On behalf of the Board of Directors, it gives me great pleasure to present the Annual Report of Mycron Steel Berhad and its group of companies ("the Group" or "Mycron") for the financial year ended 30 June 2018.

FINANCIAL PERFORMANCE

Mycron Steel Berhad encompasses the combined operations of two subsidiaries, namely Mycron Steel CRC Sdn Bhd ("MSC") and Melewar Steel Tube Sdn Bhd ("MST"). MSC is involved in the mid-stream sector of the steel industry, in the manufacture of Cold Rolled Coil ("CRC") steel sheets, while MST is involved in the manufacture of steel tubes and pipes ("Steel Tubes").

For the year under review, the Group maintained healthy operations, with total revenue of RM 793.4 million and representing 9.3% more than the RM 726.2 million recorded a year earlier, an increase of RM 67.2 million.



The increase in revenue is supported by higher turnover registered by both divisions, especially the CRC Division, which recorded a revenue of RM 546.9 million compared to RM 482.1 million the previous year, representing an increase of 13.4%. The Steel Tubes Division also performed creditably, grossing up revenues of RM 274.2 million, compared to the previous year’s RM 266.8 million, a growth of 2.8%.

The Group registered total steel sales tonnage of 275,260 tonnes as at 30 June 2018.



Of that tonnage, CRC sales decreased by 3.5% to 184,437 tonnes, compared to 191,048 tonnes the previous year. CRC sales tonnage include secondary products/services like second grade CRC, pickled and oiled, and scrap.

Steel Tubes sales decreased by 11.4% to 90,823 tonnes, compared to 102,528 tonnes previously. Sales tonnage for Steel Tubes include other secondary products/services such as second grade pipes, slitted edge, hot dipping, pipe-forming and pipe slitting services, and scrap.


DIVIDENDS

Despite the profitable performance for the year under review, the cash flow position of the Group is still considered to be tight, especially given the current high price of HRC, which utilises a great deal of working capital. Moreover, banking facilities continue to be limited. With a view to expand the business operations of the Company, no dividend is recommended by the Board of Directors.

CRC OPERATIONS REVIEW

The Company's CRC sales revenue rose by RM 64.8 million to RM 546.9 million as at 30 June 2018. The growth is mainly attributable to the substantial increase in price of Hot Rolled Coil ("HRC") which in the contrary showed a 59% drop in the PBT from RM 15.83 million to RM 6.55 million in FY2018. On a financial quarter-by-quarter basis, the first quarter saw CRC sales tonnage increase by 5.9% to 43,482 tonnes, whilst sales revenue remained at the same level of RM 121 million. As a result of this lower per tonne price for CRC, the Profit Before Tax ("PBT") for the quarter decreased 19.8% to RM 2.76 million, compared to the previous quarter's PBT of RM 3.44 million.

For the second quarter, sales tonnage increased 11.3% to 48,389 tonnes. Sales revenue however increased at a higher rate of 17.4% to RM 142 million, caused by an increase in the price of HRC, the core raw material for the manufacture of CRC. Despite the higher sales tonnage, PBT for the quarter did not grow, remaining at the RM 2.77 million level, caused by a margin squeeze, as CRC customers could not absorb the full impact of the HRC price increases.

As for the third quarter, sales tonnage decreased 2.6% to 47,149 tonnes, mainly due to the Chinese New Year holidays, which saw a short working month in February. Concurrently, PBT for this quarter was reduced to RM 1.83 million.

In the fourth quarter, sales tonnage dropped by 3.7% to 45,417 tonnes, while sales revenue dropped 3.3% to RM 139.6 million, mainly due to the uncertainties in the build up to General Elections and the subsequent Hari Raya Aidilfitri celebrations. During this quarter, CRC operations suffered a Loss Before Tax of RM 0.81 million, mainly due to the depressed price for CRC, as a result of an increase in duty-exempt imported CRC, being dumped into Malaysia.

STEEL TUBE OPERATIONS REVIEW

The Company’s Steel Tube revenue increased by 2.8% to RM 274.2 million for FY2018 is mainly attributable to the increase of HRC prices which notably reduced the PBT from RM 30.01 million to RM 15.39 million as at 30 June 2018. For the first financial quarter, Steel Tube sales tonnage was down 8.5% to 22,826 tonnes, compared to the previous quarter’s 24,934 tonnes. Sales revenue was also down 4.8% to RM 66.4 million. PBT for the quarter decreased by 13.7% to RM 5.25 million.

