This article first appeared in The Edge Malaysia Weekly on November 20, 2023 - November 26, 2023

AT a time when most steel millers making long products are finding ways to stay above water as the weak demand is coupled with overcapacity in Southeast Asia, Tan Sri David Law Tien Seng celebrated the completion of Eastern Steel Sdn Bhd’s (ESSB) Phase 2 expansion at its integrated plant in Kemaman, Terengganu, recently.

A total of RM5.5 billion has been invested in the Phase 2 expansion, which almost quadrupled ESSB’s annual steelmaking capacity to 2.7 million tonnes, from 700,000 tonnes previously.

Of the RM5.5 billion, RM4 billion has been invested in a new two million-tonne blast furnace, which was ignited in August. With the blast furnace, ESSB will be able to save on energy costs, which in turn raises its competitiveness.

The expansion has not ended, though. Law wants to produce hot rolled coils (HRCs). There has been no local producer since Megasteel shut down its plant several years ago.

Should things go as planned, ESSB, in which Hiap Teck Venture Bhd holds a 27.3% stake, will commence its HRC production by September next year.

Founded in 1993, Hiap Teck is 28.28%-owned by Law, a steel, mining and property tycoon better known as T S Law. 

Hiap Teck’s share price had gained 55% year to date to close at 46 sen last Thursday, giving the company a market capitalisation of RM801.43 million. The counter is trading at a price-earnings ratio of 26 times.

Shanxi Jianlong Industry Co Ltd holds a 68.8% stake in ESSB, Hiap Teck is the second-largest shareholder and Chinaco Investment Pte Ltd owns the remaining 3.9%. Shanxi Jianlong Industry’s parent company Beijing Jianlong Heavy Industry Group Co Ltd (Jianlong Group) is the world’s eighth-largest steel producer and the fifth-largest Chinese steel enterprise, producing more than 36 million tonnes of steel a year.

By investing an additional RM1.5 billion for a hot rolling mill, ESSB will be the sole producer of HRC in Malaysia.

“The local demand for HRC is about two million tonnes a year. We will be able to fill the vacuum,” Law tells The Edge in an exclusive interview at his headquarters in Kuala Lumpur, following a visit to the integrated steel plant the previous week.

With its ambitious expansion underway, there is no sign of ESSB resting on its laurels.

Law, who is Hiap Teck executive deputy chairman and its major shareholder, says ESSB is now setting its sights on Phase 3 expansion, which is estimated to cost about RM5 billion to RM6 billion.

“We have always known the importance of economies of scale. Now that Phase 2 has given us an additional steelmaking capacity of two million tonnes a year, our annual capacity has reached 2.7 million tonnes,” he adds.

“Next, we hope to kick-start the investment and construction for Phase 3, which involves the production of high-end steel products and special steel, in 2025.”

According to him, Phase 3 expansion, which is expected to take at least three to four years to be completed, will provide ESSB with an extra capacity of 2.3 million tonnes, bringing its total capacity to five million tonnes by as early as 2028/29.

“For perspective, our Kemaman site has enough space for us to ramp up our annual capacity to as much as 10 million tonnes in the future. Of course, it’s too soon to even talk about Phase 4 expansion now, so I wouldn’t be able to tell you what our plan is for the remaining five million tonnes,” says Law.

The local steel industry is centred on two major types of products — long and flat.

Long products, also known as construction steel — including billets, bars, beams, iron bars, rebars and wire rods — are used mainly in the construction and civil engineering industries. The major local producers of long products are Malaysia Steel Works (KL) Bhd (Masteel), Ann Joo Resources Bhd, Southern Steel Bhd and Alliance Steel (M) Sdn Bhd.

Flat products are used in the manufacture of automobiles, refrigerators, washing machines and furniture, among others. Today, ESSB is the sole producer of steel slabs — a core ingredient in the manufacture of HRC, cold rolled coils (CRCs) and steel plates — in Malaysia. Other flat product makers include Mycron Steel Bhd, CSC Steel Holdings Bhd and YKGI Holdings Bhd.

Only two major steel players — Alliance Steel and ESSB — operate integrated blast furnaces, which operate continuously for long periods but have a competitive edge over electric arc furnaces (EAFs) in the long run.

In general, a blast furnace is three times more capital-intensive than an EAF, but the steelmaking cost is lower. An EAF uses 100% scrap iron as a source, whereas a blast furnace uses 95% iron ore and 5% scrap iron.

HRCs are widely used in downstream products such as CRCs, galvanised and pre-painted steel coils, welded steel pipes and tubes for industries such as manufacturing, automotive, electrical and electronics, oil and gas, and shipbuilding.

For the longest time, Megasteel Sdn Bhd — part of Tan Sri William Cheng Heng Jem’s Lion Group — was the only HRC maker in the country, but it ceased operations in 2016 because of cash constraints. Its assets were sold to sister company Lion Industries Corp Bhd.

Malaysia is relying on imported HRC worth about RM6 billion a year, based on the current exchange rate.

ESSB now aims to bridge the gap by producing as much as 2.7 million tonnes of HRC a year. Ideally, the company hopes to sell two million tonnes of HRC locally, while the remaining 700,000 tonnes will be exported.

According to Law, the local downstream industries are “very happy” to hear that ESSB will be producing HRCs locally, because this could spare them the hassle of importing these products, including foreign exchange (forex) risks, and offer a much shorter delivery time.

