KLANG: Hiap Teck Ventures Bhd’s 55%-owned Eastern Steel Sdn Bhd, controlled by businessman Datuk David Law Tien Seng, will begin work on the first phase of its integrated steel complex in Kemaman next month. The initial cost is RM754 million and targeted completion is by mid-2013.
Despite the ongoing uncertainties in global markets and the challenging outlook for the steel sector, Hiap Teck, currently a steel pipe manufacturer, together with its China partner, China Shougang International Trade and Engineering Corp, has decided to go ahead with the project that will be among the first to produce steel slabs in Asean. Steel slabs are currently imported from eastern Europe.
According to Low Choong Sing, an executive director of Hiap Teck, the Asean market imports 4.13 million tonnes of steel slabs per year.
“Given our initial capacity of 700,000 tonnes, we hope to capture about 17% of the Asean market. We would be among the first in the region to produce steel slabs,” said Low after the company’s EGM yesterday.
While no company in Asean is producing steel slabs, foreign steelmakers have tied up with players in Indonesia and Thailand to set up steel slab plants. Local player Ann Joo Resources Bhd is also in the process of setting up a plant.
According to Low, construction of Phase 1, Stage 1 of Eastern Steel’s complex will be undertaken by China Shougang, and the work will comprise the construction of a blast furnace capable of producing 700,000 tonnes of steel slabs and 350,000 tonnes of coke per year. The ground-breaking ceremony at the site will be on Dec 5.
The cost of RM754 million for Phase 1, Stage 1, will be shared by the shareholders of Eastern Steel — Hiap Teck which owns a 55% stake, Orient Steel Investment Pte Ltd (40%) and Chinaco Investment Pte Ltd (5%).
Law controls 27.64% of Hiap Teck. He is the sole shareholder of Orient Steel, but is in the process of selling his 100% stake in Orient Steel to China Shougang, which will effectively own 40% of Eastern Steel.
Low said there are plans to build another blast furnace in the second stage with a capacity of 1.5 million tonnes of steel slabs and 700,000 tonnes of coke per year.
“We hope to complete the commission of the first blast furnace before we embark on the second stage. We foresee an investment of RM1 billion for the second blast furnace. We could look at bank borrowings to fund this portion,” he said.
At Hiap Teck’s EGM here yesterday, shareholders approved the private placement of new shares to Shougang Singapore (a unit of China Shougang), a renounceable rights issue with free warrants, and an issuance of bonds. Of the amount to be raised from these exercises, about RM389 million will be used to fund Hiap Teck’s portion of the project, while RM35.65 million will be used to repay borrowings.
To recap, Hiap Teck entered into a co-operation agreement in July with Shougang Singapore, Eastern Steel, Law and Chinaco to construct the said integrated steel complex in Kemaman, with Shougang Singapore, having a 40% stake in Eastern Steel (via the acquisition of Law’s 100% stake in Orient Steel), with the remaining 55% and 5% stakes held by Hiap Teck and Chinaco respectively.
It is worth noting that Shougang Singapore has an option to acquire up to 70% of Eastern Steel, by potentially acquiring another 30% stake from Hiap Teck, subject to the terms of the agreement. In addition to that, Shougang Singapore would also become a substantial shareholder of Hiap Teck by taking up the private placement of 32.2 million new Hiap Teck shares or a 9.84% stake in the listed outfit.
Low said Hiap Teck sought the partnership of China Shougang as it has vast expertise in building blast furnaces.
“China Shougang is one of the top three steel mill players in China and produces 30 million tonnes of steel annually. As such, it is the best entity to undertake the construction job,” said Low.
Low said the steel complex would be built in Kemaman as it is strategically located next to the deep sea port. Eastern Steel would source its raw materials from the iron ore mines in Kelantan, Pahang and Terengganu.
“We also plan to import better quality iron ore and coal from Australia,” he said.
There is a strong market in Asean as all steel slabs are currently imported from Eastern Europe, Low said, adding that the shipping of steel slabs from Eastern Europe costs about US$60 (RM191) per tonne and takes about 45 days to be shipped to this region.
“With the completion of the Kemaman blast furnace, shipping costs would be around US$10 per MT and it would (only) take about seven days to ship steel slabs to the Asean countries,” said Low.
Furthermore, Low said Eastern Steel would benefit from the construction of the steel complex in the weakening global economy.
“A weak global economy means costs will be lower and the contractors (may have less projects and so) could focus on the project and complete it on time,” he said.
Nevertheless, he said, Hiap Teck remained cautious of the group’s current pipe manufacturing operations given the current global market situation.
To recap, Hiap Teck first proposed to build the blast furnace in Kemaman after it acquired a 55% stake in Eastern Steel for RM110 million cash in 2009 from David Law and his business partners.
The blast furnace will be built on a 1,200-acre land and Eastern Steel has a licence to produce five million tonnes of steel products per year.
Hiap Teck had said the blast furnace would help it better position itself in the steel industry as the steel products would be of higher quality compared to those produced using scrap metal. Steel scrap prices has been surging and affected profit margins.
According to Bloomberg data, Hiap Teck has one “hold” and three “sell” calls with a consensus fair value of 70 sen. Analysts cited their concerns over the group’s investment risk and the possible potential low efficiency rate during the initial stage of the production of steel slabs.
Hiap Teck rose one sen to close at 90 sen yesterday with 57,000 shares done.
This article appeared in The Edge Financial Daily, November 24, 2011.
