What new initiatives is Mycron Steel currently involved in?
ABDULLAH: The main initiative that we are currently working on is to improve our quality and to try and capture some of the imported goods that come into the market. In 2011, 850,000 tons of cold rolled was imported into Malaysia. This gives us an avenue for import substitution. This is much better than trying to look for export markets. Once you export, you involve freight and insurance, which in turn makes you less competitive in terms of pricing. These 850,000 tons of material may be imported into the country because the material has been deemed to be not available in Malaysia due to the fact that it is of such high quality. So, what we're doing now is trying to improve our quality so we can target the much higher end cold rolled products, which of course brings us higher margins.
As markets move towards further liberalization and FTAs increase, to what extent do steel import tariffs impact market dynamics?
ABDULLAH: In Malaysia, there's a 20% tax on imported steel. Any material that is deemed as not available in the country may be imported duty free. With regards to the goods coming into the country, what we are more concerned with is getting local buyers to support the local manufacturers where product is available locally. Many countries have a non-tariff barrier. Having strict tariffs does not comply with the WTO. Therefore, many countries have a non-tariff barrier (NTB). For example, in Indonesia they have SNI (Indonesia National Standards), which makes it very difficult for foreign goods to go into Indonesia. Further, a local agent must be used; they must come and visit the premises and prove that they are capable of exporting what is required of them, at which time they become certified. However, in Malaysia it's basically a closed market and so the steel prices in Indonesia are much higher than in Malaysia. For example, the raw material is priced much higher than my finished product of cold rolled in Malaysia because it's difficult to export to Indonesia.
To what extent do volatile commodity prices (coal, steel, etc.) impact your business?
ABDULLAH: Of course changes in commodity prices affects our business because we are a mid-stream producer. We buy hot rolled and we convert it into cold rolled. Both begin as raw materials and are converted into semi-finished raw materials. The hot rolled comes from slabs, which can be made from iron ore or scrap. The prices of the raw materials has indeed gone crazy in the last few years as compared with maybe 10-15 years ago when it was much more stable. Volatility is high at the moment and of course we try as much as we can to pass it on to the end user. If you have a case where prices fluctuate a great deal, similar to what's happening now, people become afraid to buy and keep their stock. Everyone is at very low levels of inventory because of what happened a few years back when prices dropped by as much as $500 or more. As a result, many companies were caught in a difficult situation and became impaired by the fact that they had too much inventory on hand that they could not sell. This had a major impact on the steel industry.
Is iron ore available in Malaysia?
ABDULLAH: Iron ore has been available for quite some time but the price has not been attractive enough to be mined until recently. In the area of Terengganu there is an iron ore mine and there are many smaller mines in the state of Pahang and in Kuantan. So, because of the demand some people are going around buying up all the smaller mines for export to China.
Is the current share price of Mycron fair?
ABDULLAH: I keep reiterating that at this price of 30-33 cents, it's probably one of the most grossly undervalued counters on the Bursa Malaysia. Our IPO price was RM1.40 and it's a 1-ringgit par value. At 33 cents, with an NTA of RM1.46, we are certainly very undervalued.
What are some of the development plans of Mycronâ€™s parent company, The Melewar Industry Group (MIG)?
ABDULLAH: Mycron is about 54.8% owned by the parent company, The Melewar Industry Group (MIG). We have 3 particular segments. One segment is steel, which is comprised of Mycron and its sister company, MST, which is involved in pipes. The type of pipe that MST is involved with is the old Motoichi pipe, which was brought over by my boss and owner of the company, Tunku Yaâ€™acob back in 2002. In terms of steel pipes, there are about 20 players in Malaysia. Therefore, it's very competitive and the smaller people have more of an edge because of the lower cost structure, which allows them to sell at a very low price and the rest have got to match their price. Mycron was the first cold rolling company in Malaysia. We started in 1990, which places us in our 22nd year and today there are 5 cold rolling mills in Malaysia. Other than steel, we are involved in the power sector through MIG. We have an independent power producer (IPP) in Rayong, Thailand for about 160 megawatts; 90 megawatts is contracted to EGAT, which is the Electricity Generating Authority of Thailand, and 70 megawatts to G Steel. We are confined to these two customers in that region. G Steel is not doing very well at the moment and has been lagging in their payments to us. In a third segment of our business mix, we have an engineering consultancy, which is headed by our Melewar Industrial Engineering Group. In a nutshell, those are the three businesses under MIG.
