KUALA LUMPUR: Hiap Teck Venture Bhd expects construction of the RM750 million blast furnace in Terengganu to begin in the second half of 2011.

According to executive director Low Choong Sing, the company is currently working out the financing details which are expected to be finalised in the first half.

“The first phase of the blast furnace is scheduled to be commissioned at end-2012 and would take 16 to 20 months to build. As such, we should start construction some time in 2H of next year.

“We are also currently talking to our financiers and looking at ways to finance the expansion via bank borrowings and the equity market,” he said after the company’s annual general meeting yesterday. Low would not comment on the corporate exercise that it is looking at.

“We cannot disclose anything at the moment as we are considering the options. But we definitely do not want to be overly geared,” he said.

As at Oct 31, Hiap Teck had bank borrowings of RM390.3 million with a cash position of RM44.38 million. With shareholders’ equity at RM645.8 million, it had a net gearing of 0.53 time.

Hiap Teck had proposed to build the blast furnace in Kemaman, Terengganu after it acquired a 55% stake in Eastern Steel Sdn Bhd for RM110 million, or a price-to-book value of 1.4 times last year.

It said the 530-cubic metre blast furnace would help Hiap Teck better position itself in the steel industry as the iron ore produced would be of higher quality and would incur less cost. Steel scrap prices surged recently, eroding profit margins of steel players.

The blast furnace will be built on 1,200 acres of land, and Eastern Steel has the option to acquire another 600 acres at the estate, upon completion of 50% of the first phase of the proposed project. The blast furnace will have an annual production capacity of 700,000 metric tonnes when completed.

Low said Hiap Teck currently has the licence to produce five million metric tonnes of iron ore.

Its expansion comes at a time when steel players are moving up the value chain to help manage cost and produce better steel products.

Ann Joo Resources Bhd recently completed a blast furnace for RM600 million and is expected to begin full commissioning this month, while Perwaja Holdings Bhd is planning to spend RM201.5 million on a new plant.

According to analysts, a move upstream will help reduce costs as the price of scrap has been increasing and blast furnaces consume less electricity.

Following the acquisition of Eastern Steel early this year, Hiap Teck saw the emergence of Datuk Law Tien Seng as a substantial shareholder with a 27.64% stake in the company. He also holds the remaining 45% stake in Eastern Steel.

The tycoon is a veteran in the metals industry who made headlines in 2008 when he sold his 12% stake in Australian iron ore company Midwest Corp Ltd to China’s Sinosteel Corp. The sale of the stake put him on the Forbes list of the top 40 richest Malaysians that year. He ranked 36th last year with an estimated wealth of US$105 million (RM328.7 million).

Law was subsequently appointed deputy chairman of Hiap Teck in June. Given Law’s vast experience in the metal industry, Low said yesterday he was positive of his contribution to the group.

Hiap Teck yesterday announced its 1QFY11 results, which saw a net loss of RM1.16 million compared with a net profit of RM17.17 million a year earlier. This was attributed to lower sales volume and declining prices. The company also saw its revenue drop 14.5% to RM244.5 million from RM280 million a year earlier.

It said demand for steel prices was expected to remain weak in the near term due to the sluggish market condition. However, Low said it expects to gain from  infrastructure projects under the Economic Transformation Programme to be rolled out next year.

“2011 is set to be a good year as steel products would be needed for the ETP projects expected to be rolled out next year. However, we would not see the full impact on our bottom line as our financial year-end is July 31, 2011,” he said.

Low added that Hiap Teck seeks to remain competitive in the market by closely monitoring the steel prices and offering value-added services.

“The market is opening up within the Asean region but it is only limited to downstream players. As such, we face stiff competition while suppliers at the top are still limited. In order to stand out, we have been offering more value-added services such as designing and consultation.

“We also constantly do research and development (R&D) to offer more products to customers,” he said, adding that it allocated about RM3 million a year for training and R&D.

Hiap Teck fell two sen to close at RM1.19 yesterday with 678,700 shares done.

This article appeared in The Edge Financial Daily, December 15, 2010.