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 2013.

FINANCIAL RESULTS

For the financial year, the Group achieved total sales revenue of RM513 million compared to RM443 million the preceding year, representing an increase of 15.8%.

Similarly, sales tonnage of Cold Rolled Coil ("CRC") steel sheets increased to 204,000 tonnes, compared to 165,000 tonnes the previous year, an increase of 39,000 tonnes or 23.6%. This is the first time, in the Groupís history, that it has managed to cross the revenue figure of RM500 million and also to break the tonnage barrier of 200,000 tonnes of CRC per year.

With a total CRC production capacity of 260,000 tonnes per year, the sales volume represented a high utilisation rate of 78%, compared to 63% the previous year. Buoyed by the increase in sales revenue as well as sales tonnage, the Group recorded a Profit After Tax of RM7 million, compared to a loss of RM15.8 million previously.


DIVIDEND

Despite the better performance for the year under review, compared to the previous year, the cash position of the Group is still tight. Therefore, the Directors do not recommend the payment of any Dividend for the financial year ended 30 June 2013.

OPERATING REVIEW

The first quarter of the financial year under review started off slowly, with the domestic flat steel sector in a depressed state, due to weak demand, and imbalances in pricing across the entire value chain, caused by the influx of cheap CRC imports. In addition, demand on the International front remained weak, due to a global oversupply situation, amidst economic uncertainties caused by the US Presidential Election, and the transition of political power in China.

Sentiments changed by the second financial quarter, which saw increased deliveries, at good spreads. Quarterly CRC sales tonnage, reached 57,000 tonnes, which represented the highest quarterly tonnage achieved in the Groupís history.

The third quarter was slower due to industry wide shutdowns during the Chinese New Year period. Deliveries were also hampered by the restriction against heavy vehicles on the road during the festive season.

A new steel policy was launched by the Government in February 2013, where domestic CRC manufacturers, were restricted from importing more than 50% of their Hot Rolled Coil ("HRC") steel sheet raw material needs, on an import duty exempt basis. This new policy, effectively forced the CRC industry to purchase 50% of their HRC needs from the sole HRC manufacturer in Malaysia, namely Megasteel Sdn Bhd.

After the policy was implemented, Megasteel Sdn Bhd increased the price of their HRC, which was already higher than the international price, even further.

The implementation of the new steel policy saw 18 grades of HRC losing their eligibility for duty exemption. Although the policy had the intention of protecting the HRC industry from imports, the enforcement of downstream protection for the CRC industry was rather vague, with the majority of CRC consumers being allowed to import CRC on a duty exempt basis.

Management will continue with its efforts, to justify its need, to obtain duty exemptions for the import of high quality iron ore based HRC, which is not available domestically, for conversion into high quality CRC, as required by downstream customers.

The fourth quarter for the financial year showed slightly lower sales and tonnage numbers compared to the previous quarter. Sales deliveries were made at healthy margins, due to forward orders taken earlier. However, since April 2013, the domestic and international demand had softened significantly, due to record crude steel production in China, which led to the dumping of excess CRC production in the international markets. Margins were squeezed domestically, with cheaply imported CRC suppressing domestic CRC prices, in certain circumstances, to a level almost as low as the domestic price of HRC.

With the prevailing uncertainties in the global economy, the much anticipated global steel market recovery did not materialise, dragging most steel producers across the globe into deficit territory, brought about by overproduction and intense competition amidst rising raw material prices. Demand remained depressed for most of the year under review, fueled by overcapacity in most markets.

DOMESTIC CRC INDUSTRY

The base raw material used for the production of CRC steel sheets is 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, in the Automotive, the Steel Drum for petroleum and palm oil, the Roofing Sheet Galvanizers, and the Electronic and Electrical Appliance (e.g. fridges, television, handphones, rice cookers, etc.) industries.

Currently, there are 5 CRC manufacturers in Malaysia, with estimated capacity and utilisation rates, as follows:

CRC Industry Statistics CRC Production
* 2012 t/y
CRC Capacity
t/y
Capacity Utilisation
CRC Steel Bhd 420,000 620,000 68%
Mycron Steel Bhd 204,000 260,000 78%
YKGI Bhd 110,000 220,000 50%
Megasteel Sdn Bhd (Lion Group Bhd) 65,000 1,500,000 4%
Eonmetal Group Bhd 60,000 120,000 50%
  859,000 2,720,000 32%
Unused Capacity   1,861,000 68%

* estimated 2012 production (industry data not available)

As noted from the above table, the domestic CRC manufacturers have been operating at a low 32% capacity based on the total rated capacity available. At the same time, the amount of duty-exempted imported CRC was very high, at 945,000 tonnes in 2012, which is higher than domestically produced CRC of 859,000 tonnes.

The inability for domestic CRC manufacturers to compete against the supply of imported CRC was largely caused by their inability to manufacture sufficient quantities of high quality CRC, caused by the limited supply of high quality iron ore based HRC, on a duty exempt basis. Without a sufficient source of domestically manufactured high quality CRC, downstream customers continued to import CRC on a duty exempt basis.