In Malaysia, there's a 20% tax on imported steel. Any material that is deemed as not available in the country may be imported duty free. With regards to the goods coming into the country, what we are more concerned with is getting local buyers to support the local manufacturers where product is available locally.
Where do you see the greatest potential for growth?
ABDULLAH: Actually, there's still a great deal of potential in steel because a few years ago the government announced plans to change water pipes. We do pipes, which range in size from .25" to 14", and the bulk of it is used in what we call the last mile, which is from the reservoir to the housing estate. Many houses here are upwards of 50 years old dating back to the British era and all of the pipes are rusted which can sometimes result in brown-colored water. Therefore, the government has announced a plan to convert all of the old pipes to new pipes. That has not yet been carried out, largely due to insufficient funds. Going forward, the government has announced dozens of Economic Transformation Plans (ETPs) year-to-date worth billions of Ringgit, however this has not yet filtered down. Where we have seen some of these funds being slowly filtered down is for the Mass Rapid Transit (MRT) project. In other sectors for which funds have already been allocated, businesses have not yet seen much benefit or jobs created as a result of these major ETPs which have been announced.
Who are your biggest suppliers and how does working with different suppliers impact your business?
ABDULLAH: From Mycron's point of view, we buy only hot rolled. Locally, we are required to buy from the sole manufacturer in Malaysia, which is in fact a monopoly. Unfortunately, their raw material is scrap, so when you have a raw material from scrap there are many impurities and when you have many impurities the end product is not of such high quality. So, the moral of the story is that if you use scrap based hot rolled, the cold rolled that comes out at the end of it is also on the low end. The low end product mostly ends up being used for furniture and tube application. For example, your chair and table legs would be the end-use for the lower end scrap based hot rolled. For the iron ore base, we import largely from Japan. The policy of overprotecting the local hot rolled producer, which is scrap based, is something I would like to discuss briefly. As I explained, as a scrap based product, there are impurities in the material. This inhibits us from being able to use the locally produced hot rolled for the higher end applications. Our aspiration is to go for import substitution. As I mentioned earlier, 850,000 tons of cold rolled was imported into the country. Our aim is to target about 10% of that totaling 85,000 tons. In order to do that, I need to be able to import raw materials, iron ore based and duty-free. The reality is that I do not have double-digit margins; therefore a duty of 20% starts to eat into the margins. By allowing us to import duty-free, we can achieve import substitution, which has 2 advantages: it prevents foreign exchange from going outside the country and there will be a local company, which is capable of making higher end products.
In which industries is Mycron most active?
ABDULLAH: From the iron ore based hot rolled, customers make steel drums. In the Malaysian context, drums are used mostly to store petrol and palm oil because we're a net exporter of palm oil. Our customers also export to Europe and other parts of the world and in these parts of the world it's used not only to store petroleum or palm oil, but they also use it to store chemicals, nuclear waste and other hazardous materials. Therefore, it's very important that we use the iron ore based material so that it will not leak when it falls from a high place. It is quite dangerous to use non-iron based raw material in such cases. Apart from the drum sector, we have what we call the steel centers. The steel centers buy our cold rolled in coils and fabricate, cut, and slit the material into whatever size the end user wants. In Malaysia, most of the end-users of these steel centers are the Japanese exporters: Matsushita, Toshiba, Sony, etc. For example the rice cooker, that is cold rolled. The greyish material that you put rice inside of is made of cold rolled because it's malleable which means you can shape it into whatever shape you want and it's also very strong. The inside of refrigerators, microwaves, and most other electrical items and household appliances are also made from cold rolled. That constitutes anywhere from 30-35% of our customer base. The drums represent about 20%. Another layer of customers are the galvanizers, like BlueScope. Also, at many factories, the walls are made from cold rolled steel. Some customers may mix the cold rolled and aluminum which is called zincalume. This material may be used as wall-claddings, or on the roofs of factories among many other uses. Cold rolled is also used for automotive components. We sell between 400-600 kilograms per month to Proton. We also sell to Perodua. The automotive industry is an area where we see room for expansion with a higher-end product. As you can see, we are not overly dependent on one sector. In fact, we have 3 or 4 very strong sectors and if one sector were to be affected negatively, we still have the others. To reiterate, our sectors include: the drums, the household appliances, the furniture tubes and pipes, and the galvanizers. When we first took over the company, we were dependent on selling to our sister company. We were often criticized because we were too dependent on one buyer and that buyer was a related company. Today, both companies are listed vehicles and we do business at an arm's length basis. Again, we have the four major segments, which further strengthens our position. You might say that we are putting apples into several different baskets.