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The effect of both these factors (i.e. volume and price movements) for the Group, for the financial year 2009, is a net fall of 5.6% in total sales revenue to RM383.3 million (FY2008: RM406.1 million).
With the sudden fall in steel prices, the Group has made provisions for the diminution in value of its steel inventories, which has adversely affected its results for the year. The Group recorded a Loss After Tax of RM38.4 million for the year, compared to a Profit After Tax of RM30.3 million in the previous year.
PROPOSED
DIVIDEND
As the world continues to face economic uncertainties, and with CRC demand growth still in its infancy, the priority of the Group, will be to conserve its resources. In view of this, the Directors do not recommend the payment of any dividend, for the financial year ended 30 June 2009.
STEEL INDUSTRY REVIEW
The financial year ended 30 June 2009, has been one of the most challenging periods, in economic history, for the steel industry.
CRC demand was strong, both domestically and internationally, up to July 2008, caused mainly by a shortage of global steel supply. With steel prices at record levels, many down-stream manufacturers began to face financial problems, with the high value of steel inventories, stretching their credit facilities to the limit. Without further financial support, from the banking sector and the credit markets, that were by that time in turmoil, down-stream manufacturers could not afford to maintain their normal levels of steel raw material
inventories. Steel demand began to gradually weaken.
By October 2008, the global economic crisis was in full force, which resulted in a drop, in global demand, for almost all manufactured and consumer goods. With sale volume dropping drastically, manufacturers’ inventory levels began to look alarmingly high, which prompted them, to cease new orders for all raw material supplies, including steel. This resultant drastic drop in steel demand caused steel mills in China, to reduce prices, on a weekly basis, precipitating a collapse in global steel prices.
Hot Rolled Coil (“HRC”) steel sheets, the key raw material for the manufacture of CRC, fell from over US$1,000 per tonne in July 2008, down to US$725 per tonne in December 2008, and reaching US$480 per tonne by March 2009. With such a large and sudden drop in HRC steel raw material prices, CRC manufacturers globally, were hit with having to make significant provisions, for diminution in values, of their HRC raw material inventories.
Malaysia was not spared the fate of the global economy. Domestic steel markets remaining depressed, since October 2008, as cheap imports flooded the Malaysian steel market, initially coming from Chinese mills, followed by CIS mills, and subsequently by Korean mills. Operating margins were squeezed, with many operators reporting losses each quarter, during the later half of the financial year.
However, from May 2009 onwards, the prospects for the steel industry had begun, to show signs of improvement. Down-stream manufacturers’ inventory levels, had now reached very low levels, which prompted renewed buying activity. Due to production cuts, steel mills were not able to cope, with the sudden rise in demand, leading to a temporary shortage in steel supply. Steel prices had bottomed and were beginning to inch upwards.
Recent professional trade journals, for the steel industry have, have reported a significant improvement in optimism, amongst steel manufacturers globally. It seems, that the steel industry, may have finally, begun to turn the corner.
REVIEW OF GROUP OPERATIONS
The Group was not spared, the global steel price collapse, and the resultant need, to make provisions for diminution in value, of HRC inventories. Fortunately for the Group, due to its prudent inventory policy, the total tonnage of HRC raw materials was relatively low, which limited the damage, of the price fall. At only 1.5 months of sales, the Group’s inventory level is considered low, when compared to other domestic steel operators.
For the year ended 30 June 2009, the Group recorded a Loss Before Tax of RM49.7 million, after making a provision for inventory diminution of RM40.3 million.
On a happier note, I am happy to report, that after a development period of three years, the Group’s plant upgrade and expansion exercise, through the purchase of a new collection of batched annealing furnaces, a new skin-pass mill and a new combined tension-leveller line, was completed in June 2008. This upgrade has allowed higher quality CRC to be manufactured, whilst also increasing the overall CRC output capacity by 45%, from 180,000 to 260,000 tonnes a year.
Fortunately, the plant upgrade and expansion was completed, just three months before the global financial and economic meltdown had set in. Had it not been completed before this, the Group would have run a huge risk, of the facility being shelved, as banking credit lines dried up globally.
