Masteel Gets Revenue Boost

Masteel has entered into an agreement to supply 270,000 tonnes of steel bars & steel billets worth RM500 million in 3 years to Amsterdam-based Trafigura Pte Ltd, which is the world's second largest independent trader of bulk and non-ferrous minerals.

This will come in time for Masteel as it is currently expanding its upstream and downstream steel production.

Financial year 2011 Overview

Overall, FY2011 was a capricious year for Masteel and the steel industry as a whole. While steel demand continued to be positive as a result of increased construction and manufacturing activities in the region, declining margins due to economic emanating from abroad had impacted the Company’s profitability.

In spite of that, we were able to achieve a few notable milestones. For a start, we accomplished a record revenue of RM1.3 billion, up 24.7% from RM1.0 billion in FY2010.

In and addition for FY2011, leveraging upon Masteel’s expertise in the export markets. We were able not only to grow market share in traditional territories, but also make significant in-roads into newer markets like Myanmar and Sri Lanka.

Operationally, we incurred higher financing costs during the year, due to higher working capital requirements coupled with capital expenditure (CAPEX) investments needed to grow our capacity. The other challenging factors included higher energy costs and the effects of foreign exchange (FOREX) fluctuations.

Despite the difficult global market situation toward the end of the year, Masteel was able to weather most of the market gyrations due to its continuing cost control measures that was initiated in 2009 and continued in 2010. This has enabled the Company to remain competitive and profitable in FY2011 with a net profit of RM24.5 million.

Growth Strategies

Acknowledging the need to continue strengthening our capabilities, given Masteel’s aim to be amongst the market leaders as a quality niche steel producer, in FY2011 the Group announced CAPEX plans to invest an estimated RM230 million over the next three years to grow our annual production capacity and improve our profit margins.

This will be achieved by the setting up of a new rolling mill facility in Klang, Selangor, which will be built adjacent to our existing billet plant. This new facility, once fully operational, will have an annual production capacity of 200,000 tonnes, enhancing our total Group capacity of steel bars to over half a million tonnes per annum.

We will also steadily increased our annual meltshop capacity by about 10% to 600,000 tonnes from 550,000 tonnes currently.

This CAPEX investment will allow Masteel to take better advantage of the opportunities inherent within the domestic market as a result of the various economic initiatives being spearheaded by the Malaysian Government as well as the country’s own resilient property market.

It will also allow the Group to benefit further from new opportunities from export markets, especially in emerging regional economies like Indonesia, South India and Myanmar, which are undertaking various infrastructure initiatives that will require our products.

Masteel is also seeking to augment its core business with ventures that would yield higher returns and are less cyclical in nature,this can be seen by the strategic development in FY2011 whereby a joint venture (JV) with KUB Malaysia Berhad (KUB) to supply and operate a world-class rail transport network within the Iskandar Malaysia region and Woodlands, Singapore, was initiated.

This endeavour will provide us with an avenue to expand into the thriving infrastructure industry. Going forward, the Group will explore similar strategies as and when they arise.

      Iskandar Malaysia

Corporate Updates

• Head of Joint Venture Agreement with KUB Malaysia Berhad

On 19 January 2011, Masteel and KUB entered into a 60:40 JV agreement to combine capabilities and resources via a JV firm – Metropolitan Commuter Network Sdn Bhd (MCN) - to undertake the proposed inter-city rail network within Iskandar Malaysia with a connection to Singapore’s MRT network.

On 15 April 2011, the Menteri Besar of Johor, Dato’ Haji Abdul Ghani Othman, endorsed MCN’s application to build and operate the rail network via a press statement. Subsequently, MCN began the process of engaging various Malaysian Government agencies on the matter.

On 8 August 2011, MCN presented the rail network proposal to the Economic Council, chaired by Prime Minister Dato’ Sri Mohd Najib Tun Abdul Razak. The firm was directed to finalise the matter pertaining to its proposal in conjunction with the Government’s own double tracking programme before reverting back to the council.

In September, October and November 2011, Masteel held a series of discussions with the Ministry of Transport, Keretapi Tanah Melayu Berhad and Railway Asset Corporation on the operational requirements of the MCN project. Barring any unforeseen circumstances, the Group is now awaiting the next presentation to the Economic Council, slated for the second quarter of 2012, to seek approval for the project.

Prospects

2012 has seen the continuation of the effects of the sluggishness in demand that had plagued the global steel industry since the second half of 2011. As a whole, the sector continues to be affected by overall lower prices and higher material costs.

The Euro-zone crisis continues to impact global steel prices while China has seen a slowdown in steel imports as its construction and property sectors adjust to monetary tightening by its central government to ease inflationary pressures and to reposition its economy.

However, going forward, the market consensus is one of optimism, with the strong performance of Emerging Market economies and their continued appetite for steel needed for their infrastructure and commercial development.

According to reports in the Indian media, the South Asian nation is expected to boost steel production capacity by 20%to 100 million tonnes per annum by 2013 to meet domestic demand.

Meanwhile, Australian iron ore miners BHP Billiton, Rio Tinto and Fortescue Metals Group remain bullish on China demand in spite of recent slowdowns. The industry giants expect demand for the East Asian giant to continue to grow strongly over the next decade while steel demand elsewhere around the world would rise by about 3% per year over the next eight years.

This forecasted overseas demand bodes well for Masteel, given our continuing strategy to develop our capacity to be more competitive so that we may grow our exports.

However, we can also take heart from the domestic demand, especially by the robust property sector and the increasing number of project rollouts under the Economic Transformation Programme (ETP) that will further fuel demand for steel products.

Masteel’s on-going CAPEX investments to grow our capacity and our strategic location within the Klang Valley, where a large number of major projects are being implemented, plus our competitive pricing, will further galvanise our leading position in the Malaysian steel industry.

Dato ’ Sri Tai Hean Leng @ Tek Hean Leng
Managing Director/Chief Executive Officer