AFTER months of deliberation, Lion Group’s ailing steel miller Megasteel Sdn Bhd has ceased operations at its 17-year old flat steel products plant in Banting, Selangor, according to industry sources.
The management's decision to fully shut down its RM3.2bil plant effective from Aug 30 until further notice, however, came as no big surprise to the local steel fraternity. A source says the Megasteel situation has taken a turn for the worse this year.
“From January to August there were no fresh orders coming in. Its plant has already been running on a single shift and the full shut-down will see some 800 workers facing termination. “It is an open secret that Megasteel will need to close shop at least temporarily as there is still no white knight coming to rescue the bleeding company,” adds the source. Megasteel is the country’s first integrated steel miller, producing flat steel products including 3.2 million tonnes of hot rolled coils (HRC) and 1.45 million tonnes of cold rolled coils (CRC) per annum. It is a 79%-owned subsidiary of Lion Corp Bhd and a 21.11% associate company ofLion Diversified Holdings Bhd. Both companies are controlled by Lion Group executive chairman Tan Sri William Cheng.
Apart from Megasteel, other steel plants of Lion Group, including Amsteel Mills Sdn Bhd and Antara Steel Mills Sdn Bhd, are believed to be still in operation. The sources say: “Antara Steel Mills in Pasir Gudang, Johor is operating at 50% production capacity because its long steel bar products are still demand well supported by the government’s on-going construction and infrastructure projects.”
Megasteel’s business for more than five years has been severely affected by stiff competition from the influx of imported steel products from China, which are selling below the cost production of domestic steel players. As a result of this, Megasteel defaulted on a banker's acceptance payment on Sept 23, 2015 in respect of a working capital facility. This default created a dominoes effect as it gave rise to cross default provisions under the loan documents for its other facilities, which amounted to some RM3.02bil.
These securities are:
- Term loan facility agreement with principal amount outstanding of about RM21mil
- Syndicated term loan facilities agreements with principal amount outstanding of approximately RM683mil
- Bilateral working capital facilities agreements with a total combined limit of RM119.5mil; and
- > Ringgit-denominated bonds (LCB Bonds), redeemable convertible secured loan stocks and US-denominated debts issued by LCB of some RM2.2bil.
Protection
Given Megasteel's status as the only HRC producer in Malaysia in 1999, the Government provided protection to Megasteel in the form of 25% import duty on HRC and also increasing it to 50% in 2002. And, it also introduced an import permit and quota system. However, despite the protection, Megasteel continued to record huge losses. As at Dec 31 last year, Megasteel had racked up RM2.43bil in accumulated losses.
So far, Megasteel has gone through four debt restructurings, the latest of which in 2014, when it only had consent from two of its seven US dollar term loan creditors. As at Dec 31 last year, Megasteel owed RM895.7mil to secured creditors, while unsecured creditors and suppliers were owed RM3.28bil. Meanwhile, Megasteel’s major stakeholder Lion Corp has been a Practice Note (PN17) company since Oct 25, 2013. Lion Corp has applied to Bursa for an extension of time from July 31 to Nov 30 for the company to explore available options for its regularisation plan.
While the closure of the Megasteel plant is still indefinite, an industry source points out that it is learnt that the local steel industry players’ effort to obtain anti-dumping steel safeguard measures from the Government still remains uncertain. “Megasteel management is still hopeful that the Government can still come to the rescue. The safeguards result is due sometime in September or October this year,” the source added.
Steel industries
Within Asean, Thailand and Indonesian governments have implemented significant measures to protect their steel industries. “The request for safeguard measures by Megasteel is a fair request because other neighbouring countries have already imposed it given the threat of cheaper imported steel products selling below the production costs of domestic steel players,” the source adds.
“Our government must naturally encourage the use of locally manufactured HRC and CRC-related products, by imposing anti-dumping regulations on countries undertaking such practices, and by controlling its issuance of duty exemption certificates. “This move will help to bolster and nurture the country’s RM41bil steel industry which is currently facing tough times.”
On another note, analysts say that the void left by Megasteel is expected to be filled by Southern Steel Bhd which is the country’s second producer of HRC after Megasteel’s monopoly for over 10 years.
However, Southern Steel is also badly affected by the dumping of cheaper imported HRC steel goods flooding the local market. At the same time, analysts say Mycron Steel Bhd, the producer of CRC, is making good progress following the closure of the Megasteel plant as reflected by its actively traded share prices lately. The share ended 7.5 sen higher at 78.5 sen yesterday.
While Megasteel has a monopoly on the sale of HRC locally, it also ventured into CRC production a few years ago, thus creating an imbalanced playing field to other CRC players like Mycron Steel. In Malaysia, CRC players are required to buy half of their HRC requirements from Megasteel while other HRC users, such as pipe makers, are required to buy all or a large portion of their HRC requirements from the company.
