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” or “Mycron”) for the financial year ended 30 June 2016.

FINANCIAL RESULTS

The Group operates in the mid-stream sector of the steel industry, with the manufacture of Cold Rolled Coil (“CRC”) steel sheets and Steel Tubes.

In March 2015, the Group acquired Melewar Steel Tube Sdn Bhd (“MST”), a manufacturer of Steel Tubes and Pipes, from its parent company, Melewar Industrial Group Berhad, through a share swap exercise. The rationale for the acquisition was to concentrate Melewar’s steel activities under one company, giving the enlarged operations a stronger bargaining position when negotiating for the purchase of the Group’s core raw material, Hot Rolled Coils (“HRC”).

For the year under review, the Group achieved total revenue of RM 566.8 million compared to RM 518.3 million in the previous year, representing an increase of RM 48.5 million or 9.4%. This higher revenue was principally due to the consolidation of one full year’s operations of the Steel Tube division’s activities, compared to only 3 months consolidation in the previous financial year.

In terms of sales tonnage, CRC sales dipped 7.9% to 187,000 tonnes, compared to 203,000 tonnes the previous year, in a relatively quiet and lackluster market for steel products. The Steel Tube division recorded sales tonnage of 72,000 tonnes, a level very similar to the previous year (FY 2015: 73,000 tonnes).

The Group recorded a significantly improved Profit After Tax of RM 24.2 million, compared to RM 11.7 million in the previous year. The improved results for the Group is due to improved CRC sales margin attributed to a combination of better operational cost controls and improved CRC pricing, and the contribution of profits from one full year of Steel Tube operations.

In May 2016, the Ministry of International Trade and Industry (“MITI”) filed an anti-dumping gazette for imports of CRC from selected companies from China, South Korea and Vietnam, with additional duties imposed for a five-year period, ending in 2021. This action by the Government has helped to stabilise the price of CRC for the last quarters of the financial year.


DIVIDEND

Even though the Group turned in a profitable performance for the year under review, the cash flow position of the Group is still not considered stable enough, especially in an environment of limited banking facilities. The Directors, as such, do not recommend the payment of any dividend for the financial year ended 30 June 2016.

CRC OPERATIONS REVIEW

Overall, the total sales tonnage for CRC of 186,613 tonnes was lower by 7.9% compared to the previous financial year (202,921 tonnes) reflecting the relative quiet market for steel products. Table 1 shows the quarterly operating performance of the CRC Division.

During the first financial quarter, the revenue of RM 86.2 million was 20% lower than the previous quarter. The sales tonnage of 40,801 tonnes was also correspondingly lower by 15.3% than the previous quarter (48,172 tonnes). Historically, the first financial quarter is seasonally the lowest quarter for the Group, due to the Hari Raya holidays. Even though revenue and sales deliveries were lower than the previous quarter, the CRC Division registered a Profit Before Tax of RM 3.57 million, which was made possible by the continued efforts by the team at Mycron CRC, to streamline operational efficiencies and control operating costs.

For the second financial quarter, revenues improved by 6.8% to RM 92.1 million, with sales tonnage improving by 9.4% at 44,644 tonnes. The CRC Division registered a further Profit Before Tax of RM 4.68 million, as efforts to contain costs paid off.

For the third financial quarter, revenues improved further by 8.8% to RM 100.2 million, with sales tonnage increasing by 11.8% to 49,903 tonnes. The CRC Division registered a Profit Before Tax of RM 7.36 million during the quarter, as CRC prices improved in anticipation of the anti-dumping action by the government.

For the fourth quarter, revenues was up a further 4.8% to RM 105.1 million, with sales tonnage improving 2.7% to 51,265 tonnes. The CRC Division registered a further Profit Before Tax of RM 7.52 million, as prices stabilised following the anti-dumping gazette in May 2016.

DOMESTIC CRC INDUSTRY STRUCTURE

Hot Rolled Coil (“HRC”) steel sheets are the basic raw material used in the production of Cold Rolled Coils (“CRC”) steel sheets. CRC manufacturers, in general, produce two types of CRC, namely:

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

Due to different metallurgic qualities, Scrap Based CRC is inferior in quality compared to Iron Ore Based CRC as the former contains impurities inherent in the scrap used to manufacture the HRC. Being of lower quality, Scrap Based CRC are used by downstream manufacturers mainly in the steel tube and furniture sectors.

On the other hand, the higher quality Iron Ore Based CRC are used by downstream manufacturers mainly involved in the production of steel drums for the petroleum and palm oil sectors, for making components for the automotive industry, for producing steel sheets for color coating and galvanizing purposes, and also in manufacturing electrical appliances comprising of white goods like television sets, refrigerators, microwave ovens, rice cookers, etc.



Currently, there are 5 domestic CRC manufacturers producing both Scrap Based and Iron Ore Based CRC. The estimated utilization rate and total capacity for the industry are shown in Table 2.

It will be noted that the industry’s capacity utilisation rate is very low at 28.0%, principally due to non-operation of MegaSteel’s CRC plant.

