VI. HISTORY AND BUSINESS OVERVIEW VI. HISTORY AND BUSINESS OVERVIEW I. HISTORY OHB was incorporated to become the holding company for Omasteel, Group Steel and Omaconstruction (a subsidiary of Omasteel). A brief outline of their respective backgrounds is as follows: 1.1 Oroasteel Omasteel was incorporated to undertake the manufacturing and marketing of steel pipes and CR coils. In July 1993, the factory started produc.jng steel pipes followed by CR coils in Augnst 1994. The total capacity of the Omasteel plant for producing steel pipes was approximately 72,000 MT per a,mum and for CR products was approximately 350,000 MT per annum at that point in time. On 14 December 2000, Omasteel was acquired by the CSC Group. In 200 I, Omasteel discontinued the production of pipe products and commenced to restructure and align its resources to strengthen its core businessl Wllich is manufacturing and marketing of CR products. The outcome of that strategy resulted in the turnover of Omasteel reaching RM465.9 million in the year 2002 and recorded a PBT ofRM20.5 million. Presenlly. Omasteel’s plant has a production capacity of approximately 444,000 MT of CR products per annum. Omasteel has invested more than RM13.3 million as at 31 October 2004 to upgrade and revamp its machinery. The details of the investment are as follows: Date of COmmeilcemellt Eqllipment/Machine Details November 2002 3-feet cold rolling Installation of auto gauge control which mill will improve the gauge control of the CR products. The project was completed In September 2003. November 2002 4·feet cold rolling Installation of auto flatness control mill which will improve the flatness and shape of the CR products. The project was completed in December 2003. January 2003 Temper Mill Installation of auto elongation control, which will improve the elongation control of the CR products. The project was compleled in October 2003. July 2003 Annealing Plant Added 5 new bases. 4 furnaces and 5 inner covers, which will increase the production capacity for CRCs from 204,000 MT per annum to 300,000 MT per annum. This expansion project was completed in June 2004. VI. HISTORY AND BUSINESS OVERVIEW (CONTD)
1.2 Group Steel Group Steel was incorporated to undertake the manufacturing and marketing of GI and PPGI coils. The galvanised steel plant with a production capacity of approximately 240,000 MT per 211JlUm was commissioned in August 1998 and went into commercial production in October 1998. The prepainted steel plant was conunissioned in November 1998 and went into connnerciaJ production in January 1999. It has a production capacity of approximately 120,000 MT per annum. On 14 December 2000, Group Steel was acquired by the esc Group.
1.3 Oro.construction Omacollsnuctioll was incorporated to undertake among others, the construction of the Omasteel and Group Steel factories. Following the acquisition by esc of Omasteel and Group Steel, Omaconstruction ceased operations and is now a dormant company. (THE REST OF THIS PAGE [S INTENTIONALLY LEFT BLANKI
VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) 2. BUSINESS OVERVIEW The Group’s operations consist of the manufacturing of LB. CR, GI and PPGI coils. Ornasteel is involved in the manufacture of IB coils and CR coils whereas Group Steel is involved in the manufacture of GI and PPGI coils. A flow chart of the Group’s consolidated manufacturing process is depicted below. Production of 1B and CR coils HRCs +
Input ofHRCs +
Push Pickling Line +
3-feet Cold Rolling Mill + 4-feet Cold Rolling Mill I
Production of GJ and PPGI coils Imported lBCoils Input of IB Coils
Continuous Galvanising Line
IB Coils ,
Electrolytic Cleaning Line
01 Coils Colour Coating Line
Annealing Fumaces + Kathabar Unit + Skin Pass Mill PPGI Coils .. Recoiling and Leveling Line T -.C CRCs + Fimshed IBand CR Products Warehouse I Finished GI and PPOt Products Warehouse ~
VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
2.1 Production oflB and CRCs The Ornasteel manufacturing process as depicted above is with the purpose of manufacturing 1B coils which is mainly utilised by Group Steel and to produce CRCs which are sold to its customers. The core material for the manufacturing is HRCs which are supplied hy its parent company, CSC and a local supplier. 2.1.1 Input materials The core input materials for the production of IB and CRCs are HRCs. 2.1.2 Push pickling line The push pickling line is the first process in the manufacturing of IB coils and CRCs. It removes metal oxides on the HRCs by putting the HRCs through a hydrochloric acid bath. The pickled HRCs can then be trimmed to the desired width for the next production process.
