1.

0 Background of Malaysia Steel Industry

The Steel Industry Steel is the essential raw material used in the manufacturing sector,
machinery and engineering industries, transportation equipment which are
automotive, railway and shipping as well as the major ingredient for infrastructure
projects. Hence, steel-making capacities are often viewed as a national interest to add
value to natural resources, it ensures ready supply for the development of
manufacturing and construction sectors, substitute for import, as well as generate
saving on foreign exchange steel production has a high multiplier effect in the
economy through increased activities in other related areas. The level of per capita
consumption of steel is treated as one of the important indicators of socio-economic
development and living standard of the people in any country. It is a product of a
large and technologically complex industry having strong linkages in terms of
material flow and income generation.

The steel industry can be classified into two segments which is primary steel
producers and secondary steel producers. Primary steel producers, also known as
integrated steel producers, are involved in the entire range of iron and steel production
commencing from exploration of iron ore to the production of finished steel products.
The secondary producers purchase iron ore or steel scrap as raw material for
production process that do not use coking coal. The secondary steel producers can be
classified into three types which are major secondary players, mini steel plants and
steel re-rollers. Finished steel is used mainly in the form of long products, flat
products, which in turn contain hot rolled and cold rolled and galvanised products and
alloy steels. The demands for steel are mainly from sectors like automobiles,
consumer durables, and infrastructure and construction industry. Being a core sectors,
it tracks the overall economic growth.

The steel industry is well known for its cyclical nature. The up and down turns
are not new to the steel industry. Over the past decade, the steel industry has
witnessed had emerged as more resilient and more efficient industry despite of the
cyclic nature. Together with coal and cotton, iron and steel were the principal
materials upon which the industrial revolution was based. Technical developments
from the early eighteenth century on wards allowed dramatic increases in output, for
example by replacing relatively scarce charcoal with hard coal/lignite and coke

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respectively and by the development of the paddling process for converting pig iron
into steel.

1.1 BACKGROUND OF MASTEEL

As a steel manufacturer, Malaysia Steel Works (KL) Bhd also known as Masteel
began its operations in 1971, producing commercial grade mild steel round bars, steel
billets at its rolling mill in Petaling Jaya, Selangor. In 1997, the mill was further
upgraded to become a fully continuous mill together with the addition of a new
reheating furnace that could utilise 1 ton billets. The capacity of the mill was further
increased to 450,000mt per year. A thermo quenching line was installed to produce
grade 500 deformed bars to meet the ever increasing demand of our customers.

In December 1997, the mill obtained the ISO 9002 certification in recognition
of its commitment and dedication to quality management system. In 1998, a new
milestone in the history of Masteel was realized when its Meltshop in Bukit Raja went
into commercial production. The billet production plant supplied by Danieli became
one of the most modern meltshop in operation in the region. The electric arc furnace
is featured with ultra-high power (UHP) transformers, eccentric bottom tapping
(EBT) configuration and fully automated furnace process control and alloy additive
plant. A refining ladle furnace was also added to increase the output & quality of steel
bars, steel billets produced. A multi-stand large curvature continuous casting machine
which could cast high-grade billets up to 160mm x 160mm was also installed. The
installed capacity of the Meltshop is 700,000mt of billets per year. The quality control
laboratory of the Meltshop is equip with state of the art testing equipments such as
computer controlled spectrometer. The high consistency of the quality billets
produced by the meltshop has further enhanced the position of the Masteel as one of

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the premier steel manufacturer in Malaysia. Malaysia Steel Works (KL) Bhd factories
are located strategically at Petaling Jaya and Bukit Raja, Klang in the state of
Selangor. The Bukit Raja factory produces steel bars, steel billets which are the feed
stock for the rolling mill in Petaling Jaya. Both the manufacturing plants are equipped
with modern equipment and are fully computerised to produce precision quality
products from both the mills.

Malaysia Steel Works KL Bhd, listed on the Main Market of Bursa Malaysia
Securities Berhad, is one of the top five integrated steel companies in Malaysia. It has
68 domestic dealers and several international trading houses as partners in Australia,
New Zealand, Indonesia, Singapore, Thailand, Vietnam and the Philippines.
Masteel has vast experience in the operations & maintenance of the latest process
technologies and automation systems with over 40 years of track record of managing
European made steel mills and industrial plants. Masteel was awarded the Best
Brands Award 2012 ,2013 in Manufacturing Steel, Best Brands Signature Award
2013,2014 in Manufacturing Steel, and Masteels, MD/CEO Dato Sri Tai Hean
Leng was awarded the Brand Personality Awards 2012,2013 by The Brand
Laureate.

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1.2 KEY PEOPLE IN MASTEEL
1.2.1 Board of Directors

Name/Title Current Board Membership

Yoke Leong Lau, 46 Chief

Financial Officer & Executive Malaysia Steel Works (KL) Bhd.
Director

Siew Peng Ng, 39 Executive

Malaysia Steel Works (KL) Bhd.
Director

Teng Chun Ong, 49 Executive

Malaysia Steel Works (KL) Bhd.
Director

Ikhwan Salim bin Sujak, 59 Malaysia Steel Works (KL) Bhd., Glomac Bhd.,
Independent Non-Executive A2A Capital Services Bhd., Land & General Bhd.,
Chairman Konsortium Jaringan Selangor Sdn. Bhd.

Wah Lok Ng, 56 Senior

Independent Non-Executive Malaysia Steel Works (KL) Bhd.
Director

Chong Yew Thean, 45 JAG Bhd., Jiwa Holdings Sdn. Bhd., Jiwa Group of
Independent Non-Executive Cos., Malaysia Steel Works (KL) Bhd.,
Director ConnectCounty Holdings Bhd.