Even when excluding MegaSteel from the statistics, the industry’s average capacity utilisation is still low at only 61.8%, which means that the country is only producing 742,000 tonnes, when it could have been producing 1,200,000 tonnes of CRC. This means that there is a substantial unused capacity of 458,000 tonnes of CRC that could have been manufactured domestically.

This excess of unused capacity in the cold rolling sector is caused by the large amounts of imported CRC, totalling 846,000 tonnes in 2015, almost all of which could have been manufactured in Malaysia. Refer to Table 3 for a summary of the imports of flat steel into the country.

When one considers the imports of CRC related products (such as electrical, galvanized and colour coated sheets) of 631,000 tonnes in 2015, the combined magnitude of cold rolled steel sheets being imported into the country is enormous, at 1,477,000 tonnes.

The dumping practices of certain countries has perpetuated this high level of imports, even in an environment when the 15% import duties imposed by the Malaysian government is applied.

It is therefore heartening to note the anti-dumping action taken up by MITI in May 2016 against certain manufacturers from China, South Korea and Vietnam. Hopefully with this action, the domestic industry will experience better capacity utilisation rates in the near future.



STEEL TUBE OPERATIONS REVIEW

Business activities in the Steel Tube division remained unchanged at 72,188 tonnes for FY 2016, compared to the previous year’s 72,870 tonnes, reflecting the intense competition of many players in a soft domestic market. Table 4 shows the quarterly operating performance of the Steel Tube division.



For the first financial quarter, sales revenue was 13.0% lower at RM 50.3 million compared to the previous quarter’s RM 57.8 million. In terms of sales volume, the lower sales tonnage of 17,652 tonnes compared to the previous quarter (Q4 2015: 20,748 tonnes) was due to the Hari Raya holidays and celebrations, and also due to the disruption in the HRC supplies from MegaSteel, as a result of a plant breakdown.

For the second financial quarter, total sales revenue improved by 10.9% to RM 55.8 million, caused by an increase in sales tonnage of 7.5% to 18,974 tonnes as a catch up due to the delayed MegaSteel HRC deliveries in the first quarter.

For the third financial quarter, total sales revenue was down 13.1% to RM 48.5 million due to weakening prices. During the quarter, sales tonnage fell by only 1.3% to 18,719 tonnes.

For the fourth quarter, sales revenue recovered by 6.2% to RM 51.5 million as prices recovered, offset by a fall in sales tonnage of 10.0% to 16,843 tonnes.

Overall, Profit Before Tax improved during the financial year to RM 9.40 million compared to a pre-tax loss before impairment of RM 0.79 million in the previous year, as a result of improved margins caused by a drop in the overall cost of HRC.

DOMESTIC FLAT STEEL INDUSTRY SUMMARY



Malaysia’s overall flat steel consumption was flat in calendar year 2015 at 5.71 million tonnes (refer to Table 5).

Due to a weakness in demand, the domestic consumption of non-HRC flat steel products was relatively weak during that period: CRC down by 3.5%, CRC related products (like electrical, galvanized and color coated sheets) down by 4.0%, and Steel Pipes and Tubes down by 5.8%.

The domestic consumption of HRC on the other hand, grew by 170,000 tonnes (or 9.6%) to 1.95 million tonnes (refer to Table 5) whilst imports of HRC grew by 186,000 tonnes (or 17.5%) to 1.25 million tonnes (refer to Table 3) to reflect that growth in demand. The domestic production of HRC was therefore unchanged.

Surprisingly, on 13th July 2015, MegaSteel, the single largest domestic HRC manufacturer, submitted a Safeguard petition to MITI, citing it was injured due to excessive imports of HRC into the country. The petition requested the Malaysian government to impose safeguard duties on the import of HRC at the rate of 40% on top of the existing 15% import duty on HRC (i.e. total 55% duty), with the rate gradually reducing over a period of four years.

The Group is of a view that such a petition was baseless, and if implemented would have crippled and permanently damaged the domestic mid-stream steel industry.

In accordance with the World Trade Organization (WTO) rules, a public hearing was held on 4th November 2015 in MITI’s office, attended by 38 interested parties. The safeguard request was unanimously opposed by the Malaysian Iron and Steel Industry Federation (“MISIF”), Japan Iron and Steel Industry Federation (“JISIF”), China Iron and Steel Association (“CISA”) and many others, who jointly argued that the Safeguard request had no merits.

After conducting its own investigation and reviewing the formal submissions provided by both sides, MITI terminated the HRC Safeguard investigation. Under WTO rules, another Safeguard petition may not be entertained for the next two years.

HRC SUPPLY

HRC is the core raw material used by the Group, for both its CRC and Steel Tube manufacturing operations.

In 2015, of the 1.95 million tonnes of HRC consumed in the country, 0.71 million tonnes was manufactured domestically. Refer to Table 6 for an analysis of material movements.

Of the 1.95 million tonnes of HRC consumed, 799,000 tonnes (or 41.0%) was used to produce CRC whilst 842,000 tonnes (or 43.2%) was used to produce Steel Pipes and Tubes.