2.1.3 Cold rolling mill There are 2 units of reversing cold rolling mills, which has a rolling width capacity of 3 feet (approximately 914 millimetres (‘mm’)) and 4 feet (approximately 1,219 mm) respectively. The functions of the mills are to roll down the HRCs to the required thickness and to obtain a specific mechanical strength. The immediale prnduct from these mills is known as full hard CRC which is also known as lB coil. The lB coil is then either delivered to Group Steel for further processing into Gr or PPGI coil or is further processed by Ornasteel into CRe. 2.1.4 Electrolytic cleaning line The function of the electrolytic cleaning line is to clean the 1B coll surface which contains residual rolling oil, iron powder and dust. This is achieved by putting the coil through alkaline chemicals.
2.1.5 Annealing furnace The cleaned and treated coil is then heated at the annealing furnace to recrystallise the iron molecules of the coil to obtain the required mechanical properties such as hardness, tensile strength and yield strength. 2.1.6 Kalhabar unit The annealed coil from the annealing furnace is placed into the kathabar unit, which is a facility to cool the coil under tow humidity environment to prevent the coil from rusting before the next production process.
2.1.7 Skin pass mill The function of the skin pass mill is to provide the required surface finish and further improve the flatness of the coil and to reach Ille desired mechanical properties. 2.1.8 Leveler and recoiling line The leveler assists to improve the shape 01″ the coil after which the recoiling
process takes place. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
2.1.9 Packing and storage The finished CRCs will then be weighed, labelled and packed with rust preventive paper and steel covers based on domestic or export packing requirements before being sent to the warehouse.
2.2 Production of GI and PPGI coils 2.2.1 Continuous gal\’3nising line (i) Input ma terials The core input materials for the production of GI coils are IE coils
and zinc. (ii) Pay-off section There are 2 units of pay-off mandrel which allow the line to run continuously. The tail of I coil will be joined to the head of another coil by the facilitated welder. The entry looper (strip accumulator) allows the strip welding work to be carried out without stopping the process line. (iii) Heating furnace The oil on the strip is removed at the pre-heating zone, while iron. oxide on the strip surface is removed at the direct fire zone before the full cycle of the annealing process is carried out at the radiant tube heating zone. The strip will then be cooled by air jet to a temperature which is compatible to the zinc bath temperature. The furnace is fuelled with LPG gas. Group Steel is in the process of upgrading its furnace to run on natural gas. (iv) Zinc coating The annealed strip will then be immersed in a zinc bath to galvanise the coil with zinc. Air knives are used inunediately after the zinc bath to ensure consistency of the zinc coating thickness and coverage. Tbe coil will then be cooled by the ajr blower before passing through the water quench zone for further cooling. (v) Skin pass and leveler
The Gl coil is put through the skin pass and leveler to ensure that the required surface finish and flatness are consistently achieved.
(vi) Chemical coating
The finished galvanised coil will be either coated with chromate or anti-rust oil, depending all the requirement of the customer, to prevent white rust formation. (vii) Recoiler The post-treated galvanised coil will then be recoiled to the required weIght at the recoiler mandrel. The exit looper (strip accumulator) allows the recoiling and coil splitting work to be carried out without affecting the continuous production process. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) 2.2.2
(viii) Packing and storage The fmished GI coils will then be weighed and packed with packing paper and steel shee’s based on domestic or expon packing requirements, and labelled before being sent to the warehouse. Colour coating line (i) Input materials
The core input materials for the production of PPGI coils are GI coils and paints.