Muhammad Hanizam bin

Borhan, 43 Independent Non- Malaysia Steel Works (KL) Bhd.
Executive Director

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 1.2.2 ALL EXECUTIVE IN MASTEEL
Name Title
Hean Leng Tai Chief Executive Officer, MD &
Executive Director

Yoke Leong Lau Chief Financial Officer & Executive

Director
Siew Peng Ng Executive Director

Teng Chun Ong Executive Director

Chan Huan Kheng Head-Marketing

Julia Pong Investor Relations Contact

Ava Lee Head-Human Resources

Yit Chan Tai Co-Secretary

Ai Ning Tan Co-Secretary

Ikhwan Salim bin Sujak Independent Non-Executive

Chairman

Wah Lok Ng Senior Independent Non-Executive

Director
Chong Yew Thean Independent Non-Executive
Director

Muhammad Hanizam bin Borhan Independent Non-Executive Director

1.3 VISION AND MISSION

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1.4 OBJECTIVE MASTEEL
The objective of the manufacturing activities is to maximize shareholders value
through the generation of maximum profits by increasing sales volume and widening
profit margin per mt with the utilization of minimum overheads and capitals. Whilst
the Masteel is constantly striving to improve its output through the upgrading of its
plant and machinery, it is also diligently looking towards establishing new strategic
partnerships and joint ventures with other steel mills to increase its capacities and
expand into other steel products for its home market and new markets in the ASEAN
region.

Ongoing research and development on the technology and methodology to

improve the efficiency and reliability of the manufacturing facilities are key agendas
for the management of the Masteel. The reduction in steel melting time will reduce
energy used and the switch to using lower cost scrap which constitutes 60% to 70% of
the production costs enable the Masteel to keep the costs of production in check.

The Masteel possesses well trained and experienced workforce which is accustomed
to the challenges of the cyclical nature of the steel business and the harsh working
environment of the heavy steel industry.

The complexity of ensuring consistently high utilization rate of all manufacturing

facilities is a major factor that can affect the costs and competitiveness of its products.
The Masteel has in place a stringent and comprehensive training, inspection and
maintenance programs with extensive incentives and penalty schemes to ensure the
fullest compliance. Other external factors such as market pricing, exchange rate
fluctuations and cost push factors are harder to mitigate and anticipate.It is the
business philosophy of the Masteel to be prudent when expending its financial
resources and is constantly remaining vigilant and learned about future trends.

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1.5 SYNOPSIS OF ACTIVIES
The principal activities of Masteel is in the manufacturing and marketing of high
tensile steel bars, mild steel bars and prime steel billets. Masteel has a wide network
of customers domestically as well as internationally.The primary exercises of Masteel
is in the assembling and promoting of high ductile steel bars, mellow steel bars and
prime steel billets. Masteel has a wide system of clients locally and in addition
universally.

1.6 AUTHORIZED CAPITAL

The Company authorized capital in year 2016 RM 500,000,000 with ordinary shares
of RM0.50 each

1.7 PAID UP CAPITAL

The Company issued and paid up share capital 4,403,960 shares as at value RM
122,247,951

1.8 MAIN PRODUCT MASTEEL

Steel Billets Steel Bar

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2.0 EXTERNAL ANALYSIS
2.1 General Environment Analysis
The general environment of an organization refers to range of factors or forces
outside an organization that may influence the performance and operation of a
business. An analysis of all the forces are an attempt to understand the conditions
outside its boundaries and help to shape how the organization defines itself and how it
articulates what is good and appropriate to achieve. Managers of the organization do
consider all the aspects of the general environment as the plan, organize, lead and
control all the operation of the organization. The PESTEL ANALYSIS of the industry
is divided into five parts which can be discussed as follows: P- political analysis, E-
economic analysis, S- socio -culture analysis, T-technological analysis, E-
environmental analysis and L-legal analysis. Wise managers carefully examine each
of these six segments to identify major opportunities and threats and then adjust their
firms strategies accordingly.

i) Political Situation

According to Mason (2011), both global and local are the factors that will affect the
steel industry. As stated in Malaysia Steel Industry 2H 2011, the steel industry in
Malaysia covers global and ASEAN. Malaysia has experienced global financial crisis
in 2009 and the Government has attempted to stimulate economic recovery by
executing fiscal stimulus measures, easing of financial policy and taking measures to
ensure continued access to financing. Steel production growth has slowed sharply.
Following growth of 1.2% in 2014, in the first 10 months of 2015 world crude steel
production contracted by 2.5% in year on year terms. The production decline has
been broad based, affecting almost all regions of the world. In many economies, local
producers are adjusting output in response to heightened import competition
Moreover, the Malaysia steel industry and the landscape of doing business were
influenced by a number of domestic, regional and international developments as
follows:

1. Introducing several new administrative procedures in regulating the steel

industry

2. Liberalization of a great part of the industry

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 3. Gradual removal of subsidies of natural gas and electricity, resulting in higher
manufacturing costs

4. European sovereign debt crisis

5. Further realization of the ASEAN Free Trade Area as well as zero duty for all
normal track products under the ASEAN-China Free Trade Agreement
(ACFTA)

6. Significant fluctuations and uncertainties in the price and supply of raw

materials

7. Strengthening of the Malaysian Ringgit and dynamics of other key currencies

Basically, the Malaysia metal products consists of the main processing and
downstream manufacturing of ferrous (iron and steel) and non-ferrous (aluminum, tin,
copper, zinc and lead) metal products. Meanwhile, the iron and steel industry covers
two primary sub sectors, which are long products (billets, blooms, sections, bars and
wire rods, and downstream wire products such as wire mesh, hard drawn wire, bolts,
nuts and nails), and flat products (hot rolled coils [HRC], cold rolled coils [CRC],
coated sheet coils, plates and sheets, and downstream products such as pipes,
galvanized coils, tin plate and fabricated products). Meanwhile, the political condition
in Malaysia is relatively stable (Mason, 2011). In addition, the Government is playing
a crucial role in the steel industry. For instance, the Government is influencing
through imposes tariffs and trade barriers, provides tax breaks to support the growth
of the industry, and enforces rules and regulations to control the industry and reduce
competition and environmental pollution.

