FINANCIAL RESULTS

For the financial year ended 30 June 2011, the Group had attained total sales revenue of RM414 million compared to RM465 million the previous year, a drop of RM51 million or 11%. Similarly, sales volume dropped to 156,000 tonnes compared to 181,000 tonnes the previous year, a fall of 25,000 tonnes or 13.8%.

With a production capacity of 250,000 tonnes a year, the sales volume represents a utilisation rate of 62.4%.

The lower sales revenue was a result of the soft market conditions that prevailed for much of the period under review. While the first half of calendar year 2010 was a strong one in terms of demand, the market turned soft from July onwards and this continued into the first half of calendar year 2011.

The Group recorded a Profit After Tax ("PAT") of RM0.5 million which was a substantial drop compared to RM25.5 million previously, reflecting the significant margins squeeze brought about by intense competition, both in the global markets as well as the domestic market. Malaysian competition was further strained by cheap imports of Cold Rolled Coil ("CRC") Steel Sheets from China.

Due to the weak performance for the period under review, the Directors do not recommend the payment of any Dividend for the financial year ended 30 June 2011.

After a very strong first half in calendar year 2010, the steel industry started turning sluggish by the 3rd quarter of the year and continued into the beginning of 2011. Demand for CRC steel tapered off and destocking activity continued into the early part of 2011 with customers keeping inventory levels at near zero levels and only placing orders against back-to-back orders. This cautious stance by customers reflects their unwillingness to stock up on inventory in case markets deteriorate further.

The slowdown in the US economy, which resulted in the US Dollar weakening against other major currencies further contributed to the bearish sentiment in the steel industry. The economic slowdown in China resulted in the Chinese Government tightening credit markets, further removing economic stimulus and causing China’s steel demand to weaken for the second half of 2010.

The calendar year 2011 started with the expectation that steel prices would increase, which it did initially, being reinforced by the floods in Australia thus affecting the supply of iron-ore. However, the steel price increase could not be sustained, with many steel players preferring to stay on the sidelines and adopting a wait-and-see attitude.

The change in the system of ordering steel products from a quarterly basis to a monthly basis had also caused instability in order volumes, as customers are now able to gauge demand on a monthly basis thus giving them the option not to buy for the month.

After the earthquake and tsunami hit Japan on 11 March 2011, there were expectations that steel prices would shoot up due to demand created by the rebuilding process. But this has not materialised as yet, and it is now expected that it will take some time before reconstruction activity starts.

In summary, the poor performance for financial year ended 30 June 2011 can be attributed to low demand, overcapacity and the global economic weakness, especially in the US, Europe and now China. Domestically, the Malaysian steel industry also had to contend with cheap imports especially from China, in view of the weakening demand there.

All Cold Rolled Coil ("CRC") Steel Sheets are manufactured from its base raw material, Hot Rolled Coil ("HRC") Steel Sheets and in general, CRC manufacturers have two main products, namely:

• Iron-Ore Based CRC (made from Iron-Ore Based HRC) and
• Scrap Based CRC (made from Scrap Based HRC)

In general, Scrap Based CRC has a lower quality and is used by less demanding manufacturing processes, like the manufacturer of pipes for the furniture industry. In Malaysia, the supply of Scrap Based HRC is provided by the sole HRC manufacturer, MegaSteel Sdn Bhd.

The higher end Iron-Ore Based CRC is used by more demanding manufacturers, like the Automobile, Galvanising, Drum and Electrical industry. As there are no Iron-Ore Based HRC manufacturers in Malaysia, all such materials are imported.

In the case of Mycron Steel CRC Sdn Bhd ("Mycron Steel"), the Group's CRC subsidiary, its customers, in general, need Iron-Ore Based CRC and Scrap Based CRC in the mix of 70% and 30% respectively.

Mycron Steel's customers comprise mainly of Steel Service Centres being the largest segment with 30% of total sales, followed closely by the Pipe sector at 23.8%. Other customers include Electronic and Electrical customers, Steel Drum Manufacturers, Steel Galvanisers and Automobile Manufacturers.

