Removal of duty exemptions to block import loopholes

KUALA LUMPUR: Megasteel Sdn Bhd has defended its proposal to the Ministry of International Trade and Industry to impose import tariffs on steel products, saying that “the proposal to reduce the import duty and replace duty exemption with duty drawback covers the entire flat steel sector and will help all flat steel producers to compete more effectively”.

The Edge Financial Daily reported last week that Megasteel had proposed a reduction in import duty from the existing 25% to 15% or RM300 per tonne, whichever is higher, on all flat steel products combined with the abolishment of duty exemption.

In an emailed statement, Megasteel clarified that flat steel in the proposal referred to hot-rolled coils or HRC (HS codes 7208 & 7211), cold-rolled coils or CRC (HS codes 7209 & 7211), coated coils like galvanised iron, electro-galvanised and coloured sheets (HS codes 7210 & 7211) and lastly pipes and tubes (HS codes 7304, 7305, 7306 & 7307).

“There should be the consideration that duty exemption will not be granted with the reduction in duty in order to plug the loopholes in the current system whereby there is rampant importation of HRC, CRC, coated coils and pipes on a duty-free basis from many non-Asean countries into Malaysia,” the company said last Friday.

In justifying the increased protectionism, Megasteel said following the termination of the safeguard petition for HRC by Megasteel, the government agreed to explore other options to assist the local flat steel products industry. To-date, it said five licences to produce HRC have been issued, but only Megasteel has implemented its project.

Megasteel has proposed that a duty-drawback system be reinstated, instead of duty exemption, to assist manufacturers that import and process for re-export.

“The duty-drawback system is time tested and being used by other industries and can be in the form of cash or bank guarantee. For the industries that will not be granted duty exemption, the impact will be minimised with additional measures to assist them,” Megasteel argued, but did not provide specifics on the additional measures.

“Of the one million tonnes of HRC imported into Malaysia last year, about 400,000 tonnes were from Taiwan, 200,000 tonnes from Japan and about 100,000 tonnes from South Korea. Of these imports, about 70% are within the range that we can produce,” said Megasteel, citing a report by the Malaysian Iron and Steel Industry Federation at a recent steel conference.

“The effect of the withdrawal of duty exemption on industries will be minimal if every effort is made to use local materials,” Megasteel said.

Megasteel is 78.9%-owned by Lion Corp Bhd with the balance held by Lion Diversified Holdings Bhd. Lion industries Corp Bhd has substantial holdings in both Lion Diversified and Lion Corp.


This article appeared in The Edge Financial Daily, November 8, 2011.

Misif against Megasteel’s proposed 15% levy

KUALA LUMPUR: The Malaysian Iron and Steel Industry Federation (Misif) is opposing Megasteel Sdn Bhd’s proposed reduction in import duty from the existing 25% to 15% or RM300 per tonne, whichever is higher, on all flat steel products combined with the abolishment of duty exemption.

“Misif, after consultation with its members, rejected Megasteel’s proposal and has conveyed its position to Miti (Ministry of International Trade and Industry) during the meeting between Miti and Misif,” the steel association said in a statement.

Misif was responding to The Edge Financial Daily’s front page report yesterday.

Flat steel products include hot rolled coil, cold rolled coil, coated sheets, pipes and tubes.

Misif president Chow Chong Long told the financial daily that there would be both winners and losers should the proposal go through.

The reduction in duty from 25% to 15% would be welcomed, but the abolishment of duty exemption could be detrimental to many sectors of the downstream flat steel players.

Exporters and steel players that depend on imported steel grades which are not produced locally could be adversely affected.

To allow exporters to remain competitive, Megasteel has proposed to have a duty drawback principle implemented for re-exporters.

“While the duty drawback system will reduce the possibility of abuse by importers, it adds a big financial burden to the exporters,” Chow said.

On the other hand, he pointed out, “The duty drawback will have an impact on the cash flows of businesses. They will have to pay more upfront for their raw materials and wait until they actually export the goods to reclaim the duty paid.”