According to Mizuno (2012), there are some significant legislative and other
changes in Malaysia which are the Competition Act, the Construction Industry
Development Board (CIDB) Amendment Act, a new minimum wage for workers,
changes in the retirement age to sixty years old, conclusion and further advancement
of bilateral Free Trade Agreements (FTA) negotiations with Australia, Turkey,
European Union and the Trans Pacific Partnership, 2015 timetable for the
establishment of the ASEAN Economic Community, and the Implementation Phase
of projects under the Economic Transformation Programme (ETP). The newly
updates on the iron and steel import policy and procedures are the import duty

9
exemption on the 18 grades of hot-rolled coils (HRC), and temporary certificate of
approval (TCOA) is stopped from issuing to the importation of iron and steels
products. Also, Malaysia is initiated the anti-dumping investigations and a
preliminary duty of between 5.56% and 36.32% has been imposed on the steel wire
rods.

ii) Economic Situation

In todays world, the steel industry is considered as the backbone of the economy and

often indicative of economic progress due to its crucial role in infrastructure and
overall economic development (Malaysia Automotive Institute [MAI], 2013).
Coherent with this, the increasing population and growth in economic is causing the
increasing demand for new buildings, vehicles, and variety of infrastructures, which
direct and indirectly increase the needs and demands for steel and steel based
products, making the steel industry to be a lucrative industry. Besides, mergers and
acquisitions are recognized as a growth strategy as well as to capitalize on economics
of scale during purchasing and production are taking place in the recent years.
Therefore, the industry has becoming more cost competitive where there is not much
differentiation and competition which is based on price.

According to MARC (2013), the highly cyclical demand, pricing pressures from
raw material cost volatility, and high fixed-cost structures are the characteristics of the
steel industry and it is sensitive to the economic conditions. Also, these factors can
affect the earnings and cash flow volatility to the steel businesses. The combined
effect of weakening global steel demand, growing imports in many economies, and
decreases in steel making costs has led to a very sharp decline in steel prices this year.
An index of the average world steel price was down by 25% in November 2015
compared to its January 2015 level. In November, the world average hot rolled coil
price stood at USD 332 per tonne, down from USD 480 in January 2015. Prices of
steel making raw materials have also fallen sharply, reflecting oversupply issues in
some markets. In November 2015, the spot price of iron ore to China fell to USD48
per tonne. Coking coal and ferrous scrap prices have fallen by 30% and 43%,
respectively, since the start of 2015. However, an opportunity has aroused from the
increasing allocation of large Government project in the Malaysia Plan. As Malaysias
steel industry is dependent on its trading partners.
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 iii) Social Situation

The steel industry is said to have a significant role in the social and economic
development of a nation because many activities, process or equipment are required
steel in the production such as to manufacture engineering goods, construction
materials, defense, telephonic and scientific equipment and many consumer goods
(Deep, 2013). The basic statistical data from the Economic Planning Unit (EPU) has
estimated that the population of Malaysia will increase 1.5% from RM31.2 million in
2015 to RM 31.7 million in 2016. Meanwhile, the Gross domestic product GDP is
estimated to grow from RM 1062.27 billion in 2015 to RM 1107.billion in 2016.

The labor force stands at 14.6 million with about 67.7% participation rate in 2016
and the labour force is employed by agriculture, mining, manufacturing, construction,
and services sectors. Coherent with these, the Ministry of International Trade and
Industry (MITI), Malaysia has indicated that a fully developed steel industry is able to
contribute up to 6.5% to the economy of Malaysia with 225,000 jobs will be created
by 2020. As mentioned in Mason (2011), the World Steel Association has indicated
that the steel industry has offered career opportunities in many different sectors due to
the steel industry needs people with many different skills, diverse knowledge and with
the ability to work in a multidisciplinary teams represented by various disciplines
which are metallurgy, materials science, physics, chemistry, engineering,
mathematics, information technology, languages, business, accountancy, and etc.
Furthermore, the employers in the steel industry should have concerned the
employees on their health and safety, provide training and education as well.

iv) Technology Situation

The steel industry is recognized as an intensive energy user. Resulting from the
increasing fuel price, the manufacturers are forced to search for and adopting a more
efficient steel manufacturing technology and process. Advanced technology is also
used to produce higher quality steel products to the market. Basically, there are three
types of firms in the steel industry which work individually on three stages in the steel
production, namely iron making, steel making and rolling including surface treatment.
Therefore, the steel production technologies have different features in each stage. The
chemical reaction and plant-based technology are used in the iron making and steel
making, while the machinery industry is as the processes to adjust the shape and
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surface of the steel products in the rolling processes (Sato, 2009). However, the option
of technology is depending on the industrial policy which could be change as
ideology and economic policy shift, and the local firms are facing difficulties in
selecting technology as well as the target markets (Sato, 2009).

Meanwhile, another increasing concern in the steel industry is the energy efficient
new technologies where the energy consumption in the steel industry can be
substantially reduce (Samajdar, 2012), and Mason (2011) has stated that the steel
industry is rapidly moving towards the world-best technology that will result in fewer
carbon emissions and more efficient energy use in existing and future. Even though
energy is not iron and steel, energy is a major raw input required in the steel industry
supply chain (Mason, 2011). Hence, the development in the energy related
technologies are definitely in need in the steel industry.

v) Environmental Situation

Though the steel industry is encouraging the many sectors and the encouraging the
development it is creating the unfavorable environment in the nature. The all leading
industries are following the environmental acts which are declared by the
governments, though it is creating very bad impact on the environment. Many
industries are using the pollution control equipment and energy saving equipment but
that is not sufficient in the nature. The least importance is given to the environmental
aspect. But the Masteel ongoing research and development on the technology and
methodology to improve the efficiencies and reliability of the manufacturing facilities
are key agendas for the management of the Company.

The reduction in steel melting time will reduce energy used and the switch to
using lower cost scrap which constitutes 60% to 70% of the production costs enable
the Company to keep the costs of production in check. The company possesses well
trained and experienced workforce which is accustomed to the challenges of the
cyclical nature of the steel business and the harsh working environment of the heavy
steel industry.

