super competitive", with Chinese steel export prices being the lowest in the world, and with many mills selling at or below cost.

As a consequence, many countries are responding with legitimate trade remedy measures to counteract unfair trade practices compatible with World Trade Organization ("WTO") rules to safeguard their domestic industries. The Malaysian Steel Industry is also adversely affected by all these developments and will require remedial action to sustain its viability in the long run.

The influx of cheap imports, especially from China, remains the key issue facing the domestic steel industry. CRC sheets that are given duty exemption to be imported are encouraging domestic downstream manufacturers to import CRC, as opposed to buying from local CRC manufacturers. A contributing factor to this avoidance of import duty is the practice of wrongful declaration of tariff codes and description of the type of steel products, resulting in importation of steel products that could otherwise be produced locally.

PROSPECTS FOR THE NEW FINANCIAL YEAR

In view of the situation facing the overall steel industry, the Group remains cautious for the new financial year. It would appear that the steel industry is facing turbulent times, with global capacity in excess of demand. In addition, steel manufacturers also have to contend with higher domestic costs, especially for electricity, fuel, natural gas, SIRIM and CIDB fees, as well as the newly implemented minimum wage regulations. Another major factor to be considered will be the new Goods & Services Tax ("GST") system which will be implemented next year.

Typically, the consumption of steel products tends to grow in tandem with the industrial progress of the nation. In this respect, the numerous Economic Transformation Programme ("ETP") projects announced by the government, which are now being slowly implemented, is expected to have a positive impact.

Based on this, and the fact that demand for steel products is currently relatively weak, the long-term prospects for the Group remains challenging. The Group will continue to maintain its cautious and conservative stance on inventory management and at the same time closely monitor the domestic seasonal demand patterns, as well as regional and global economic reports.

ACKNOWLEDGEMENT

On behalf of the Board, I would like to express my heartfelt thanks and gratitude, as well as sincere appreciation, to all members of the management team and their staff for their contribution and hard work. The Group's long term success depends on ensuring that Mycron Steel remains the premier name for quality CRC steel sheets. The management and staff have an important role to play in achieving and maintaining this objective.

To our shareholders, I look forward to your continuous support in the years to come and thank you for your patience especially during the challenging times in the past.

Tunku Dato' Ya'acob bin Tunku Tan Sri Abdullah
Chairman