Steel industry bodies explain supply squeeze Posted on 29 April 2016 - 05:37am Print PETALING JAYA: The Malaysian Iron and Steel Industry Federation (Misif) and the Malaysia Steel Association (MSA) have put the current tight steel supply situation domestically and internationally to the recent cancellation of steel supply contracts by Chinese sellers.
MSA said over-reliance of imports of steel products into Malaysia at artificially unsustainable low prices over the past few years has undermined the viability of the Malaysian steel industry by decimating its strategic role to buffer against international steel shortages.
“As steel users continued to rely excessively on artificially cheap imports of steel products from China, it caught everyone by surprise that the Chinese steel prices skyrocketed beginning this year,” Misif said in a statement yesterday.
“With China preferring to meet its local demand, given the recovery in domestic prices rather than export, China suppliers cancelled a large number of steel contracts signed prior to the price surge, thus resulting in shortage for those who rely on them for their regular supply,” it added.
You noticed that while CRC price increased 17% in China since July, HRC rose just 8%? These figures from your charts above. That shows an increased margin spread for CRC producers. There are reports of record spread between HRC and CRC in the US. For some reason, this appears to be a global trend now.
Thank you for the 3 part series. Very well done. I have a doubt I can't find a satisfactory answer. According to Mycron's annual report, which I have also corroborated using Megasteel's website, Megasteel has the largest CRC capacity in Malaysia at 1.5m ton per annum. It was running at very low capacity. According to Mycron's report, in 2014, it was running at a mere 3.3% of capacity. Megasteel's capacity is almost 3x Cscsteel's and almost 7x Mcron's. If CRC is so lucrative, why isn't Megasteel ramping up CRC utilization, instead of closing down its plant? It can theoretically shut off just its HRC segment, and just import cheap HRC from China like what the rest of the CRC players are doing now. Why need to shut everything down if CRC is so lucrative?
November 1, 2013: MyCC issues proposed decision on Megasteel
MyCC issued its Proposed Decision on Megasteel Steel Sdn Bhd (Megasteel), as the Commission found it infringing the Competition Act 2010 by abusing its dominant position. A financial penalty amounting RM4.5 million is being proposed.
The MyCC finds that Megasteel’s practice of charging or imposing a price for its Hot Rolled Coil (HRC) that is disproportionate to the selling price of its Cold Rolled Coil (CRC), amounts to a margin squeeze that produces anti-competitive effects in the market, and is an infringement of section 10(1) of the Act.
“Margin squeeze is also regarded as abusive means by a dominant enterprise to leverage its market power in the upstream market so as to drive out the enterprise’s rivals in the downstream market,” said Shila.
The MyCC takes into account the nature of the product, the structure of the market, the market share of the enterprise, entry barriers and the effects of Megasteel’s margin squeeze on its downstream competitors as well as the seriousness of the infringement in determining the basic amount of financial penalty.
The MyCC viewed that Megasteel is dominant in the HRC market (upstream segment) and had found it is also involved in CRC production (downstream segment). HRC is an essential input for the downstream manufacturers of CRC and at present, Megasteel is the only domestic manufacturer of HRC. The MyCC also notes that the barriers to entry into the HRC market are high.
These factors place Megasteel in a very special position in the market over all the other CRC producers. Although Megasteel’s monthly prices for its CRC were all lower than those charged by its competitors in the downstream market, they cannot be considered competitive prices.
The reason is the monthly margins (between CRC and HRC prices) earned by Megasteel were all insufficient for the recovery of its monthly costs of transforming HRC into CRC.
The artificial lower CRC prices that were charged by Megasteel have the effect of hindering, if not lessening, competition in the downstream market, making this type of pricing practice a serious breach of competition law.
If Megasteel is to run their CRC plant and sell with a higher pricing now...despite a low priced HRC sourced externally...that would clearly prove they are guilty beyond doubt.
When a thief got caught by police for one small mistake such as driving beyond the speed limit...they might as well admit and give in to the fine instead of fighting it....to permanently cover up a much bigger mistake they have done.
Thanks, probability, I think Megasteel was not running efficiently, every ringgit sale make more losses, less sale less loss, no sale no loss, that's interesting.
ust giving a plausible reason to Soojinhou query earlier:
they were selling HRC at price they can cover the costs (via an inefficient process) and they were selling the CRC with artificially low pricing (unrealistic margins) to kill of competitors...
Now if they sell CRC at the same level of price with outsourced HRC...or with the same 'unrealistic margin'...they cannot survive.
If they hike up the margin..MyCC can clearly know they were selling at bullshit margin before to kill competitors....and will never entertain supporting this HRC producer via an import duty.
In any case Megasteel will be killed...and they wont be able to pay the electricity bills or pay the workers in the near term...so best choice is to close down complete production line including CRC at least for the near term.
I agree with you on the point that the Malaysia Government will not support Megasteel any more if Megasteel was to play out all other CRC players unfairly.
It's double edged sword, lenglui, but seem CSCSteel benefited most from weakening RM while Mycron has been actively hedged its currency exposure, no so much gain or loss last year.
The reason Megasteel didn't ramp up production of CRC could be due to no money. The same reason Kinsteel couldn't increase production, and Perwaja stayed at 0 output, of HRC. Steel price recovery came too late for them. Creative destruction. In contrast, Ann Joo had surplus inventory to sell into the high prices.
based on news is temporary shut down due to no fresh order since Jan ~ Aug causing 1 shift running…
steel mill HRC shd preferred 24 hours running for production effiency and energy cost wise
running for CRC not worth as compete with other CRC manufacturer… it will be better running HRC which is monopoly biz… in addition no infringement to LIONCOR for monopoly case…possible backdoor resolve with CRC miller? settle
Congrats, WealthWizard, enough investors are persuaded by your articles to buy into Mycron and CSCstel, both major gainers today. Annjoo and Prestar there too. A strong Steel Day.
A senior manager from Megasteel said they need miracle to revive. It's true as Megasteel has been trying to return to profit for so many years with full supports from government but yet couldn't make it.
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.
I received an email from one of i3 fellow member, where a famous remisier in i3 has a buy call to his subscribers on Mycron with target price of RM1.61, using 5 methods of calculation.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
murali
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