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 vi) Legal Situation

Every company is bound with some internal and external rules and regulations which
is helpful for the smooth flow of the company. It also includes the international laws
and regulations that company is bound to follow it also include the safety and health
regulations of the employees of the company. The principal activities of Masteel is in
the manufacturing and marketing of high tensile steel bars, mild steel bars and prime
steel billets. Masteel has a wide network of customers domestically as well as
internationally. The Malaysian Investment Development Authority, abbreviated
MIDA, previously known as Malaysian Industrial Development Authority is the
government's principal agency to oversee and drive investment into the manufacturing
and services sectors in Malaysia. MIDA was given the mandate to promote
investments in the manufacturing and services sectors; and to advise the Minister of
International Trade and Industry (MITI) on industry matters including the formulation
of related policies. The International Trade and Industry Ministry of Malaysia (MITI)
has announced a review of steel policy which ultimately lead reductions in duties on
the imports of steel and the introduction of a set of Malaysian standards for imported
steel products. The policy measures for iron and steel industry are formulated after a
series of discussions held with the Malaysian Iron and Steel Industry Federation
(MISIF) since early2007. For safety and health regulation it is familiar with
Occupational Safety and Health (OSH) As far as the legislation that regulates
activities in the Malaysian industry is concerned, the Occupational Safety and Health
Act 1994 (OSHA) and Factories and Machinery Act 1967 (FMA) are the primary
legislation that govern safety and health of all employees in the industry

3.0 MICHEAL PORTERS 5 FORCES ANALYSIS

Industry analysis which also known as Porters Five Forces Analysis is a very useful
tool for business strategists to understand the competitiveness of the business
environment. It also used to identify the potential profitability of companys strategy.
The Five Forces Analysis consist of these competitive forces:

i) Supplier Power: Any Masteel requires five Ms Man, Material, Money,

Machine and Method. These five or some of them could be supplied by others.
Suppliers price can affect the very our own Masteels prices and costs incurred in
productions. Suppliers have a significant power in their hands of even affecting your
13
market share. So, the suppliers have bargaining power, following are the reasons
which gives the supplier a bargaining power.
The required inputs or raw material required are supplied by very few
suppliers. This gives the supplier bargaining power over the Masteel. They can
easily demand for higher prices which could force the Masteel to raise their
prices and could easily affect their market share.
The inputs required are unique and which gives the supplier a power to
bargain for higher power. The Masteel could not shift to other supplier
because of the uniqueness of the raw materials supplied by their supplier.
Masteels purchases from the supplier are not making a significant amount of
the supplier business. It means supplier is not at all dependent on their
customers which mean they are not much concerned with the smaller revenue
dependency on the Masteel. So, they could bargain for higher price or they
will transfer to others.
Sometimes supplier have access to Masteel own customers and they could
target the end customers by themselves. This will not only be affecting the
Masteel customer base but also impact on their prices as the supplier is no
more there for supplying raw material.
If it is difficult for the Masteel to switch to another supplier like if the Masteel
has recently invested a huge sum on inventory management system and then it
will not be possible for the Masteel to switch to another supplier.
Masteel does not have full understanding of the supplier business so when
negotiations are required the Masteel could not properly negotiate with the
suppliers.
When we look at the specific Masteel they do not have exploration business so are
dependent on their suppliers for iron ore. But because of other factors like they could
switch to other suppliers if the need arises as the raw material supplied by supplier are
also facing similar competition. Below is some newspaper citing where we can see
that how Masteel is extending their business and are also looking for backward
integration and for forward integration which will expand their business by leaps and
bounds and give a strong holding in the market. To counter or reduce the buyer
influence on a Masteel the Masteel should focus on following things

14
 Reduce inventory cost, try to implement just in time facilities. Automating the
whole procurement process may be by implementing ERP solution a Masteel
could achieve this.
Speed up the adoption of new technology, invest in R&D and always focus
also in backward as well as forward integration.

ii) Buyer Power: This is a power where every industry is dependent on it. It is
the degree to which buyers of your product could influence the prices and ultimately
the profit margins of the Masteel. If the numbers of buyer are too small, then
definitely they have negotiating and influencing power. But if the numbers of buyers
are too large in size then even if a group of buyers are capable of influencing the
prices but still there the Masteel will not be dependent on that small size. In case of
Masteel they are into business to business model in Malaysia and their customers
are not the end user but the other steel goods producing companies. So, they are very
few in numbers which gives them barraging and negotiating power. Factors which
affect this porters force are as under
Your Masteel have few but large customer and there are many suppliers of the
similar products that you are supplying this will give buyers a significant
amount of bargaining power which the Masteel will not be able to negotiate
and finally they might will have to reduce prices and affect their profit
margins.
The products supplied by your Masteel reflect relatively very large expense
for your customers and this is true in Masteel case. The steel supplier by them
to their customers will be a huge expense for their customers and this might
force customers to negotiate for prices or switch to other providers.
Customers are very much aware of the market condition and are always
equipped with the best deals that they could have from various other vendors.
Which is very much likely in Masteel as their customers are other companies
which are very much agile and nimble always updated with the market and
other supplier options. So, to counter this Masteel must be aware of their other
competitors and they also must invest in branding and try to deliver best
possible values to their customers and customer also must be made to perceive
that they are getting the best possible deal for their raw materials.

15
 Product supplied by the Masteel is not unique and could be very easily
supplied by any other competitor. This is again where Masteel have to make
the perceived value of their product to best available in the market.
Customers could make your product by them self-give customers always an
option to switch to this option. It means your business is vulnerable and entry
for new entrants is easy. Masteel Steel holding does not face this problem as
the entry into making the products supplied by them is not easy and requires
government approvals, huge investments and the breakeven is also not close
enough to be digested by small investors.
Customer could easily switch to other substitutes like say aluminum. We can
see in the market that there are many products which were initially made up of
steel are now switching to aluminum. So Masteel do have this problem.
If we look at the revenue trend of Masteel and the demand trend of steel industry of
Malaysia we can say that till now Masteel is going perfectly fine. If the trend of the
Masteel matches with the trend of the industry demand, then its doing well.

