This article first appeared in The Edge Financial Daily, on December 28, 2015.

KUALA LUMPUR: CSC Steel Holdings Bhd, a 46.055%-owned subsidiary of Taiwan’s China Steel Corp through China Steel Asia Pacific Holdings Pte Ltd, said it stands ready to face any adverse business conditions facing the domestic steel industry including imposition of safeguard duties on imported hot-rolled coils (HRCs).

Its managing director Steve Chen Chung-Te said the steelmaker is considering buying cold-rolled coils (CRCs) instead of HRCs, a key raw material in cold-rolled steel making, to produce its flat steel products.

“We might opt to buy CRCs instead of HRCs in order to avoid paying extra on anti-dumping import duties on HRCs. (However,) this requires making some adjustments to our operations here as we currently have a division that produces our own CRCs (using imported HRCs as well as local HRCs purchased from Megasteel Sdn Bhd),” he told The Edge Financial Daily in an interview in Melaka recently.

“This is one way (for CSC Steel) to avoid paying safeguard duty,” he added.

Megasteel, the country’s largest HRC producer, is now lobbying the government for a safeguard duty of 40% on top of the existing 15% import duties on HRCs, which local steelmakers see as a move to protect Megasteel’s dominant position in the upstream segment.

The Ministry of International Trade and Industry (Miti) in February imposed five-year anti-dumping duties on imported HRCs from China and Indonesia of between 6.35% and 12.19%.

Chen said CSC Steel is of the view that an imposition of safeguard duties at the rate of 40% with no exemption for certain HRC products, is unhealthy for the domestic steel industry.

“This is because we need to import (HRC) products that Megasteel is not able to produce. If the safeguard duty is to focus only on the 18 grades of HRCs that Megasteel produces, then it would be reasonable (to impose a duty). However, if the duty is being imposed on every grade of HRCs, it will hurt even more steel players while not benefiting Megasteel either,” he said.

On its part, Chen said CSC Steel has put all its HRC import orders on hold for now, pending a preliminary determination on the safeguard duty by Miti on Jan 8.

Under current practice, the group sources 50% of its HRC needs from Megasteel, and the rest from overseas.

“However, we have stopped importing HRCs because we do not know whether Miti will impose the safeguard duty,” said Chen.

“Our inventory can keep us running for the next few months, but we won’t make any new orders just yet until further clarification from the authorities,” he added.

The government had on Dec 8 deferred its decision on Megasteel’s petition to impose safeguard duty to Jan 8. In the face of oversupply and the depressed steel market and prices, Megasteel had repeatedly pointed out that it had been suffering losses for several years due to rampant importation of steel products into the country at dumping prices.

For Chen, nothing is more crucial than clarity at this juncture, which could help him decide on implementing the strategies for CSC Steel.

“Now we can only wait. We cannot risk to bear a 40% increment in our cost as our margins are already in the single digit,” he said.

Chen pointed out that CSC Steel needs a gross profit margin of 4% in order to break even at profit level.

“In our (steel) industry today, it is considered very fortunate for us to be able to break even in relation to our production, thanks to the management and technical support from our parent (China Steel),” he remarked.

On its performance for the financial year ending Dec 31, 2015 (FY15), Chen said it is difficult to conduct any projection due to the uncertainties in the steel industry, but he believes that CSC Steel will be able to make appropriate responses to market conditions.

“We do have an internal target revenue growth (for FY15), which is a marginal growth of less than 1%,” he said.

“I still have faith in Malaysia’s steel industry, but it requires the government’s help. Throughout my 33-year career in the steel industry, I have not seen a country that is willing to forego (the economic well-being of) the steel industry,” Chen added.

CSC Steel swung to a net profit in the first quarter of this year (1QFY15) after posting a loss since 1QFY14.

For 3QFY15, the group posted a net profit of RM10.21 million against a net loss of RM3.12 million a year ago, despite revenue falling 12.4% to RM222.74 million from RM254.37 million in 3QFY14.

For the cumulative nine-month period (9MFY15), CSC Steel registered a net profit of RM26.08 million compared with a RM12.25 million net loss previously, while revenue fell 1.5% to RM775.44 million from RM786.96 million in 9MFY14.

Chen attributed the improved 9MFY15 earnings to the group having an advantage to react faster to market opportunities due to support from China Steel.

The group also witnessed a surge in demand in 1QFY15 prior to the implementation of the goods and services tax, as well as lower average cost of production in 2QFY15 and 3QFY15.

Chen revealed that the group experienced some shortage of locally-produced HRCs in 2QFY15 and 3QFY15, which are usually priced higher than the international market price.

“Once a shortage of locally-produced steel is detected, we will make immediate orders to China Steel and buy the HRCs at international market price. That’s how our average costs can be brought down (during those periods),” he explained.

“On top of that, due to fact that China Steel is our parent company, our orders usually enjoy a shorter delivery schedule, which is a kind of premium service, but the prices we pay remain at market rate,” he added.

Chen reckoned that CSC Steel, whose substantial shareholders include Lembaga Tabung Haji with a 5.436% stake, is likely to declare a dividend to reward its shareholders for FY15.

“Last year, we declared a three sen (dividend) despite incurring losses. This year, I think we may reward our shareholders since we are making a profit,” he said.

CSC Steel (fundamental: 1.2; valuation: 2) shares closed one sen or 0.98% higher at RM1.03 on Dec 23, giving it a market capitalisation of RM379.81 million. Year-to-date, CSC Steel’s share price has risen 1.98%, outperforming the FBM KLCI’s 5.55% decline.

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