KUALA LUMPUR: The local steel industry, whose profits have been hurt due to an influx of imported products, could pose a risk to banks’ books with the high debts held by these steel players.

According to Lion Group executive chairman Tan Sri William Cheng, the local steel industry currently owes banks an estimated RM12.8 billion in loans, if not more.

“So many steel manufacturers are already in trouble. If they cannot make profits, how do they pay back this RM12.8 billion?” commented Cheng, who has been fighting for the protection of the local steel industry.  

He stressed that the key challenge local steelmakers are facing is the lack of government support and protection, resulting in the flood of cheap imported steel products.

“We are giving the government three months … within the next three months, if the government does not do anything, we will have to think of Plan B and C,” said Cheng, adding that the steel industry players have been in talks with the government on protection measures.

On this note, Cheng reaffirmed the possibility that Lion Group may relocate its steel manufacturing plant — currently located in Banting, Selangor — to Indonesia.

He pointed out that the preference would still be for the government to offer full protection to the industry as it does not bode well for the country’s reputation if it moves out.

Consumers would prefer cheaper imported steel products to reduce costs. There are also grouses that the quality of some local steel products is not up to the mark.

“Currently, when we export our hot-rolled coils (HRC) to Indonesia, the government taxes us at 48% for export duty. However, when Indonesia exports its HRC to Malaysia, it’s at 0% duty,” said Cheng. He noted the same for Thailand, where local players are taxed at 26% for exports, but imports are not affected.

Cheng said it would not cost the government to halt the 6.5 million tonnes of steel imported currently and instead it should allow imports of only 2.5 million to 3 million tonnes per year.

“This will allow local manufacturers to run from its 30% capacity currently to 70%, and everybody will be making profits by now,” he said. Ideally, Cheng said, at least 70% to 80% of domestic demand should be sourced locally.

He described the current operating environment as the worst he has ever seen. According to Cheng, the country’s imports of steel have doubled from three million tonnes to 6.5 million tonnes annually in the past three years. In contrast, local production of steel has been reduced from over five million to just three million tonnes per year.

This means that about 6.5 million tonnes or 68% of steel utilised in the country is imported presently.

Cheng said Lion Group has been divesting profitable companies to keep its steel division going. This included its divestment of the entire equity interest in tyre maker Silverstone Bhd three years ago for RM600 million.

The struggle of Cheng’s steel business is well reflected in Lion Corp Bhd, whose subsidiary Megasteel Sdn Bhd manufactures HRCs and cold-rolled coils. The company was categorised under Practice Note 17 in October last year.

Its accumulated losses ballooned to RM1.22 billion as at Dec 31 last year, with borrowings of RM1.08 billion.

Cheng admitted that bankers, directors and shareholders do not have confidence in the group. “The trouble is when you lose money, and with no signs of turnaround, who wants to put money inside?” he said.

This article first appeared in The Edge Financial Daily, on May 7, 2014.