Figure 1 : Masteel 5 Years Revenue and Profit Trend

iii) Competitive Rivalry: Although the competition is the foundation for free
enterprise system and good healthy business environment. But for individual
companies it is a problem which they have to constantly be aware of and agile enough
to counter competitors strategies. Rivalry among competitors is often the strongest of
the five competitive forces, but can vary widely among industries. If the competitive
force is weak, companies may be able to raise prices, provide fewer products for the
16
price, and earn more profits. If competition is intense, it may be necessary to enhance
product offerings to keep customers, and prices may fall below break-even levels.
Factor which makes Masteel profits vulnerable because of competitive rivalry are as
below
When economies of scale for production is very much effective for the
Masteel in that case the competitors and Masteel may itself be tempted to
produce large quantities, and make profits from economies of scale this will
intense the competition more and competitive rivalry will increase then it will
demand for higher investments in marketing and branding for the Masteel.
This is holding true for Masteel where competition is intense, and companies
earn profits by economies of scale operations only.
Products are perishable and there is a pressure of selling them even at lower
prices which will push the companies to go for too lower prices which adds to
competitive rivalry. Masteel does not face this problem as the products are not
perishable.
Customer loyalty for Masteels products is very important for competitive
market as the customer may switch to other providers any time they want.
Masteel invest huge amounts in marketing and for customer loyalty.

iv) Threat of Substitution: Steel industry particularly has been facing this
problem of substitute which is aluminum for steel in many sectors especially in
construction industry. If there are easily available low-priced substitutes of a
Masteels product, then that Masteel is naturally facing a big problem of losing
market share. The factors which affect the treat of substitute are as under
Product does not have any differential advantage over the other substitute
products or the products provided by other competitors then it becomes a
threat for the Masteel to lose market share. This could be overcome by
branding of Masteel products, by increasing customer loyalty; perceived value
delivered by your product must be higher than compared to others. Customers
loyalty and switching nature are again the two more reasons for this threat.
To reduce the threat of Substitution Masteel must add differential advantage to their
products and focus on branding. Masteel does a unique technique to target end user of
steel products and they are investing the end user branding also.

17
 v) Threat of New Entry: This is the measure of degree how easy it for
business to enter into your market. Steel market of a country is somewhat protected
market from the governments as it is one of the core industries for Malaysia after
tourism. But new entry in the market is not easy for an investor. Secondly it requires
very big investor for this industry as the initial investment is very high and breakeven
point is too long some time even more than five years. So, the investors have to be
patient and invest huge amount in marketing and branding to capture market. Already
existing companies have first mover advantage too. To reduce the threat of new
entrants a Masteel should protect their man, method, machine and technology.

Forces Intensity

Threat of new Entrant Medium

Rivalry among Competing Firms Low

Threat of Substitute Products High

Bargaining Power of Suppliers Medium

Bargaining Power of Consumers High

4.0 FINANCIAL RESULTS MASTEEL

Review of operating activities includes discussions on the main factors that may affect
the operating activities are as follows:

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(a) The sales revenue increased to RM1.2 billion for the year under review, i.e. an
increase of 5% from the previous year.
(b) The profitability of the Masteel saw a turnaround from a loss of RM50.4 million in
2015 to a profit of RM21.4 million for the financial year under review.
(c) The capital-intensive steel making facilities output was driven by market demand,
duration of festive holidays and scheduled and unscheduled plant outages. The
utilization rate improved to 80% from 71% as compared to the previous year. The
new rolling mill that began its operation in early 2016 produces 63.5% of premium
size steel bars based on the plants designed capacity and this output was mainly
driven by the learning curve of the new plant operators.
The cyclotron at the radio pharmaceutical production facility is targetted to
produce its record output of radioisotopes from 101,000 mCi in 2016 to 122,000 mCi
in 2017 (21% higher) due to more hospitals installing Positron Emission Tomography
- Computed Tomography (PET-CT) scanners throughout Central and Southern
Peninsular Malaysia. The required equipment and appropriately trained manpower
have been deployed at all manufacturing facilities for the realization of the above-
mentioned capacities.
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 The financial outcome of the Masteel other than being driven by the above
capacities is also affected by actual sale volumes, selling price and input raw material
costs. In addition, the magnitude of energy cost increase, labor and financial costs will
also affect the final financial outcome of the Masteel. Many technology packages will
be installed in the plants in the ensuing 12 months and the speed and successful
implementation of these equipment will also affect the profitability of the Masteel.
The tactical business direction is to further improve the output of the steel making
plants by maximizing the existing equipments to achieve a higher level of economies
of scale that would reduce the total costs of production and improve the bottom line.
The concurrent improvement of its sales volume will be to target more new end users
such as GLCs and main contractors in West Malaysia and new dealers in East
Malaysia. To enhance its sales volume by 15%, the Company is actively pursuing
new sales opportunities for its products in Sabah and Sarawak in anticipation of the
heightened demand for steel with the construction of the RM16.49 billion Pan Borneo
Highway that will be implemented from 2017 till 202
In the FYE 2016, the global selling prices of steel bars, in particular China-made
bars, had improved. Furthermore, with the lower imported long steel products, the
demand of our locally manufactured steel bars had also increased. Consequently, our
Companys turnover for the FYE 2016 had also increased by 5.51% to RM1.206
billion compared to RM1.143 billion in FYE 2015.
4.1 Ratios and Margins Masteel

Activity ratios are used to measure how efficiently a company utilizes its assets. It is
measure the rate at which the company is turning over its assets or liabilities. In
other words, they present how many times per year inventory is replenished or
receivables are collected.
4.1.1 Receivables turnover

The receivables turnover ratio is calculated by dividing net revenue by average

receivables. This ratio is a measure of how quickly and efficiently a company collects
on its outstanding bills. The receivables turnover indicates how many times per period
the company collects and turns into cash its customers accounts receivable.

According to The World Street Journal website Masteel receivables turnover

for year 2016 is 8.48x, signaling that, on average, receivables were fully collected

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8.48 times during the period or once every 44 days (365 8.48). Once again, a high
turnover compared to that of peers means that cash is collected more quickly for use
in the company, but be sure to analyze the turnover ratio in relation to the firms
competitors. A very high receivables turnover ratio can also mean that a companys
credit policy is too stringent, causing the firm to miss out on sales opportunities.
Alternatively, a low or declining turnover can signal that customers are struggling to
pay their bills.

4.1.2 Liquidity Ratios

The liquidity ratio measures a firms ability to pay its short-term obligations and these
calculations are especially important to the creditors.

