Miti to meet Japanese embassy on steel impasse

KUALA LUMPUR: The International Trade and Industry Ministry's (Miti) decision to extend the deadline for the decision on hot rolled coil (HRC) imports came as no surprise to the industry given the divided views on a 35% hike in import duty.

The issue has become bigger with the involvement of foreign parties, particularly downstream players and manufacturers whose inputs are steel.

Sources said the Japanese embassy is meeting with Miti on Monday, Aug 1 to get a commitment from the ministry that import duties on HRC will not be increased.

Miti seems to need more time to make up its mind. Last Thursday, the ministry announced that the deadline for a decision whether to increase import duty on HRC had been extended from July 30 to Aug 28.

Notably, at a public hearing in June, some Japanese players under the Japanese Chamber of Trade and Industry Malaysia threatened to pull out of Malaysia if the petition to raise import duty was successful.

Industry observers note that five Japanese players have equity ownership in many downstream companies and export certain products to Malaysia.

However, Miti's delay in making a decision is taking a toll on downstream players as many are in a dilemma over getting adequate supplies for the next one month.

Industry players note that the one-month delay would make it difficult to place import orders as shipment takes 45 to 60 days.

"If we were to place our orders and the government decides to hike the import duty, then we would have to pay a large amount on arrival of the shipment. While we are not surprised by the extension, it is very frustrating as it muddles our planning and production," a downstream player told The Edge Financial Daily.

The government received a safeguard petition from Megasteel Sdn Bhd, representing the domestic industry producing HRC, alleging that imports into Malaysia had increased from 2007 to 2010 and caused serious injury to the local industry.

Megasteel, the sole producer of HRC or flat steel in the local market, is seeking an additional 35% duty on imported HRC, which would raise it to 60%.

The government initiated a preliminary safeguard investigation whereby a preliminary determination was supposed to be made by July 30.

Megasteel chairman Tan Sri William Cheng argues that the country has been flooded with imports of HRC by "unscrupulous importers" who are exploiting loopholes in the import regulations.

If the situation continues, it will lead to plant shutdowns and retrenchment of workers not only by Megasteel but by supporting and downstream industries as well, Cheng said, defending the need to raise the trade barrier on the import of HRC.

HRC is used as base material in various industries such as automotive, construction, electric and electronics, fabrication, engineering and manufacturing.

Industry observers note that Megasteel is reliant on the domestic market as it is not competitive enough to export its products due partly to the lack of economies of scale.

Apparently, Megasteel's financial health will be threatened if the import of HRC continues to climb. The company is highly geared due to its large spending of RM3.2 billion to set up its flat steel plant. As at end-June 2010, Megasteel had current liabilities of RM3.28 billion and non-current borrowings of RM785.4 million.

"If this continues and the duty is hiked, it would kill the industry. A lot of smaller players will not be able to survive. As it is, the current duty is already a hindrance to them. Margins are suffering," said a downstream player who declined to be named.

"We could possibly close shop before Megasteel if the import duty goes higher. This would also result in unemployment and plant shutdowns," he said.

A random check on public-listed downstream steel players' financials showed Yong Kong Galvanising Industries Bhd, which manufactures galvanised steel, posted substantially lower profits in the latest quarter due to higher input costs which could not be passed on to customers in proportion.

For 2QFY11 ended June 30, Yung Kong's net profit plunged 82% to RM876,000 from RM4.9 million in the previous corresponding quarter. Revenue fell 7% to RM116 million from RM124.9 million previously.

For the six months ended June 30, it made a net loss of RM2.4 million compared with a net profit of RM10.1 million in the previous corresponding period.  Revenue rose to RM277.7 million from RM242.3 million.

In notes accompanying its quarterly results, Yung Kong noted that the pending decision on the petition by Megasteel for safeguard on HRC is causing uncertainty in the steel industry.

"However, the management remains optimistic and pro-active to take all the necessary precautionary actions to react to the changing environment in the steel industry," it said.

At last week's press conference, Malaysian Iron and Steel Industry Federation (Misif) president Chow Chong Long said it would be detrimental to the iron and steel industry if the government were to impose an additional 35% duty on imported HRC.

He pointed out that the new duty would affect a wide range of industries, including electrical and electronics, automotive and other export-based manufacturers.

According to Chow, some foreign companies have already notified the World Trade Organisation about the petition for the imposition of an additional import duty on HRC.