This article first appeared in The Edge Financial Daily, on June 23, 2016.

KUALA LUMPUR: Ann Joo Resources Bhd is yielding the fruits of its massive RM600 million investment in its hybrid production process, which enables the long steel product maker to have the raw material mix that maximises its profit.

With that, Ann Joo will enjoy some cost advantages over its rivals. And this explains why its group managing director Datuk Lim Hong Thye is optimistic about the company’s prospects despite the tough operating environment.

Ann Joo is the only local player that runs a hybrid of blast furnace and electric arc furnace (EAF) in its production plant.

Lim said Ann Joo had planned for the worst. Besides the raw material mix, he noted the hybrid production process also allows Ann Joo to have flexibility in steel products that are fetching higher selling prices.

For instance, it could reduce the production of long steel products like billets, slabs and reinforced bars (rebars), should the selling prices of these products fall further than expected.

“We have a choice, when things are unfavourable. We can switch to supply more pig iron instead of billets and rebars,” he said.

Pig iron is a by-product produced by Ann Joo’s blast furnace. It is the feedstock that substitutes recycled steel to produce billets and rebars.

Lim expects demand for pig iron to grow further. He observes that steel mills which use EAFs are resuming production in Asean as a result of the recovery in steel prices in March and April this year after the China government started cutting steel capacity there.

“They (steel millers) need pig iron to boost their productivity and to substitute scrap (recycled steel). Pig iron used to be our huge deadlock. We used to have huge volumes of pig iron stocks, but today we [have] cleared all, and in fact the demand is so strong, we cannot cope[with it],” Lim told The Edge Financial Daily.

“We have a choice to export because demand for billets and rebars in Vietnam is very strong,” he added.

In March, Vietnam introduced temporary safeguard duties of 23.3% and 14.2% on steel ingots and long steel products imported from China until October this year.

The safeguard duties would prompt Vietnamese steel millers to source billets elsewhere. “That is why Ann Joo is in a very good position, because we are a billet producer, not an importer. If we import billets from China, we cannot export to Vietnam,” Lim explained.

He noted that when Malaysia was flooded with artificially low-priced steel in the past, some mill operators opted to cease production and procured imported steel.

“The situation is so different now. Even our by-product is generating revenue. In the past few years, when demand was low, we had to sell our pig iron at [a] loss,” he recalled.

Steel is usually produced through two main routes: the blast furnace to basic oxygen furnace (BF-BOF) route or the EAF. The key difference between them is the type of raw materials they consume.

The BF-BOF uses iron ore and coal, while the EAF consumes recycled steel and electricity.

In the financial year ended Dec 31, 2015 (FY15), Ann Joo suffered a net loss of RM135.48 million, compared with a net profit of RM23.39 million in FY14, as the influx of imported steel products from China dragged selling prices to below production costs.

For the first quarter ended March 31, 2016 (1QFY16), Ann Joo reported a net profit of RM5.52 million, up 3.66% from RM5.33 million in the previous corresponding quarter. Revenue, however, fell nearly 6% to RM489.53 million from RM520.65 million previously.

Lim expects improved earnings in 2QFY16 amid the rise in demand for pig iron that has piled up in the past three years.

Lim reveals that Ann Joo has initiated its own cut and bend centre this month.

“This is a key thing for Ann Joo as all the big mega [infrastructure building] projects now need cut and bend. This means rebars are pre-cut and pre-bent, instead of bending and cutting at the construction site,” he explained. He believes this is a trend in the local construction sector to move towards an industrialised building system (IBS).

The IBS is a construction technique where components are manufactured in a controlled environment and subsequently assembled at the construction site.

Ann Joo is now supplying both cut and bend rebars as well as straight bars — two key building materials — which would put it in a better position to win more projects.

“In many projects, if a vendor (steel producer) does not offer cut and bend, they are totally out of the project,” Lim said.

In the past, he said, Ann Joo could only team up with stand-alone cut and bend centres to reap a share of these projects, but it was not efficient for the group.

“So compared to last year, Ann Joo’s potential market share has improved tremendously this year because mega projects are moving. These are the kind of demands that Ann Joo are focusing on as a premium product supplier. Now with cut and bend, we can move into almost all kinds of projects,” Lim said.

Ann Joo’s share price had rallied to reach a peak of RM1.24 on April 20, up 85.07% from 67 sen on Jan 4. It closed at RM1.13 on Tuesday. To sustain its share price, a good set of earnings figures would be essential.