For the second quarter, sales tonnage dropped a further 5.2% to 21,630 tonnes, with sales revenue dropping by 2.6% to RM 64.7 million. Unfortunately, PBT declined 27% to RM 3.83 million, due to reduced gross margins, caused by sharp increases of HRC prices over the first two quarters.

In the third quarter of the financial year, Steel Tube sales tonnage increased 6.7% to 23,078 tonnes, resulting in an increase of 7.7% or RM 69.7 million in sales revenue. PBT was however down 7.0% to RM 3.56 million, due to lower gross margins, as a result of higher HRC raw material prices, and the shorter working period, due to the Chinese New Year celebrations.

As for the fourth quarter, sales tonnage remained stable at 23,289 tonnes, with sales revenue increasing by 5.3% to RM 73.4 million, as a result of the higher price for HRC. A margin squeeze, caused the PBT to drop significantly by 22.8% to RM 2.75 million. This quarter was profoundly influenced by uncertainties following the General Elections, as the Steel Tube Division has exposure to the construction sector. The fasting month and subsequent Hari Raya shutdown dampened the market further during the quarter.

GLOBAL STEEL ECONOMY REVIEW

During the financial year under review, the global and domestic steel industry environment proved to be extremely challenging.

On March 8, 2018, the US president announced his intention to impose 25% tariffs on all steel imports into the United States of America under Section 232 of the US Trade Expansion Act 1962 which took effect 15 days later. This sent shockwaves across the global steel industry. The European Union (“EU”) was first to react, by initiating their own investigation, towards the imposition of safeguard measures on steel imports into the EU on March 26, 2018. The EU has since introduced a 25% duty of steel imports into the continent.

The US Tariffs and EU Safeguard measures had triggered a massive trade diversion of steel, that were headed for the US and EU, and now redirected towards Southeast Asia. Liberal import controls at our borders, saw CRC and other steel products being dumped into Malaysia, without being charged any import duties. This has consequentially caused significant harm, to the domestic steel manufacturers, and is threatening the livelihood of the industry, and the employees that operate in the sector.

Mycron Steel CRC Sdn Bhd (“MSC”) continues to endure unfair competition from foreign CRC producers, many of which are heavily subsidised by their governments. Trade distorting policies and practices, coupled with global steel overcapacity, impacts pricing in the Malaysian market, and influences our ability to compete on a level playing field.

In retaining our position and domestic market share, MSC has had to compete in an unjust environment, filled with cheap duty-free foreign steel, being dumped into Malaysia. The Group’s results for the year under review, has been strongly affected by Malaysia’s lack of control, in managing dumped steel.

DOMESTIC CRC INDUSTRY STRUCTURE

Hot Rolled Coil ("HRC") steel sheets are the basic raw material used in the production of Cold Rolled Coils (“CRC”) steel sheets. CRC manufacturers, in general, produce two types of CRC, namely:

  1. Scrap Based CRC (produced from Scrap Based HRC), and
  2. Iron Ore Based CRC (produced from Iron Ore Based HRC)
Scrap Based CRC is considered to be inferior in metallurgical quality, as it contains impurities, derived from the scrap used to manufacture the Scrap Based HRC. Being manufactured from lower quality HRC, Scrap Based CRC is used by downstream customers, mainly in the Steel Tube and Furniture sectors, which do not require high quality CRC.

On the other hand, due to its higher quality, the Iron Ore Based CRC is used by a different group of customers, primarily involved in the production of Steel Drums for the palm oil and petroleum sectors, in the production of Colour Coated and Galvanized CRC (usually for the manufacture of roof sheet), in the production of electrical appliances mostly comprising of white goods like washing machines, refrigerators, microwaves ovens, rice cookers, and also in the production of components and parts for the automotive industry.

In Malaysia, there are five CRC manufacturers, with only four in active production, as Megasteel Sdn Bhd had stopped operations three years ago. Mycron manufactures CRC as well as Steel Tubes, while Eonmetall Group Berhad is more focused in the production of machinery and equipment, as opposed to CRC. CSC Steel Holdings Berhad and YKGI Holdings Berhad manufacture CRC, but also undertake the downstream manufacture of colour coated and galvanized CRC sheets. All CRC producers offer Scrap Based and Iron Ore Based CRC products for sale.



Table 3 provides details of utilisation rates and total capacity for the domestic CRC industry. Over the past four years, Malaysian domestic CRC producers, have been facing substantial under-utilisation of production capacity at 49.8%, principally due to substantial CRC imports.