Current ratio Current assets / current liabilities

= 1.00
Quick ratio (Cash + short term marketable
securities + account receivable) /
current liabilities
= 0.42
Cash ratio (Cash + short term marketable
securities) / current liabilities
= 0.09

Current ratio is a short-term indicator of the companys ability to pay its short
term liabilities from short term assets. Based on the calculation above, since the
current ratio is 1.00 and quick ratio is 0.42, It show that Masteel can able to pay its
short-term obligation by liquidated all of its current assets except inventory for quick
ratio. However, the cash ratio of Masteel is low and below 1. This implies that the
company will not have enough cash on hand to pay its current liabilities.

4.1.3 Solvency Ratios

Solvency ratio is used to measure the ability of a company to meet its long-term debts.
It indicates whether a companys cash flow is sufficient to meet its short term and
long-term liabilities. The lower a companys solvency ratio, the greater the probability
that it will default on its debt obligation.

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Debt to assets ratio Total liabilities / total assets
= 0.04 @ 4%
Debt to capital ratio Total debt / (total debt + total
shareholders equity)
= 5.78
Debt to equity ratio Total debt / total shareholders equity
= 9.58
Interest coverage ratio Earnings before interest and taxes /
interest payment
= 1.86

The debt to assets ratio measures the extent to which borrowed funds have
been used to finance the companys assets. For Masteel, it only used 4% of it
borrowed funds to finance its assets. Apart from that, the companys debt to capital
ratio is quite high. This means, the company is in high financial leverage and risk.
Thus is create additional financial risk by increased fixed interest payments. Next is
debt equity ratio. Debt equity ratio measures the amount of debt capital a firm uses
compared to the amount of equity capital it uses. For Masteel, the debt to equity ratio
is high. This is because, the company is operating in capital intensive industries. The
industries needed the funds to purchase more property, plants and equipment to
operate.

On the other hand, the interest coverage ration defined as the measurement of
companys ability to meet its interest payments. As shown the calculated figure
above, the companys interest coverage ratio is positive. This implies a very high
interest coverage ratio. Meaning that, the companys current earnings is sufficient to
service the companys current outstanding debt and there is greater possibility of
bankruptcy or default.

4.1.4 Profitability Ratios

Profitability ratios compare income statement accounts and categories to show a

companys ability to generate profits from its operations. Profitability ratios focus on
a companys return on investment in inventory and other assets. These ratios basically
show how well companies can achieve profits from their operations.
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Gross profit margin Gross income / net revenue
= 8.09
Operating profit margin Operating income / net revenue
= 3.37
Net profit margin Net income / net revenue
= 1.78
Return of assets (ROA) Net income / total assets
= 1.66

Return on equity (ROE) Net income / total stockholders equity

= 3.97
According to the calculation above, the return on assets (ROA) and return on
equity (ROE) both showed positive ratio. The company has a positive ROA because
the company is investing a high amount of capital into its production and
simultaneously receiving higher income. For the positive ROE means that the
shareholder is getting profit. There are few reasons that contribute to the positive
return. This is due to the capital expenditures like investment in equipment and other
major assets. Apart from that, economic downturns and recession also can hinder
demand from the companys customer can make company drop profitability but
Masteel doing well in their financial performance in year 2016.

5.0 SWOT ANALYSIS

SWOT is an acronym used to describe the Strengths, Weaknesses,
Opportunities and Threats that are potential strategic for a specific company. A
SWOT approach is not only result in the identification of corporations distinctive
competencies but also in the identification of opportunities that the firm currently not
able to take advantage.

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 SWOT analysis for Masteel

Strenghths
- Brand
Weakness
-Skilled workforces
- Weak financial position
- Excellent capabilities
technology

Opportunities Threat
- Globalization - Competition in the market
-Population growth -Currency fluctuation
-AFTA -Economic downturn
-WTA - Natural disaster

5.1 Strengths

Masteel was a Malaysias local company which has been developed in a well-
established market. Being the smallest integrated long steel producer in Malaysia
gives it the flexibility to quickly adjust to changes in the market. Next strength is
skilled workforce. Through continuous training, the company strive to produce
talented and knowledgeable employee to achieve companys goal. Besides that, the
company has strong technological capabilities which enable them to compete
globally.

5.2 Weakness

In year 2015 Masteel reported a core net loss of RM27.4m after stripping out
RM23.6m in unrealized and realized foreign exchange losses and showing the
declining performance financial. The weaker numbers were mainly due to lower sales
volumes and a further decline in steel bar selling prices, which have fallen more than
19% in year 2015

5.3 Opportunities

Globalization can be defined as free flow of goods and services. Meaning that, it helps
the company to grow and expand its operation worldwide. Apart from that, the
growing population will have contributed to balance supply and demand in the
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market. Technological advancement also will be helpful and beneficial for the
company to runs effectively and efficiently. The implementation of mega projects
under the nations Economic Transformation Programme (ETP) may boost steel
demand and the approval of its rail project by the Government will add a new income
stream, subject to favorable terms and conditions to Masteel.

5.4 Threat

Competition especially in upstream activities are very high and continue competition
from imported steel set to dent its overall profit margins. Any increase in electricity
prices will dent margins and will affect the operating and cost. Substantial excess
capacity in both local and international markets may prolong the steel downcycle.
Moreover, currency fluctuation and economic downturn also will significantly impact
the steel companies. Last but not least, natural disaster also could harm the companys
operation. Thus, all these factors are threats to any organization.

6.0 TOWS MATRIX

IFAS STRENGTHS WEAKNESSES

S1: Brand W1: Weak financial position
EFAS S2: Skilled workforce
S3: Strong technological
capabilities

OPPORTUNITIES
O1: Globalization
O2: Population growth SO Product development, WO Capitalizing on the
O3: Technological follow the market penetration growing local and
advancement strategy by presence in US international market potential
O4: AFTA market optimizing the manufacturing
O5: WTA (S1, S2, S3, O1, O2, O3,) cost and according
recovering financial position
(W1, W2, O1, O3, O4)

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THREATST
1: Competition in the
market
T2: Currency fluctuation ST Direct R&D efforts to WT Turnaround strategy and
T3: Economic downturn focus on producing optimized usage of technology to
T4: Natural disaster cost produce steel forecast future demand
(S1, S2, S3,T1, T3) (W1, W2, T1, T3, T4)

SO: Product development, follow the market penetration strategy by presence in US

market. Masteel has the capabilities to explore into new business strategy. As the
company adapted to the new steel environment, there is greater opportunity to explore
to new exciting potential. This new business strategy affirmed the company vision
towards operating as a successful solutions provider for renewable energy in Malaysia
and beyond. This strategy needs to take into consideration the changing external
environment. The company need to continue to remain capex and asset light, while
focusing on low a low cost but high premium products and solutions. The company
can work with other technology partners to develop competitive product line as
distributed market network and presence to be successful in these new business areas.