The following table details Malaysia's 2012 production and movement of HRC, CRC and CRC Related Products:

MALAYSIAN FLAT STEEL 2012 Production (tonnes) Import (tonnes) Export (tonnes) Consumption (tonnes)
Class Description
481 Hot Rolled Coil (HRC) carbon steel 1,032,974 826,765 11,376 1,848,363
511 Cold Rolled Coil (CRC) carbon steel 858,501 765,789 56,970 1,567,320
  CRC Related Products    
520 Cold-Rolled Electrical Sheets - 105,202 9,501 95,701
611 Galvanized (Hot Dipped) Zinc Sheets 327,378 353,373 13,022 667,729
612 Electro-Galvanized Iron (EGI) Sheets 213,610 149,316 77,956 284,970
620 Tin Plated Sheets 119,000 95,380 59,156 155,224
692 Colour Coated Sheets 225,034 90,674 39,868 275,840
693 Other Metallic Coated Sheets - 20,681 1,353 19,328
    885,022 814,626 200,856 1,498,792
Total HRC, CRC & CRC Related Products 2,776,497 2,407,180 269,202 4,914,475

Source: MISIF (Malaysian Iron and Steel Industry Federation)

It will be noted that Malaysia's total consumption of CRC was 1,567,000 t/y, of which 51% (or 859,000 t/y) was manufactured domestically, and the balance 49% (or 766,000 t/y) being imported.

Mycron's downstream customers, manufacture CRC related products, such as Galvanized Zinc Sheets, Metallic Coated Sheets, Tin Plated Sheets, EGI Sheets, etc., and require high quality iron ore based CRC, as their main raw material. In 2012, the total consumption of CRC related products was 1,499,000 t/y; supplied by 885,000 t/y of domestic material and 815,000 t/y of imports.

In total, imports of CRC and CRC related products amounts to 1,581,000 t/y, a substantial amount, compared to the countryís total CRC unused capacity of 1,861,000 t/y. There are clearly great opportunities for the country, if the Governmentís flat steel policy, were applied appropriately, to fully apply, already paid for unused CRC manufacturing capacity, to substitute the substantial import of CRC and CRC related materials.

In early 2012, the Ministry of International Trade and Industry ("MITI") commissioned the Boston Consulting Group ("BCG") to conduct a study on "Enhancing the Competitiveness of the Iron and Steel Industry in Malaysia". The Government adopted the recommendations made by BCG and formed the Malaysia Steel Council (ďMSCĒ) as well as 5 working Groups, namely:

  • Working Group 1 - Megasteel Solutioning
  • Working Group 2 - Access to Key Inputs
  • Working Group 3 - Steel Industry Capability
  • Working Group 4 - Standards & Importation Process
  • Working Group 5 - Trade Measures

The Government also approved the formation of the Malaysia Steel Institute ("MySI"); with the objective of providing support for, and establishing an environment for a sustainable iron and steel industry. MySI is private-sector driven and its functions will include human resources development, research, formulation of industry standards, as well as to provide testing facilities for iron and steel products. The Federation of Malaysian Manufacturers ("FMM") was given the lead role in the formation of MySI, assisted by the Malaysian Iron and Steel Industry Federation ("MISIF") and the Malaysia Steel Association ("MSA").

It is envisaged that at the end of the day, the domestic steel industry will be fully restructured, from upstream to downstream, with the Government seeking to formalise policies and measures, necessary to ensure a level playing field, and provide a competitive and fair industry environment. A time frame of 24 to 36 months, has been given by MITI, to enable this goal to be achieved.

LONG-TERM OUTLOOK

The Group remains cautiously confident of the long-term growth potential of the flat steel sector in Malaysia. Following the conclusion of the General Election, industry now awaits the full implementation of the Economic Transformation Programme ("ETP") projects, announced by the Government several years ago.

Key challenges facing the Malaysian steel industry going forward include:

  • The Government's policies for the steel industry;
  • The ability to source high quality materials;
  • The effects of free trade agreements, including the ASEAN Free Trade Agreement ("AFTA");
  • The growing capacities in competing ASEAN countries;
  • China's production capacities; and
  • The weak ringgit.

The Group will continue to pursue a full capacity utilisation strategy, by focusing efforts to convince downstream customers to replace imported CRC, with Mycron's material. With 766,000 tonnes of CRC steel sheets being imported into the country last year, the prospect for the Group to replace some of the imported material, is positive. In this respect, Mycron will focus on the further penetration on the galvanizing, drum and automobile sectors.

PROSPECTS FOR THE NEW FINANCIAL YEAR

For the coming new financial year, the Group expects the demand for CRC to be relatively stable, with the occasional volatility brought about by seasonal factors as well as regional and global influences.

MISIF projected an annual growth of 4% for the domestic steel industry until 2020, which includes the long and flat steel sector. However, for the CRC sector, the country's consumption growth rate from 2008 (1.25mt/y) to 2012 (1.57mt/y) averaged 6.3% reflecting the strong demand for CRC steel sheets.

Based on this, the long-term prospects for the Group remain positive, even though demand for steel is currently relatively weak. The steel industry has always been cyclical and remains highly sensitive to global economic conditions and developments, including the volatility of raw material prices such as scrap, iron ore and coking coal, as well as shipping rates and oil prices.

The Group will continue to maintain its conservative and cautious stance on inventory management, while at the same time, monitor closely, the domestic demand patterns, as well as 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 Groupís 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 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