Domestic CRC production has dropped by 34% from 798,000 tonnes in 2014, down to 527,770 tonnes in 2017, while CRC Imports, as a percentage of CRC consumption, stands at a staggering 70%. The ratio of imported to domestically produced CRC is 2:1, which is preposterous, for countries that have domestic steel CRC producers.



Table 4 shows the summary of imports of flat steel into Malaysia. Imports of Cold Rolled Coil (“CRC”) sheets and strips are 1,075,598 tonnes, while the combined imports of CRC and CRC Related Products are at an astounding 1,705,094 tonnes, the bulk of which could have been manufactured locally.

To address the surge in CRC imports from dumping and trade diversion, Mycron continues to lead the CRC industry, in efforts to address dumped and subsidised steel imports, which injure the domestic industry, and the welfare of its workers and investors. We actively continue to engage the relevant administrative reviews, and new Anti-Dumping investigations, with the Malaysian Government. We are constantly in dialogue with the government, to educate and enlighten them, of the impact of unscrupulous imports on our business, and to constantly advocate the protection of the domestic steel industry.

Nevertheless, we are confident that we will be successful, in due course, to ensure the sustainability of the Malaysian steel industry.

DOMESTIC FLAT STEEL INDUSTRY SUMMARY

In 2017, Malaysia's overall flat steel consumption decreased to 6.40 million tonnes, from 6.67 million tonnes the previous year, a decrease of 4.15%. Table 5 provides a breakdown of the domestic flat steel consumption for the past five years.



The domestic consumption of HRC fell by 3.03% to 1.67 million tonnes, a reduction of 0.05 million tonnes from the previous year. It is evident from Table 5 that consumption of Welded Pipes & Tubes, increased by 2.08% to 0.97 million tonnes. A great deal of that consumption was met by a surge of imports of Steel Tubes (refer to Table 4) of 0.55 million tonnes, an increase of 0.18 million tonnes or 50.7% from the previous year. This increase was caused by dumping activities of certain countries, which even after paying the 15% duty for imports, competitors priced the imported steel tubes at lower than domestic prices. Clearly, the duty set by the Malaysian government is too low.

On the CRC side, domestic consumption decreased by 10.7% to 1.53 million tonnes, a decrease from the previous year's 1.71 million tonnes. Of this amount, imports decreased by 4.38% to 1.08 million tonnes (refer to Table 4). The domestic CRC manufacturing industry is hopeful that the Ministry of International Trade and Industry (“MITI”) can persuade local CRC users, to buy more domestic CRC, by being stricter in its issuance of duty exemptions for imported CRC. In this way, capacity utilisation will increase, which will lower manufacturing cost, the benefits of which may be passed on to customers, which would benefit all participants in the CRC value added chain.



Table 6 provides a summary of the overall movement of flat steel in Malaysia for the calendar year 2017. In general, the flat steel industry performed moderately, with domestic consumption falling behind by 4.2% to 6.40 million tonnes, compared to 6.67 million tonnes in the previous year.

With respect to the sectors the Group is involved in, consumption for CRC saw a decrease by 10.7% to 1.53 million tonnes and CRC Related Products declined by 6.7% to 1.50 million tonnes. However Welded Pipes & Tubes grew by 2.1% to 0.97 million tonnes. HRC consumption slightly decreased by 3.0% to 1.67 million tonnes compared to 1.72 million tonnes the previous year.

HOT ROLLED COIL ("HRC") SUPPLY

Hot Rolled Coil ("HRC") is the key raw material used by the Group, for both its CRC and Steel Tube business segments.

During financial year 2018, international HRC prices have been on a significant uptrend. HRC prices from July 2017 to June 2018 increased by 28% due to reduced production of HRC from China, caused by mandatory government production cuts during winter months to eradicate pollution. This caused domestic demand in China, to outweigh supply, and hence reduced exports of HRC from China. Robust domestic demand in Japan, for the Tokyo Olympics, and strong automotive demand in Korea, have led to a drastic hike in international HRC prices, reaching 7-year highs, and has subsequently caused shortages in supply.



During the period, HRC prices moved from levels of USD 500 to USD 652 per tonne, causing substantial strain to working capital needs of the industry.

With no domestic HRC manufacturer in operation, the Group has been importing all its HRC needs from Japan and other countries. Fortunately, even in times where there was tight HRC supply, the Group was well positioned to continue its operations, without any disruptions to its business, due to our long history of importing Iron Ore Based HRC from reliable suppliers.

The Safeguard petition submitted by Megasteel Sdn Bhd in late June 2017, the third submission by them since 2011, to levy heavy duties on imported HRC, was rejected by MITI, after conducting their own investigation.