WO: Capitalizing on the growing local and international market potential optimizing
the manufacturing cost and according recovering financial position According to the
(Annual Report, 2016), the economic growth engines of US and China, and other
rising for producing steel including ASEAN, will likely overtake the productivity of
developed markets such as Europe and North America. These factors will place
greater pressure on the need for accessible and affordable energy, water, urban
transportation and other needs. Given the nature of its business, the company is well
placed to meet this growing global demand. Due to the various favorable policy
driven factors emanating from within China such as steel plant consolidation, robust
construction activities, reducing steel inventory and rising production costs, this has
resulted in the steady increase of steel prices. The recent news on the election agenda
of the President- elect of the United States of America, Mr Donald Trump which has
promised to spend up to USD 550 billion for stimulus plan is estimated to increase
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steel demand in the USA by 22 million metric tons of steel per year for the next 5
years (Source: Morgan Stanley 14th November 2016) The global steel market is
buoyed by the above news and domestic steel prices is expected to continue to
improve underscored by the effects of the weaker ringgit and safeguard duty being in
placed since end of September 2016 and thus making imported steel products to be
substantially more costly. A strong upward steel price trajectory is expected to be
tempered by the current softness in domestic demand for steel. However, Masteel
company is well poised to benefit from any opportunity due to the timely
commissioning of its new rolling mill, improved steel making technology and
proximity to major markets.

WT: Turnaround strategy and usage of technology to forecast future demand

emphasizes the improvement of operational efficiency and is most appropriate when a
corporations problems are pervasive but not yet critical. Research shows that poorly
performing firms in mature industries have been able to improve their performance by
cutting cost and expenses and by selling off assets.

7.0 ISSUES THAT EXIST IN THE INDUSTRY

China Export steel from India, Thailand, Malaysia and Singapore

According The Star website in previous year (between year 2013 - 2015) Malaysia
had aggressive dumping of imported steel products, mostly from China, has rendered
many local steel millers uncompetitive with widening losses and their operations
almost at a standstill. Between year 2013 and 2015 industry steel Malaysia were seen

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raking up losses of up to RM2 bil from the global tin slump and because of the
cheaper China steel imports.
The turnaround in steel prices this year is also well reflected in the trading of
most steel counters, which have risen sharply in the past three months. Mycron Steel
Bhd tops the list surging over 100% at 88 sen, Ann Joo Resources Bhd and YKGI
Holdings Bhd gained 95% each, to RM2.07 and 35 sen respectively, Malaysia Steel
Works (KL) Bhd firmed 94% to 95 sen and CSC Steel Holdings Bhd rose 50% to
RM1.93. To date, domestic steel prices have gone up by over 10% year-on-year with
steel bars trading at RM1,800-RM1,900 per tonne while wire rods at about RM1,900
per tonne respectively.
Datuk Soh Thian Lai president Malaysia Iron and Steel Industry Federation
(Misif) said the Governments latest provisional safeguard measures in the form of
duties of 13.9% for imported steel coils and 13.4% for imported reinforced steel bars
are certainly good news to local steel millers. According to president Misif basically
the safeguard measure is for the like steel products such as steel bars, wire rods,
deformed bar in coils that local mills have already been producing for many years and
in recent years severely affected by the influx of cheaper steel imports mostly from
China. The latest safeguard measures would mean that China-like steel products with
the imposition of around 13% duties plus MFN (most-favoured-nation) steel tariff rate
of 5% totalling 18% will definitely deter cheaper China steel imports from entering
Malaysia shores. On steel outlook, Kenanga Research is positive on the steel sector as
steel prices are expected to remain stable if Chinas depleting steel inventory
indicating rising domestic demand there, closure of loss-making steel mills in China,
and China governments strong commitment in reducing steel production capacity
through consolidation of steel groups coupled with financial support of 100 billion
yuan for worker retrenchment schemes.
Meanwhile regarding on MBAM the less imported steel to Chine will make
uncontrollable prices of steel bars due to the absence of the free flow of imported
steel. A few months earlier, the price of steel bars had increased from RM1,500 per
tonne in January 2016 to a record high of RM2,700 per tonne. In year 2008 had
happened artificial rebar shortage or manipulation price due to free flow of imported
steel. The Government should look at a sustainable long-term plan on this issue, as the
local producers are not supposed to be protected for their inability to be competitive

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even when the Government has provided the industry with numerous protection
measures.

8.0 PROBLEMS
The problem of Masteel is that, the company is experience the weakening financial
position in year 2015 financial performance due to the unfavourable foreign exchange
and competition after stripping out RM23.6m in unrealized and realized foreign
exchange losses and showing the declining performance financial. The weaker
numbers were mainly due to lower sales volumes and a further decline in steel bar
selling prices, which have fallen more than 19% in year 2015. However, according to
an industry observer, as long steel prices are still languishing, the drilling fluids
business is not going to be big. With the competition from big players in the market
making it harder for Masteel to sustain in the business.

9.0 STRATEGIC DIRECTIONS

Turnaround strategy and usage of technology to forecast future demand is the
financial recovery of a company that has been performing poorly for an extended time
in future. To affect a turnaround, a company must acknowledge and identify its
problems, consider changes in management and develop and implement a problem
solving strategy. Correspond to that problem Masteel have to consolidate to remain
competitive and resilient to these industrial changes or to engage with strategic
partners to have technology transfers and process improvements. Masteel have to
keep pace with the latest mega trends and technology advancements as well as the
new business models emergence that could potentially disrupt traditional markets.