“I have been importing HRC products myself, so I know how cumbersome the process is. When I imported it, I received the item only three months after I placed my order. In the business world, a lot of things can happen in three months,” he says.

Forex risk, for one, is a factor that cannot be ignored, says Law, who is familiar with the ins and outs of the business, ranging from logistics and transport of raw materials from port to plant to cost efficiency and pricing.

As the currency factor is beyond the control of HRC importers, Law says they should be happy to source ESSB’s products locally because they could lock in the transaction prices in ringgit. Besides, the HRC buyers could expect delivery within two to three weeks.

“Over the past one to two years, I’ve seen so many people lose so much money because of forex loss, and they didn’t even know what was going on,” he adds.

Asked about the selling price, Law says ESSB’s pricing will be competitive, although it could be slightly higher than imports.

In the past, common complaints included local downstream players being forced to import HRC that were priced lower than local products.

“Our price will be competitive to international prices. Let’s say the price of an imported product is RM2,000, and we are selling between RM2,050 and RM2,080, I can assure you that most people would rather buy from us, because they save on transport costs and waiting time, and it reduces their forex risks,” he says.

“Of course, we have to make sure our product quality is good and our prices are reasonable. I am confident that our customers don’t mind paying us a little bit more to source HRC locally. Taking all factors into consideration, we would like to think that buying HRC from us will be ‘cheaper’ than importing it.”

The completion of the Phase 2 expansion was fraught with challenges. About 12 years ago, ESSB held its ground-breaking ceremony at the plant site, thus launching Law’s venture into the upstream steel business with the fortune made from mining operations in Australia. Little did he know that it would be the start of a bumpy journey in the steel industry.

The integrated steel plant, which is just a few miles from the Kemaman port, started its dry run in 2014, followed by the commencement of production in January 2015.

Just when Law thought things were falling into place and his investment would soon yield returns, things started to fall apart.

ESSB was caught in tough market conditions, with an influx of cheap imports from China. To stop the bleeding, he shut down the operations barely 10 months into production. “I was losing a lot of money every month, which I couldn’t afford to.”

But Law did not abandon the plant and his venture. “We still continued with all the necessary maintenance works and retained a group of workers, because I knew production would start again one day,” he says.

Law immediately started looking for a new partner. The breakthrough came in April 2018, when Hiap Teck successfully roped in Shanxi Jianlong as a new strategic partner.

Jianlong Group, through Shanxi Jianlong, embarked on its first overseas investment venture by acquiring a controlling stake of 60% in ESSB. Within 100 days, ESSB resumed its steel production.

In 2021, Shanxi Jianlong injected RMB500 million (RM325.6 million) cash into ESSB, raising its stake in the company to 68.8%. Consequently, Hiap Teck’s shareholding in ESSB was diluted to 27.3% from 35%.

While most businessmen prefer to be a controlling shareholder in a joint venture, Law started to look at the big picture after forming the partnership with Jianlong Group.

“In the early days, ESSB was producing 700,000 tonnes and Hiap Teck used to own a 60% stake in the company. So, effectively, our share was 420,000 tonnes. Today, ESSB is making 2.7 million tonnes and Hiap Teck owns a 27% stake in the company. Effectively, our share is almost 730,000 tonnes,” he says.

“In other words, my share has increased by 310,000 tonnes. Now, you tell me: Is it better for me to be a controlling shareholder or the second-largest shareholder? If Jianlong were not the controlling shareholder, ESSB wouldn’t be where we are today.”

Law adds that being the largest shareholder, Jianlong Group is obliged to provide ESSB with unconditional support.

“Today, I don’t have to worry about production. I can sleep soundly at night. You visited our Kemaman facility recently, so you should know how huge the operation is. I can’t imagine us managing this factory alone without our Chinese partner. I am very happy to be the second-largest shareholder because my share of volume does not decrease,” he says.

Following the revival of its Kemaman plant, ESSB made its maiden profit contribution of RM3.83 million to Hiap Teck’s FY2020, with the figure jumping almost 20 times to RM76 million in FY2021, before declining to RM52.7 million in FY2022.

In FY2023, ESSB generated a profit of RM163.06 million, and thus made a profit contribution of RM44.52 million to Hiap Teck.

However, Hiap Teck’s earnings dropped 80% to RM30.911 million for the financial year ended July 31, 2023 (FY2023), from RM156.013 million a year earlier.

Moving forward, based on the internal agreement, ESSB plans to distribute 30% of its profit as a dividend, says Law, and this could start as early as 2025.

“Our capacity expansion will lead to multifold growth in ESSB’s revenue, with significant cost savings arising from the greater economies of scale. Hiap Teck looks forward to much greater contributions from ESSB in the immediate future,” he adds.

Law and his partner Shanxi Jian­long will always strike while the iron is hot. There are already preliminary plans to increase Phase 3 capacity by 2.3 million tonnes. By then, Law says, ESSB would be eyeing the high-end steel products and special steel segment.

“For high-end steel products, our plan is to make seamless pipes being used in the oil and gas industry for deep-sea oil develop­ment activities. Currently, there are few manufacturers of seamless pipes in Southeast Asia and none in Malaysia. Meanwhile, we also plan to make special steel for the automotive industry,” he says. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.