ELECTRICITY AND NATURAL GAS SUPPLY



Apart from HRC, which is the core raw material for the manufacture of CRC, the industry is also a large consumer of electricity for its rolling plants, and natural gas, which is used to anneal CRC. In the past decade, Malaysian domestic CRC producers, have experienced substantial price hikes in these two inputs, which has contributed to significant margin squeeze.

It can be seen from the charts, that the cost of natural gas, has escalated to a record high of 23% (y-o-y) in January 2018 with significant adjustments made not only on the base tariffs, but also on the GCPT, which was revised from negative RM1.59/mmbtu to positive RM1.62/ mmbtu (about a 200% increase). In totality, the Natural Gas price has increased by 115% over the past eight years.

TECHNOLOGICAL ADVANCEMENT & FUTURE INVESTMENT

As Mycron enters the 4th Industrial Revolution, our factory operations is transforming its technology, to focus on automation and computerisation. Our plant uses Real-Time Data logging to achieve new levels of optimisation and productivity. The integration of Computerisation and Physical Processes, leads to live data acquisition, recording, and enables surgical analysis; to ultimately achieve interoperability between machines and people. It also supports decentralised decision, to make the operations become cognitive, predictive, and as autonomous as possible, to improve overall efficiency, and cost reduction.

Mycron's upcoming 2019 investments, of a new Acid Regeneration Plant ("ARP"), and Continuous Pickling Line ("CPL") revamp for its CRC plant, is another commitment to sustainability. The investment on the state-of-the-art pickling and acid recovery technology, aims to improve the overall conversion cost, expand into new market segments, and reduce environmental impact through a close loop system. The hazardous acid waste, will be recovered and reused into the pickling process, with almost 95% efficiency. We trust that we will leverage on these advantages, to further strengthen our competitiveness in the steel market, as well as play our role in perfecting sustainable operations.

LONG-TERM OUTLOOK

For the present, as a result of trade wars and trade diversion, government policy and enforcement plays an extremely crucial role, more than ever, for the overall well-being of the Malaysian Steel industry.

Rogue steel importers that abuse grey regulatory areas, by manipulating specifications, width and contents, as well as CRC exporters from Vietnam that abuse ATIGA (AFTA Form D) exemption rules, remain a major concern and threat for the industry.

While the world closes its borders to cheap steel imports (in particular the US and EU, but also including Australia, Indonesia and other ASEAN nations), the weak import controls of Malaysia, needs to be immediately addressed. It is our hope that this new Government, that has been entrusted to manage the affairs of the country, will act quickly and decisively, and follow the example of other nations, and introduce immediate steps, to stem the dumping of steel into the country.

We are confident that the Malaysian government will protect the domestic steel manufacturers and its workforce.

Operationally, in the areas where we are in control, we are committed to improving our operations, maximising our product quality, and developing our talents.

We are focused on value creation by creating and maintaining, a competitive cost structure, centred on operational excellence. We remain committed, to maintaining our position as the industry leader, by striving to create sustainable competitive advantage, with a customer centric focus, on delivering on time high quality products, and addressing the challenges of our customers, and providing them with a one stop total solution.

PROSPECTS FOR THE NEW FINANCIAL YEAR

The Group's prospect for the new financial year remains tough due to effects of International steel capacity diversions into Malaysia, and the transitional period of the new government, which has caused short term uncertainties, in the domestic economy, arising from changes in policy, government personnel, and the halt of various mega projects, of the previous administration.

We expect the Group’s financial performance to remain profitable, albeit weaker moving forward, due to lower combined sales volume, and lower gross margins, due to the reasons mentioned above.

Going forward, the Group is actively engaged with the new government, to ensure that our businesses, are protected from unfair trade practices, such as dumping, and we are working together with other Malaysian steel manufacturers, for the long term betterment of the Malaysian steel industry.

ACKNOWLEDGEMENT AND APPRECIATION

On behalf of the Board, I would like to thank our former Managing Director and Group Chief Executive Officer (“CEO”), Encik Azlan Abdullah, who retired this year, for his valued service in the Group. I would also like to take this opportunity to congratulate Mr Roshan Mahendran Abdullah, for his promotion to CEO of Mycron.

I would also like to express my sincere appreciation to the management team and staff for their commitment, dedication, and contributions to the Group. To our valued business associates, customers, suppliers and shareholders; thank you for your continued invaluable support, confidence and trust you have placed in us.

Finally, I would like to thank my fellow Board members, for their stewardship and contributions to the Group.



Tunku Dato' Yaacob Khyra
Executive Chairman