This article first appeared in The Edge Financial Daily, on November 12, 2015.

BUTTERWORTH: Southern Steel Bhd expects another year of losses for the current financial year ending June 30, 2016 (FY16), before it marks a return to the black in FY17, helped by higher revenue from a new hot-rolled coil (HRC) steel product under its upstream segment.

Its managing director Chow Chong Long said the turnaround will also hinge on the federal government adopting favourable measures on trade imposition or anti-dumping duties levied on some steel imports from China to protect the domestic market.

Chow said RM1 billion was invested in its wholly-owned unit Southern HRC Sdn Bhd in 2012 to set up a new line to produce the new HRC product, a market currently dominated by Megasteel Sdn Bhd.

He noted that demand for HRC in Malaysia currently amounts to about four million tonnes per year, half of which is sourced locally and the rest imported.

“Our plant’s capacity is about 700,000 tonnes per year, but we are making about 10,000 tonnes to 15,000 tonnes per month to cater to the shortfall not met by our competitor,” he told reporters after the group’s annual general meeting.

“We are able to produce more, but we are not [doing that] right now due to the [low] prices as a result of dumping of HRC by Chinese steel companies,” he added.

Chow anticipates the group to remain in the red in the next two financial quarters.

“We do not think FY16 would be good for the group because the government has yet to decide on the [anti-dumping] policies, but we believe in the future HRC will give us a wide coverage in the local steel industry,” he said.

The government is expected to decide on a safeguard petition from Megasteel, which represents the domestic industry producing HRC, next month.

Southern Steel slipped to a net loss of RM117.58 million in FY15 from a net profit of RM18.95 million the previous year due to depressed selling prices. Revenue fell 10% to RM2.52 billion from RM2.81 billion in FY14.

For the first quarter ended Sept 30, 2015 (1QFY16), Southern Steel saw its net loss widen to RM51.91 million from RM21.66 million a year ago.

The local steel miller also recorded a lower revenue for 1QFY16, down 3% to RM592.44 million from RM610.73 million in 1QFY15.

In a filing with Bursa Malaysia yesterday, the group attributed the higher quarterly loss to margin erosion and unfavourable foreign exchange losses of RM29 million, which were partly mitigated by a gain of RM25 million from a disposal of associated companies.

“Despite a higher sales volume was recorded, the decline in revenue was mainly due to lower selling prices, which eroded the margin,” it said.

The group said it would continue to improve its operational efficiency to mitigate the eroded margin in the unpredictable market, despite the influx of cheap Chinese steel products is expected to continue until the government adopts effective measures to curb the unfair trade practice.

Southern Steel (valuation: 0.9; fundamental: 0) shares closed unchanged at 92 sen yesterday, with a market capitalisation of RM385.9 million.

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