“Megasteel, being the sole producer of hot rolled coil (HRC), is also a major part of the flat steel value chain and Misif would like to see a win-win solution for the upstream, mid stream and downstream,” he added.

It is important to note the current levy of 25% and Megasteel’s proposal will only affect imports from non-free trade agreement nations (NFN). Since Malaysia is part of the Asean Free Trade Agreement (Afta), imports by Asean members are not taxed.

Chow added that the biggest concern for Malaysian steel producers is China, which has become a threat since the Asean-China FTA.

MIDF Research released a report on Lion Industries Corp Bhd in which it downgraded the steel player to a “trading sell” on the expectation of negative earnings growth this year and weak industry fundamentals.

Lion Industries is the holding company of Megasteel.

The report entitled “The lion is trapped” revised the target price for Lion Industries down to RM1.12, below its closing price of RM1.53 yesterday.

The stock has fallen 24.26% year-to-date compared with the FBM KLCI’s 5.09% decline.

MIDF expects negative earnings growth due to the declining price trend for long steel products and slowing demand in both domestic and export markets.

“Currently, long steel prices are trending downwards with both billet and bar prices having declined 6.2% month-on-month and 9% m-o-m respectively,” the report said.

It also pointed out that contractors which use steel products for construction have also adopted a wait-and-see approach, keeping their inventories low on the expectation of a further decline in steel prices.

The blast furnace joint venture (JV) proposed in March by the Lion Group worth RM3.22 billion has yet to materialise, it added.

Partners of the JV, which include Lion Forest (20%), Lion Industries (29%) and Lion Diversified (51%), are on hold pending shareholders’ approval for a corporate guarantee on a RM2.3 billion loan from China Construction Bank

Shareholders were initially supposed to meet to approve the guarantee of the loan facility earlier this year on March 3. On Monday, the group announced that the date would be extended to March 2 next year.


This article appeared in The Edge Financial Daily, November 4, 2011.

OSK maintains 'neutral' call on steel stocks

OSK Research is cutting its fair value for steel firms across the board, citing their below average outlook amid the volatile market as a factor.

The steel stocks are currently offering limited price upside, the research house said, adding that it has placed a "neutral" call on most counters, except Perwaja Holdings Bhd and Kinsteel Bhd.

For Perwaja and Kinsteel, it has maintained its 10 per cent discounted cash flow valuation for the potential iron ore mine as well as "buy" and "trading buy" recommendations, respectively.

Although no official agreement has been signed to date, Menteri Besar of Terengganu was reported to be ready to consent to Perwaja’s application to mine ore in Bukit Besi.

OSK said the sluggishness in the economy also suggested that its earlier anticipated mergers and acquisitions in the sector might now take longer to materialise.

News that Lion Group is liquidating its steel assets has dragged on following a series of negative developments in the European Union and United States, it said.

"Although negotiations are ongoing and there are at least four interested buyers, we suspect the conclusion of such deal may be delayed as buyers may take up their time in bargaining for better pricing amid a weak economic backdrop," OSK said.

OSK also said that the possibility of the Lim family selling 10 - 15 per cent stake in Ann Joo is fading as the share price has fallen too far from the ideal price tag.

The research house is also generally bearish on steel demand, which may potentially be dampened by a weak economic outlook but believes that Asia’s steel market may hold up better than in other parts of the world.

On the local front, various government mega projects to be rolled out under the Economic Transformation Programme will boost the country’s steel requirements, particularly long steel products.

OSK also foresees the Mass Rail Transit (MRT) and the 100-storey Warisan Merdeka as the two projects that may substantially spur steel demand. -- Bernama

Megasteel eyes steel import duty?

KUALA LUMPUR: Megasteel Sdn Bhd is believed to be lobbying for a 15% levy on steel imports across the board from non-Asean countries, according to industry sources.

