This article first appeared in The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024

TOP-level executives from four large long steel companies in Malaysia — Ann Joo Resources Bhd, Malaysia Steel Works (KL) Bhd (Masteel), Lion Industries Corp Bhd and Southern Steel Bhd — have written in to the Ministry of Investment, Trade and Industry (Miti) urging it to scrutinise Alliance Steel (M) Sdn Bhd’s compliance with the terms of its manufacturing licence application back in 2014.

In a nutshell, the four are alleging that Alliance Steel has violated the terms of its manufacturing licence and is dumping certain specifications of steel in the local market. Other than this, there are also allegations of a change in shareholding at Alliance Steel that would require the approval of both Miti and the Malaysian Investment Development Authority (Mida). However, there are doubts as to whether there has been any change in Alliance Steel’s shareholding.

To put things in perspective, Alliance Steel manufactures square billets, high-strength bars known as rebar, high-speed wire rods and large-scale H-shaped steel bars, (H-beams) among others. There is a requirement in its manufacturing licence that Alliance Steel should export at least 50% of its production of the iron and steel supply chain that is currently not produced in Malaysia, such as H-beams.

This 50% export requirement is also being questioned.

The letter viewed by The Edge says, among others, “Amid such serious overcapacity situation (in the long steel sector) the only viable immediate solution is for Miti to enforce that all producers strictly limit their production and sale in the domestic market as per the conditions of the manufacturing licence issued by Miti. At the same time, we also humbly request Miti to investigate if such steel producers comply with the conditions stipulated in the tax incentive granted to them by Mida.”

While Alliance Steel is not named in the letter, it is obvious who the four players are referring to.

Alliance Steel did not reply to questions from The Edge.

A source familiar with Alliance Steel, however, says, “Alliance Steel is a G2G (government-to-government) project, it (Alliance Steel) has proper legal business with licence and has been contributing to the country’s economy and creating jobs.”

Questions are also being asked about the employment of Malaysians by Alliance Steel.

A steel industry executive, when asked about the complaint by the four about Alliance Steel, says that while the nationalistic view would be to help the local players, the benefit of open competition to consumers will also be taken into account. “It’s whether you are going to support the nationalist agenda or the capitalist ideology.”

Nevertheless, Alliance Steel, which is wholly owned by Guangxi Kunyi Investment Co Ltd, has invested US$1.4 billion (RM6.5 billion) and operates a steel mill on a 710-acre facility in the Malaysia-China Kuantan Industrial Park, which manufactures high-speed wire rods, bar rods and H-beam steel and has an annual production of 3.5 million tonnes. All the products manufactured by Alliance Steel fall under the long steel category which is largely used in construction. The company has been operating since 2018.

The letter by the four local companies was sent in early December last year and was addressed to Miti minister Tengku Datuk Seri Zafrul Aziz, and copied to his deputy Liew Chin Tong and Miti secretary-general Datuk Hairil Yahri Yaacob.

Neither Miti nor Mida responded to questions from The Edge.

Mida is in the mix because Alliance Steel enjoys a 15-year tax incentive. The company is required to submit an application to Mida for any increase in the production capacity of the products manufactured, which it is alleged to have done.

The issue of the alleged change in shareholding is perplexing.

Alliance Steel’s 2022 annual report states that it is wholly owned by Guangxi Kunyi Investment Co Ltd, formerly known as Guangxi Beibu Gulf Iron & Steel Investment Co Ltd. There seems to be some confusion as the complainants believe Guangxi Kunyi Investment is deemed a new shareholder, when it is only a name change.

“One of the biggest challenges facing the iron and steel sector in Malaysia is overcapacity, which was caused partly by the entry into Malaysia of Alliance Steel, based in the Malaysia-China Kuantan Industrial Park,” says former Miti deputy minister Ong Kian Ming in a short phone message.

“Although Malaysia welcomes good quality foreign direct investment (FDI) into the country, the companies that invest in Malaysia must also abide by our local regulations and investment incentive conditions.

“With overcapacity reaching critical levels, especially with the slowdown in the construction sector in China, it is crucial that Miti and Mida evaluate if Alliance Steel has complied with its investment conditions and, if it has not, to take immediate action against Alliance Steel, including fines and clawing back some of its tax incentives. Without an even and fair playing field, some of the Malaysian players in the iron and steel sector may have to shut their operations, leaving the country more vulnerable to geopolitics and disruptions in the domestic supply chain,” Ong says.