10.0 RECOMMENDATION
Generally, the steel industry is located in the upstream of the supply chain that
provide steel goods to the customers who are in the lower stream or downstream of
the supply chain, and it is a typical process industry which achieve value-added in the
continuous production process from input to output like raw materials to
manufactured goods.

In my opinion to tackle the issues in the industry and business, the few strategies
have proposed to tackle the challenges and to continue achieving high growth and
profitability in the business. First and foremost, the business should focus and

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enhance the human resource strategy on egalitarian where the employees should be
treated as equal and deserve equal rights and opportunities in their career, and rewards
and compensations for the employees should be based on their performance.

Furthermore, strong leadership together with the spirit of highly motivated,

productive, flexible and innovative workforce should be available at all level of
management, and create a risk-taking oriented culture in the business. In addition, a
clearer role and job distributions should be clearly specifying in the organization
structure for a clearer picture in reporting each specify issues in each department to
the person in charge. Therefore, the business should implement a lean and
decentralized system but coordinate each department and the activities such as
marketing and purchasing to reduce duplication of efforts, overall costs and benefit
from economy of scale and be more consistent in serving and satisfy the customers.

A long-term relationship in the supply chain is very important in ensuring the

business sustainability and satisfactions of customers. With this, the business should
have trust in the supply chain members, and be committed in the supply chain
relationship. Moreover, understanding the products and business road maps of the
suppliers and customers are also important in building a long-term relationship as
these could assist in minimize the impact of cyclical demand and minimize the
chances of switching suppliers, eliminate competitions and improve the buyer and
seller relationship.

To sustain in the steel industry, the business should have its own research and
development (R&D) team in identify new products and develop new products to cater
the changing customer wants at high quality with cheaper cost and receive the goods
at a timely manner with correct ordered quantity. In addition, the cost of energy is
significant in any business and therefore, the business should find its own way to
utilize the energy by adopt and implement energy efficiency initiatives in the
business. Nowadays, the environmental concerns should not be neglected as corporate
social responsibility (CSR) is important in the business as it is critical in enhance the
business reputation. As such, the manufacturing process is needed to be
environmental friendly and productive and cost effective at the same time. On the
other hand, an accurate inventory record is required to be kept properly in order to
measure how closely official inventory records are match with the physical inventory.

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The reasons for having accurate records are basically divided into two reasons which
are financial and operational reasons. For financial reasons, inventory is a good
indicator for the ratio analysis for a companys financial health and value. It is also
used as collateral for conventional lenders and taxation is also based on the value of
the inventory.

On the other hand, stock outs critically affect the production and create delivery
delays to the customer and caused customer dissatisfaction, and the overall
manufacturing efficacy can be reflected from inventory turnover. Furthermore, the
enterprises within the steel industry should provide theoretical training, cost
accounting and any other educations and training that could increase knowledge based
on scientific and reasonable inventory management to improve the understanding of
inventory management in the industry. Meanwhile, the setup, structure and function
of each business unit shall be managed by one department to handle the whole process
management from the beginning until the end, with institutions no redundancy and
repetition business. Also, a comprehensive information and communication can
enhance and strengthen the accuracy of the information to provide a timely demand
forecast, stocking up in advance, shorten the supply cycle to ensure smooth
implementation of inventory management in the steel enterprises.

In addition, the electronic data interchange (EDI) can be used by the business to
predict or bypass the downstream enterprises to obtain relevant information for better
forecast on the demand on steel to avoid over stocks of steel and bullwhip effects and
then supply to the downstream suppliers. Also, a cycle counting which allow the
business to perform a periodic stock taking is a good approach in verifying the
inventory records.

By cycle counting procedures, the inventory items are counted, records are verified
and inaccuracies are periodically documented. Should there be any variation between
system and physical quantity, it can be identifying, and cause of inaccuracies is then
trace and appropriate remedial action can be taken to ensure integrity of the inventory
system.

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11.0 REFERENCES

Masteel.com.my. (2017). Malaysia Steel Works (KL) Bhd Analyst Reports.

[online]Available at: http://www.masteel.com.my/investor-relations/analyst-report/
Thesundaily.my. (2017). Malaysia's iron, steel industry urged to innovate, plan for the
future. [online] Available at: http://www.thesundaily.my/news/2017/10/26/malaysias-
iron-steel-industry-urged-innovate-plan-future [Accessed 4 Dec. 2017].
Sirim-qas.com.my. (2017). Cite a Website - Cite This For Me. [online] Available at:
http://www.sirim-qas.com.my/sirim/core-files/uploads/2012/04/2-TCQS-DOC-01-2-
COA-Guidelines-for-Importation-of-Metal-Products.pdf
Klse.i3investor.com. (2017). MASTEEL Top 4 Rebar Manufacturer in Malaysia -
Davidtslim (Part 2) - Davidtslim | I3investor. [online] Available at:
https://klse.i3investor.com/blogs/david_masteel/135149.jsp
Masteel.com.my. (2017). Available at:
http://www.masteel.com.my/uploads/2015/03/270215-A-Standout-In-The-
Challenging-Steel-Market-RHB.pdf
Dalal Street Investment Journal. (2017). Recommendation From Steel Sector. [online]
Available at: http://www.dsij.in/article-details/articleid/15310/recommendation-from-
steel-sector
Miti Journal (2017). Miti.gov.my. Retrieved 4 December 2017, from
http://www.miti.gov.my/miti/resources/MITI_Report_2015-5.pdf
Seasi Journal (2017) Seaisi.org. Retrieved 4 December 2017, from
http://seaisi.org/seaisi2017/file/file/full-paper/Session1%20Paper1.pdf
Local steel millers to ramp up production - Business News | The Star Online. (2017).
Thestar.com.my. Retrieved 4 December 2017, from
https://www.thestar.com.my/business/business-news/2016/04/30/local-steel-millers-
to-ramp-up-production/
Putting the steel back in steel industry - Business News | The Star Online. (2017).
Thestar.com.my. Retrieved 4 December 2017, from
https://www.thestar.com.my/business/business-news/2016/10/01/putting-the-steel-
back-in-steel-industry/

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