Any CRC manufacturing competitor, planning a capacity expansion project today, would be fighting, and losing, an uphill battle, as banks and credit markets, have all but stopped funding new projects. The opportunity for a competitor, to expand its facilities will not come again, for many more years to come. In view of this, the Group can consider itself, extremely fortunate, to have completed its plant upgrade and expansion, in June 2008.
Based on this new expanded plant output capacity of 260,000 tonnes a year, the drop in total sales for the year to 128,000 tonnes, translates to a capacity utilisation of 49%. Although much lower than the preceding year’s capacity utilisation of 89% (FY 2008: 160,000 tonne output. 180,000 tonne capacity), the improved and expanded facility, does bode well for the Group.
I am happy to report, that the improved CRC quality has benefited the Group, by allowing it to tap into the steel roofing sector, especially in relation to its off-take contract with Bluescope (Malaysia) Sdn Bhd. The higher grade CRC output, together with continued technical assistance from JFE of Japan, has also allowed the Group, to penetrate the automotive sector, with Mycron currently producing fifteen (15) components, for the recently launched MPV Exora, which has proven to be quite a hit for Proton, with some 4,000 units being booked within months of its launch. Going forward, it is envisaged that Mycron, will also be supplying, automotive grade CRC, to Perodua - the second national car project.
With its expanded capacity of 260,000 tonnes a year of CRC, the Group considers itself to be in an ideal position, to meet future improved sales demand, as a result of the improved global economy. Going forward, Mycron’s goal will be to try to achieve, better operating margins, through increased sales of higher grade CRC, and through better economies of scale, due to the expanded capacity of the plant.
Although the Group is in an excellent position, to improve and expand its operations, it also recognises the uncertainty and volatility of the economic conditions it now faces. There are still concerns today, about the pace and timing, of the current recovery in world steel price and volume, and the management team will do its utmost, to win new orders, and to operate its plant, at an optimum level, to ensure the best returns, for the Group.
BUSINESS OUTLOOK
In spite of the challenging environment, that had plagued the steel industry last financial year, the prospects for the future, is beginning to look brighter.
Down-stream manufacturers’ inventory levels are now at an all time low, prompting renewed buying activity. Overseas steel mills operating at reduced capacities have caused a temporary supply shortage to develop. Prices are trending upwards, and the prospects for the rest of the financial year, is looking positive.
With Mycron’s decision, to increase its HRC purchases for the second half of 2009, the Group should be in a favourable position, to take advantage of increasing CRC demand, and rising CRC prices.
PROSPECTUS FOR THE NEW FANANCIAL YEAR
There is optimism that the global economy, will emerge from the current recession, with moderate growth expected in 2010. As CRC steel is a key component required by most manufacturing concerns, consumption of CRC in the medium and long term, is expected to continue to grow.
With steel mills globally, having implemented production cuts, the supply situation has become tight, with many operators reporting long delays in material arrivals. The Group has also experienced delayed arrivals of HRC, which has caused some knock-on delays, in the delivery of CRC sales. Although inconvenient, these are positive signs, and the Group is fairly optimistic, for the financial year 2010.
However, on a cautionary note, due to the fragility and volatility of the global economy, the Group will continue to monitor global steel demand patterns, and will maintain its cautious inventory management policy, of only matching HRC purchases, to committed and projected customer CRC orders.
The Group’s decision to invest heavily, to expand CRC output capacity, and to further improve the quality of its CRC products, is proving to be a fortuitous one. The Group now finds itself, in an excellent position, to take advantage of the recovering global economy, and achieve a higher-value and larger market share.
With many long-term and well established down-stream manufacturing customers, a wider product range, and a highly skilled and motivated employee base, the Group is in a good position, to excel in the coming years. Barring any unforeseen circumstances, the Group remains confident, in its long term business prospects.
ACKNOWLEDGEMENT
On behalf of the Board, I would like to express my gratitude to our shareholders, customers, suppliers, business partners and staff, for having stood by Mycron, over these past years. Your continued support will certainly help to take the Group, to new levels of success, in the years ahead.
Tunku Dato’ Ya’acob bin Tunku Tan Sri Abdullah
Chairman
04 November 2009
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