While Ong is supportive of the local steel industry, some quarters see the stress of the local players as a reflection of their efficiency level in terms of technologies and costs, compared with the foreign players. The local steel industry was initiated as the country entered into a construction boom in the 1980s and 1990s, with one mega infrastructure project after another generating strong demand for long steel products. Nonetheless, with infrastructure development slowing down, local demand for long steel has been adversely impacted, and some are even saying that a consolidation of the industry is needed for things to get better.

Financially, Alliance Steel has been doing well. In its financial year ended Dec 31, 2022 (FY2022), it posted an after-tax profit of RM773.1 million on revenue of RM10.49 billion. In FY2021, the company made an after-tax profit of RM531.06 million from revenue of RM9.16 billion.

As at Dec 31, 2022, it had total assets of RM8.77 billion and total liabilities of RM4.72 billion. The company had retained earnings of RM1.58 billion as at end-2022.

In contrast, the local long steel players have not fared well.

In its nine months ended Sept 30, 2023, Ann Joo Resources suffered a bigger net loss of RM76.12 million compared with RM66.7 million in the previous corresponding period. It also recorded lower revenue of RM1.9 billion against RM2.24 billion previously.

As at Sept 30, 2023, Ann Joo’s cash and bank balances stood at RM102.49 million but it had short-term borrowings of RM1.32 billion and long-term debt commitments of RM163.58 million.

On prospects, Ann Joo says, “Regionally, a massive influx of integrated mega mills into the Asean market is poised to exacerbate the persistent overcapacity issue, raising serious concerns as capacity could outpace demand, particularly as demand remains relatively stagnant in both Asean and China.

“The challenges have spread to the local front, where a supply-demand imbalance is looming large. Rising operating costs and underwhelming mega infrastructure projects will continue to put pressure on the domestic steel market, weighing down demand for construction steel.”

Ann Joo closed at RM1.10 last Friday, giving the company a market capitalisation of RM617.5 million.

Similarly, Lion Industries, controlled by businessman Tan Sri William Cheng Heng Jem, incurred a net loss of RM137.15 million in the first nine months of 2023 on revenue of RM1.48 billion. This compares with a net loss of RM222.59 million and sales of RM1.9 billion in the same period a year ago.

As at end-September last year, Lion Industries had deposits, cash and bank balances of RM155.39 million. Its short-term borrowings stood at RM140.27 million and long-term debt commitments at RM714,000.

Commenting on its outlook, Lion Industries notes that the domestic steel market, faced with low demand from the construction sector, continues to struggle with volatile steel prices and high production costs due to the hike in energy cost.

“Nonetheless, the group will remain vigilant and readily responsive to market changes and continue to focus on optimising operational efficiencies and to contain costs.”

Lion Industries closed at 34.5 sen per share last Friday, valuing the company at RM234.9 million.

Meanwhile, Southern Steel, controlled by billionaire Tan Sri Quek Leng Chan, posted a net loss of RM39.59 million on a turnover of RM601.81 million in its July-September 2023 quarterly results. In the same quarter in 2022, it recorded a net loss of RM64.44 million on revenue of RM574.03 million.

In the period in review, Southern Steel had cash and cash equivalents of RM96.49 million, versus short-term borrowings of RM662.57 million and long-term debt commitments of RM201.4 million.

Southern Steel closed last Friday at 66 sen apiece for a market capitalisation of RM393.6 million.

What is worth noting is that Masteel bucked the trend, making a net profit of RM3.65 million in the first nine months of 2023. This was lower than the RM17.39 million achieved in the same period a year ago. Revenue for the period in review came in higher at RM1.49 billion compared with RM1.33 billion previously.

As at end-September 2023, Masteel had short-term deposits of RM48.34 million and cash and bank balances of RM13.42 million, with short- and long-term borrowings of RM418.85 million and RM81.68 million respectively.

Masteel closed last Friday at 34.5 sen for a market value of RM233.7 million.

The complaints to Miti and Mida come on the back of two local cold rolled coil producers — Mycron Steel Bhd and CSC Steel Holdings Bhd — obtaining a judicial review and a stay on Miti’s decision to terminate anti-dumping duty on the import of cold rolled coils from South Korea and Vietnam.

In a nutshell, Miti, or more precisely its Trade Practice Section, now has to justify how it reached such a conclusion so as to have an administrative review of the anti-dumping duties imposed on South Korea and Vietnam, and why it sought to reverse an earlier decision.

An administrative review puts an end to the imposition of anti-dumping duties, and is sought in two cases — first, where the circumstances change so much so as to impact the dumping margin or amount of subsidy or where it is deemed no longer necessary for the anti-dumping duties to be maintained.

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