This article first appeared in The Edge Malaysia Weekly, on Month November 16 - 22, 2015.

Megasteel Sdn Bhd, which has a monopoly on the supply of hot-rolled coils (HRC) in Malaysia, is seeking more protection than what it has already been granted — it recently petitioned for a public hearing on a safeguard action with regard to the imports of HRC.

A safeguard action restrains trade and protects a particular industry or company — in this case, Megasteel — from foreign competition through import restrictions. The company is a unit of Lion Group, which is controlled by tycoon Tan Sri William Cheng.

The public hearing was held on Nov 4 at the office of the Ministry of International Trade and Industry (Miti). It is understood that Miti has yet to decide on the issue. If it gives a negative determination, Megasteel’s petition will come to nought; if it opts for a preliminary determination, duties will be imposed immediately to protect the company.

HRC are raw materials for flat steel, which is used to make electronic appliances such as fridges and washing machines as well as cars — as opposed to long steel, which is used in construction.

Questions posed by The Edge to Miti, on whether Megasteel should be accorded protection, were forwarded to Malaysia Steel Institute. According to the latter’s website, it is “an industry driven enterprise supported and funded by the Miti on shared responsibility basis with the iron and steel industry”.

In an email response to The Edge, Malaysia Steel Institute says, “The request for the safeguard measure has to fulfil a number of requirements as spelt out by the Malaysian legislations … Miti is currently examining all submissions to make a decision on Megasteel’s request.”

It adds, “Miti will balance the interests [of all parties] and [a decision will be] based on information submitted by all parties.”

Judging from precedents, Miti could give Megasteel the cold shoulder.

In April 2011, Megasteel had submitted a petition for the Malaysian government to initiate a safeguard investigation into the imports of HRC on the basis that the surge in imports of HRC from 2007 to September 2010 had severely and adversely impacted the domestic industry — that is, Megasteel. It sought an additional 35% import duty on HRC, which would mean the total duty payable on the raw materials would be up to 60% for five years. This request was not approved by Miti.

Megasteel is 69.79% controlled by Lion Diversified Holdings Bhd. The rest of its shares are held by Limpahjaya Sdn Bhd, a wholly-owned unit of Lion Corp Bhd. Both companies are controlled by Cheng.

To put things in perspective, Megasteel already has a leg-up on its competitors with a 15% import duty levied on companies seeking to bring in HRC. Prior to this year, the import duty had been 20%. Also, last year, Megasteel initiated anti-dumping investigations into HRC from China, Indonesia and South Korea, resulting in anti-dumping duties of between 6.35% and 25.4% being imposed over and above the 15% import duty.

Nevertheless, Megasteel came under fire on Nov 4.

Documents viewed by The Edge indicate that members of the Malaysian Iron & Steel Industry Federation (Misif), Japanese Chamber of Trade & Industry Malaysia (Jactim), Japan Iron and Steel Federation (Jisif), Japanese outfits such as Kobe Steel Ltd, Nisshin Steel Co Ltd, JFE Steel Corp and Nippon Steel & Sumitomo Metal Corp, and a whole host of other companies were present at the public hearing and they did not mince their words.

Jactim’s representative, Yoshiyuki Komaki, said, “In the event safeguard measures are imposed, Jactim would be seriously concerned that it would also negatively affect future investment opportunity from Japan to Malaysia.”

Jisif was equally harsh and said the outcome of the safeguard investigation could have far-reaching impact and any adverse decision could have “far-reaching repercussions for the trade relationship between Japan and Malaysia”.

Jason Teoh of Jason Teoh & Partners — a legal firm that represents as many as 17 companies and Misif — questioned, “Why should we continue to bear the burden which is Megasteel?”

Teoh also highlighted that Megasteel is an insolvent company with more than RM3.02 billion in debt and had serious doubts as to its ability to sustain its operations. He said it is “not in Malaysia’s public interest to impose any safeguard measures to bail out an insolvent entity at the cost of the entire Malaysian iron and steel industry”.

For its financial year ended June 30, 2014, Megasteel suffered an after tax loss of RM416.76 million from RM2.26 billion in revenue. As at end-June last year, the company had non-current assets of RM2.64 billion and current assets of RM673.38 million. Meanwhile, its current liabilities stood at RM3.80 billion and it had long-term borrowings of RM439.39 million.

It is noteworthy that Megasteel had accumulated losses of RM1.53 billion as at end-June last year.

Teoh pointed out that the company’s borrowings are pegged with interest rates as high as 15.6%, compared with the average of 6%, and he “respectfully requests Miti to immediately terminate this investigation as Megasteel’s petition is fundamentally flawed”.

Apart from the sharp depreciation of the ringgit against the US dollar, local steel players also have to deal with an 16.8% increase in electricity tariffs that translates into an increase of millions of ringgit in electricity bills as well as a 31% increase in gas tariffs, the implementation of the Goods and Services Tax and the imposition of minimum wage, which significantly increases their costs.

“We’ve been bleeding losses for some time now. It’s so bad that banks are shying away from us, largely because of the perception created by Megasteel … we are in serious trouble,” one industry player says.

For its financial year ended June 2015, Mycron Steel Bhd reported a net profit of RM17.82 million from RM518.34 million in revenue. However, the company’s notes suggest that its cold-rolled coils (CRC) arm, which accounts for about 90% of its revenue, registered a pre-tax loss of RM8.97 million.

According to the notes that accompany its financials, Mycron’s profits were largely from a bargain purchase of RM21.3 million, among others.

Over at YKGI Holdings Bhd, the company suffered a net loss of RM8.02 million from RM273.64 million in revenue for its six months ended June.

Eonmetall Group Bhd, for its six months ended June, posted a mere net profit of RM75,000 from RM32.91 million in revenue, and the company has business segments other than steel.

Meanwhile, Misif members are crying foul over Megasteel’s appointment of Prof Jeffrey M Waincymer as its lawyer. They say there is a conflict of interest as Waincymer had, until recently, been representing Misif.

In August, CRC producers — lead by Mycron — wrote to Miti seeking protection for the domestic CRC market. They claimed that China, South Korea and Vietnam export CRC at a lower price — 21% cheaper than the price in their domestic markets — resulting in the likes of Mycron suffering losses.

Two years ago, the Malaysia Competition Commission proposed a RM4.5 million financial penalty on Megasteel after it was found to have infringed the Competition Act 2010 by abusing its dominant position. However, The Edge understands that this proposed financial penalty has since been reversed.

Megasteel commenced operations during a difficult time in 1999, brought about by the Asian financial crisis, with an initial investment of RM2.5 billion.

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