Sourcing HRC at a fair price and delivery reliability is clearly imperative for the going concern of CRC and Steel Tube manufacturers.

For the manufacture of the Steel Tubes, the Group uses Scrap Based HRC, which was exclusively supplied by the former sole manufacturer of HRC in Malaysia, MegaSteel Sdn Bhd (“MegaSteel”). In early 2016, MegaSteel had announced a temporary cessation of HRC production, which, up to the date of this report, has not recommenced.

Another local Scrap Based HRC manufacturer, Southern Steel Berhad (“Southern Steel”), started production of HRC in 2015. Southern Steel had encountered some technical problems in their production and has also temporarily ceased operations, with legal cases being drawn up against their equipment suppliers.

With no domestic HRC manufacturer currently in operation, the Group has been importing all its HRC needs, mainly from Japan, but with some minor supplies from other regional countries. Fortunately, having had a very long history of importing Iron Ore Based HRC from reliable suppliers, the Group is well-positioned to continue its business without any disruptions to its operations.

As mentioned earlier, MegaSteel had filed for a Safeguard petition, which was rejected by MITI in early 2016, a move which was welcomed by the domestic steel industry. It is understood that MegaSteel is challenging the Government’s decision not to impose the Safeguard measures. This is being closely monitored by the entire steel industry as well as affected and interested parties locally and abroad. It is hoped that the challenge will not be successful for the sake of the future of the local mid-stream steel industry.



Imposing high duties will make Malaysian CRC and Steel Tube products uncompetitive and expensive, and will cripple demand for such products.

It is hoped that the Government will not reverse its decision to avoid implementing Safeguard measures, which may negatively tarnish Malaysia’s position as a major trading nation, and which may invite retaliatory action against the country, in a tit-for-tat imposition of duties on other Malaysian products, such as palm oil and manufactured goods.

LONG-TERM OUTLOOK

The Malaysian government’s current import duty for flat steel material of 15% is considered reasonable enough, to shield the industry from dumping practices of steel manufacturers that enjoy export subsidies from their respective governments (e.g. China). As CRC is an important component for the manufacture of many downstream products such as automobiles, white goods (e.g. television, computers, handphones, rice cookers, refrigerators, air-conditioners, etc.), drums for petroleum and palm oil export, furniture and roofing sheets, protecting the supply of CRC is key to securing the country’s long-term position as a major trading and manufacturing base for the world.

China’s total steel export recorded an all-time high of 112.4 million tonnes in 2015, up 20% year-on-year, while its exports to ASEAN countries was even higher, at 28% year-on-year, at 31.9 million tonnes. It was therefore of no surprise that between 2013 and 2015, a total of 65 unfair trade complaints were made by countries all over the world against China’s steel trade practices.

It is the Group’s long-term view that the Malaysian government will continue to practice sound judgement in its flat steel policy, which bodes well for the Group’s activities. The ability to keep Malaysia as a competitive manufacturer, whilst protecting its industries from unfair trade practices, takes great skill, and can only be achieved with open dialogue between regulators and industry.

Although the steel industry is highly competitive and is subject to significant global supply and demand anomalies, the prospects for the business are still positive as global demand grows. To this end, the Group is currently exploring the opportunities for export of its CRC and Steel Tube products, to take advantage of recently signed free trade agreements.

The ability to turn a profit from this mid-stream steel activity, is paramount for the Group’s ability to survive in this industry. Maintaining strict control on operating costs with the consistent monitoring of production efficiencies is the key for success. The Group has been successful in these activities, which has allowed it to generate profits, as the results of this financial year illustrates.

Subject to unforeseen circumstances, the long-term prospects for the Group’s activities in this mid-stream steel industry is positive.

PROSPECTS FOR THE NEW FINANCIAL YEAR

Even though the Group has performed well for the period under review, there is no guarantee that the same performance will be attained in the coming year. There are both internal and external factors that can affect the performance of the domestic steel industry, including the direction of the local and global economies, the strength/weakness of the Ringgit, the China export factor, and how the Government reacts to dumping practices.

A plus point for local CRC manufacturers was the recent anti-dumping action taken against CRC imported from South Korea, Vietnam and China in May 2016.

Going forward, domestic demand will continue to be the main driver of growth, supported primarily by private sector spending. Private consumption is expected to expand further, underpinned by continued growth in wages and employment, as well as additional disposable income following government stimulus measures. Projects under the newly launched 11th Malaysia Plan should also augur well for the steel industry as a whole.

ACKNOWLEDGEMENT

On behalf of the Board, I would like to express my heartfelt gratitude and thanks, as well as sincere appreciation, to all members of the management team and their staff for their hard work and contribution to the Group.

It is during these hard times that we differentiate ourselves by focusing our efforts in making quality products, backed by excellent after sales services. Mycron will continue to be a force in the domestic mid-stream steel industry for many years to come. Success does not always come easy and usually start from humble origins.





Tunku Dato' Yaacob Khyra
Executive Chairman