For the calendar year 2010, total Malaysian domestic consumption of CRC Steel Sheets was 1.57 million tonnes, compared to 1.34 million tonnes in 2009. Of this amount, 979,000 tonnes of CRC was imported due to the lack of availability of locally manufactured Iron-Ore Based CRC. There were no imports of Scrap Based CRC.

Regulations imposed by the Malaysian authorities restrict the supply of duty-free Iron-Ore Based HRC into the country, which has denied domestic CRC manufacturers from obtaining sufficient HRC raw material to manufacture Iron-Ore Based CRC.

As a result of this shortage of raw material, the subsequent shortage in supply of domestically manufactured Iron-Ore Based CRC has caused down-stream customers to seek supply by importing Iron-Ore Based CRC from overseas, which has been approved by the authorities, on a duty-free basis, on a case-to-case basis.

Calls by the Steel Industry to allow for the free import of Iron-Ore Based HRC to meet this supply gap has met with limited results and unless these calls are heeded, imports of nearly 1 million tonnes of duty-free Iron-Ore Based CRC will continue unabated.

The Group is hopeful that the authorities will eventually lift the restriction of supply of duty-free Iron-Ore Based HRC, in view of the fact that there are no Iron-Ore Based HRC manufacturers in Malaysia.

It is the Group's strategy to continue its focus to manufacture high-end Iron-Ore Based CRC and follow an import substitution campaign. Operating at only 62.4% plant utilisation for the financial year ended 30 June 2011, the Group has ample capacity (about 94,000 tonnes a year) to target the almost 1 million tonnes a year of CRC supply, which are currently being imported into the country.

There is no excuse for down-stream customers to import duty-free Iron-Ore Based CRC if there is adequate supply of the same material, which can be made in Malaysia.

The Group is well placed to penetrate this sector as it has invested RM120 million in upgrading its facilities in 2007. The quality of Mycron Steel's CRC is as good, if not superior, to imported CRC, and this bodes well for the Group in the long-term.

The Group remains confident in the long-term growth potential of the various sectors in Malaysia, especially the manufacturing, electronics, construction, petroleum and palm oil industries. With the Economic Transformation Programme ("ETP") projects already announced by the Malaysian Government and those coming on stream later, the expected demand for CRC, be it in the form of raw materials or semifinished products, should be significant.

The Government’s ETP is expected to be a key driver for Malaysia to attain a Developed Country status by the year 2020. The ETP aims to attract investments worth a total of USD444 billion to propel the country’s Gross National Income ("GNI") to RM1.7 trillion. This will augur well especially for the infrastructure and tourism sectors, among many others.

As mentioned earlier, the Group will continue to pursue an import-substitution strategy, especially in the galvanising, drum and automobile sectors, which are currently using imported CRC for their feed material. With almost 1 million tonnes of CRC being imported into Malaysia each year, the prospects for the Group to penetrate new markets is tremendous, as soon as HRC raw material supply issues are resolved.

When markets stabilise, and with its strategy of targeting the almost 1 million tonnes of imported CRC, the prospect for the Group's production capacity utilisation growing from the current 62.4% level (i.e. 156,000 tonnes a year) to full capacity (i.e. 250,000 tonnes a year) is very real.

Although the long-term prospects for the Group is good at present, steel demand remains weak due to the concerns of the global economic environment.

The steel industry has historically always been cyclical and remains highly sensitive to global economic conditions as well as the volatility of raw material prices, such as iron-ore, scrap and coking coal.

In view of this, the Group will continue to remain focused and closely monitor the global and domestic steel demand patterns, and continue to maintain a cautious stance on inventory management.

On behalf of the Board, I would like to express my thanks and gratitude, as well as sincere appreciation to all members of the management team and their staff for their contribution and hard work in the past year. Although times are difficult at present, by ensuring that Mycron Steel remains the premier name and quality in the Cold Rolling fraternity, I believe, will guarantee the Group’s long-term success.

To our shareholders, I thank you for your support and patience, especially during this period of high volatility and look forward to your continued support in the years ahead.