“If this proposal goes through, it will irreparably damage the (downstream) steel industry in Malaysia. Why would anyone want to do business in Malaysia?” said an industry source.

Industry sources are not happy with Megasteel’s new proposal, which they claim will tax imports of all steel products, even those not produced by Megasteel.

A unit of the Lion group’s flagship Lion Corp Bhd, Megasteel is the country’s sole manufacturer of flat steel products, producing hot rolled and cold rolled coils.

Bursa Malaysia-listed Lion Corp owns 79% of Megasteel while another Lion group listed entity, Lion Diversified Bhd, holds the remaining 21% stake.

To recap, Megasteel had in May filed a safeguard petition to seek an additional 35% import duty on hot rolled coils (HRC), which would bring the total duty payable on HRC up to 60%.

The new proposal of a 15% import duty is not in the nation’s interest, the source said.

“Almost every industry uses steel. It is used in the automotive industry, in manufacturing and construction. Everyone will lose out if this goes through.”

A player from the steel industry who supports the liberalisation of the steel industry told The Edge Financial Daily, “Protectionism is very unhealthy. We must look at the whole value chain, the growth of the whole industry and protect everyone’s interests. Not just the well-being of one company.”

The Edge Financial Daily was unable to reach the International Trade and Industry Ministry for comment on the progress of the discussion on the proposed levy.

The country's sole manufacturer of flat steel products, Megasteel Sdn Bhd is believed to be lobbying for a 15% levy on steel imports across the board from non-Asean countries.

Global conditions of late have been unfavourable to Megasteel, noted an analyst.

“While iron ore prices have fallen, steel prices have fallen even further. Megasteel’s costs may have fallen giving them some reprieve but overall, their net margins would have fallen,” said the bank-backed analyst.

“The fall in prices has been due to softening demand. China, for example, has been slowing down its property market, which has in turn reduced appetite for steel used for construction. Manufacturing has also been slowing down in tandem with poor global economic conditions.”

He pointed out that Megasteel continued to make losses despite the lack of competition due to safeguards by the government and Megasteel’s monopoly.

“Megasteel has not been profitable even though there has been a 25% levy on HRC, its primary product. Also, Megasteel is essentially the sole HRC producer in Malaysia. This could be indicative of its uncompetitive cost structure.

“Furthermore, Megasteel uses the the electric-arc furnace, which produces lower grade steel products.

“If the proposed import tariffs on steel do not go through, Megasteel may not be able to compete with imports,” noted the analyst.

The situation is further exacerbated by the fact that Megasteel’s products are mostly sold in the local market.

An industry player said: “Nobody wants Megasteel to suffer. We want Malaysia to have its own steel makers. We just want the industry to be fair. A 15% levy on all steel imports will cripple the industry. A solution will need to be discussed across the value chain that can benefit everyone.”

“Unfortunately, it doesn’t seem like Megasteel is ready to talk,” the industry source added.

Megasteel is undertaking a RM3.2 billion blast furnace project that will be able to produce about 2.07 million tonnes of liquid hot metal a year, of which 1.57 million tonnes could be converted into slab for sale on the open market.

“They are trying to rope in foreign partners and secure a loan from Chinese bankers, but the economic climate is not conducive,” said an analyst.

If global economic conditions worsen, Megasteel could be affected by a collapse in demand for steel, which will drive steel prices down.

“Given the present situation, unfavourable global economic conditions will have an adverse impact on Megasteel,” the analyst added.

He also noted that Megasteel has a high level of debt.

A summary of Megasteel’s financial information for the year ended June 30, 2010 revealed it had liabilities of RM4.06 billion and RM146.6 million in accumulated losses.

Meanwhile, Lion Corp reported a net loss of RM45.1 million for 4QFY11 ended June 30 compared with a net profit of RM60.4 million a year ago.

That brought full-year net loss to RM234.4 million, more than double FY10’s loss of RM112.8 million.


This article appeared in The Edge Financial Daily, November 3, 2011.