(ii) Pay-orr section The operating principles and functions are similar to the
galvanising process, except that it uses a joiner Co fasten the steel sheets together. (iii) Clean, pre-treatment and chemical coating The GI coil is cleaned at the degreaser tank, where oil and dust are removed by chemical means. The white rust fanned on the surface can be removed at the brush assembly. The clean coil will then be coated with conditioner and chromate at the conditioner and chromate tank respectively, to provide better adhesion and corrosion resistance ability. (iv) Primer coating A basic layer of paint, called primer, is applied on the chemical coater in order to strengthen the corrosion resistance and paint adhesion ability. (v) Baking and water quenching The primer coating is funher cured at the primer oven and cooled at the primer water quench to ensure the painted coil is completely cured. (vi) Finish coating The requested colours and specifications of paint will be applied at both the top and bottom of the primer coated coil to complete the painting work. (vii) Baking and waler quenching Similarly, the finish oven and finish water quench also serve to ensure that the paint applied is completely cured and cooled. (viii) Recoiler The operating principles and functions are similar to the
galvanising process. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
(ix) Packing and storage The finished PPG] coils will then be weighed, labelled and packed according to the given packing requirements before being sent to the warehouse. 2.3 Delivery The CR, GI and PPGI coils stored at the warehouse will be delivered to the Group’s customers. 3. VIABILITY 3.1 Principal markets 3.1.1 CR products The Group’s CR products are mainly sold to service centres. drum makers, small and medium sized manufacturers and pipe and tube makers. The Group also exports its CR products to other countries including, among others, Viemam, Indonesia and China. (i) Service centres
Service centres which own slitting and shearing machinery usually provide such services such as cutting, slitting, pressing and shaping of the CRCs for manufacturers of household products and industrial items.
(ii) Drum makers
Drum makers purchase CRCs mainly for the manufactuTing of drums for storage of palm oil, chemical and petroleum products. (iii) Manufacturers Manufacturers who purchase CRCs from the Group are normally manufacturers of furniture, electronic and/or electrical home appliances and automobile parts. However, certain small and medium sized manufacturers prefer to source their materials from the service centres that are able to cut, slit, press and shape the CRCs to the required specifications of the manufacturers. (iv) Pipe and tube makers
One of the Group’s largest buyers of its CRCs are pipe and tube makers. Most of the pipe and tube makers manufacture furniture for the export market.
The main export market nf the Group is China. Other export markets of the Group for CR products include Viemam and Indonesia. The Group’s customers for its export market are generally in the business of service centres, pipe and tube manufacturing and drum manufacturing. Based on the [mandai yeaT ended 30 November 2003 and the six (6).month period ended 31 May 2004, the Group exported approximately 5% and 1% respectively of the CR products manufactured. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
3.1.2 GI and PPGI products Based on the financial year ended 30 November 2003, approximately 60% of the Gl and PPGI products produced by the Group were for the export market and the remainder were sold in the domestic market. The local market consists of mainly manufacturers of roofing sheets, steel truss, steel trunk and air ducts. For the fmancial period ended 3 J May 2004, the export ratio fell to approximately 38% of total GI and PPGI products produced. The Group’s export market consists of countries such as Vietnam, Canada, Thailand, Australia and China. Based on the financial year ended 30 November 2003, sales to China alone were approximately 45% of the Group’s export of Gl and PPGI products. However, for the financial period ended 31 May 2004, sales to China accounted for only approximately 22% of the Gronp’s Gl and PPGl exports. 3.2 Marketing and method of distribution Due to prevalent competition in tile iron and steel industry, good marketing strategies are important to the success of the Group. The OHB Group’s marketing department consislS of 13 persons. Their duties include identifying and targeting potential markets as well as expanding existing market share for the Group’s produclS. Apart from competitive prices, the OHB Group provides quality products and good professional service to its customers. The Group does not rely on agenlS for the sale of its products. Instead, the Group’s sales people deal mainly with tile customers. This ensures tllat the Group is in control and obtains immediate feedback from its customers. At times, CSGT assists in
sourcing customers for the OHB Group in return for a conunission.
3.3 Competiti,,” advanlage The Directors of the Company believe that the following factors would give the OHB Group a competitive advantage in cOIUlection with its business: (i) Name
Omasteel and Group Steel are well known in the Malaysian iron and steel industry for lhe quality of their steel products which is the result of hIgher quality steel raw materials, bener management, production control and support from the CSC Group.
(ii) Modern manufacturing facilities
The OHB Group has invested approximately RM622 million in its factories and machinery. In addition, it intends to invest an additional RM23.9 million to introduce other machinery and to improve efficiency of the Group’s mannfacturing process. At present, Group Steel’s factory operates two (2) continuous production tines. which is faster and more efficient compared to a non-continuous production line. (iii) Modular structure As the Group’s production facility is modular, it is able to vary the production quantity amongst its 1B, CR, GI and PPGI products to cater to the changing demands in different nurket segment and to maximise the Group’s profits. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) (iv)
(vii) (viii) Quality The Group places high priority on the quality of its products and works closely with its custom<rs to produce prooucts which will meet the
requirements of its customers. The Group is able to source higher quality steel raw materials from esc such as low carbon and IF steel, Ihereby permitting it to penetrate into higher end markets. As IF steel raw materials are difficult to obtain in the open market, the OHB Group has a competitive edge over its competitors. The Group is able to produce IF steel quality CRCs of DQ and DDQ quality which it can sell locally to reploce the current IF steel quality eRCs being imported into Malaysia by the various manufaclUrers requiTing such quality steel coils. Quality control The OHB Group implements quality control procedures at its factories which involve the checking and testing of the IB, CR, GI and PPGI products respectively for manufacturing defects, which include, inter alia, hardness test, tensile strength test, surface condition test, bending test and colour difference test, before the products are packaged. Quality control is important in the iron and steel industry to enSure that the specifications of the customers are adhered to. The quality control procedures aTe conducted at 3 main stages, being raw material quality inspection, work in progress quality inspection and end product quality inspection. In addition, the management of the Group constantly checks and monitors the manufacturing activities in its factories to ensure that its employees adhere to the Group’s operating procedures. Experience The Executive Directors and Ihe respective key management from cse in the OHB Group who are involved in the day to day manufacturing operations and/or marketing and development ofthe steel products produced by the Group have at least 20 years of experience each in the iron and steel industry. The respective division and department heads of OHB have been involved in the iron and sreel industry for at least 10 years. Further to that, the OHB Group also benefits from the R&D and technical I..”llow-how of other key management persOTUlel within the esc Group who are sent to Omasteel and Group Steel by request at any tim<. Pricing As the Group is one of Ihe major customers of esc, the Group is able to obtain its source of steel raw materials at a competitive price. The Group is thus able to price its products competitively. Lower operating costs As the Group’s operations are not heavily labour intensive, and rely on a combination of heavy machinery and equipment, the Group is able to operate wilh minimal skilled employees. The Group is also in the midst of converting its LPG-fuelled furnaces to accept natural gas which is safer and would further lower the Group’s operating costs with an estimated cost savings of approximately RM8 million per annum. The migration to nalUral gas is expected to be completed by end of 2004 or early 2005. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) (ix) Customer service The Group’s services include, among others, advising its customers on processing methods, and explaining the differences in the Group’s product offerings to ensure that the Group’s customers obtain the best suited steel for their needs. The services provided to the Group’s customers ensure customer’s satisfaction and maintain continuity of the business relationship between the Group and its customers. By providing such services to its customers, the Group is able to expand its market share by meeting the needs and demands of its customers during the growth of its customers’ operations. 3.4 R&D The OHB Group’s R&D unit consists of 12 persons, comprising employees from the Group’s Engineering Department and other senior level executives. The R&D unit is divided into 2 teams consiSling of the CR product research team and the surface treatment research team. The CR prodnct research team is principally involved in studying and formulating process parameters for, among others, steelmaking chemical content, hot rolled temperature control, cold rolling reduction ratio, annealing process and skin pass extension ratio to develop new products and improve product quality. The surface treatment research team is principally involved in studying and formnlating production process parameters for galvanising and colour coating to develop new products and improve product quality_ At present, the Group has 3 R&D laboratories. The physics and metallurgy laboratory is nsed to test the physics and conduct microstructure analysis on the HR and CR sheets by nsing universal tensile testing machine, hardness testing machine, heat treatment furnace, optical microscope and other equipments. The chemistry laboratory is used to conduct chemical properties analysis on the hydrochloric acid solution, rolling oil and roll coolant detergent used during the production process of the CR products by using various precision chemical analysis tools. The surface treatment laboratory is utilised to analyse the zinc liquid content, adhesiveness and corrosion-resistant properties of the galvanised coating by using x-ray spectrometer, thermohydrometer and film thickness tester. (THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK) VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) The on-going R&D activities are as follows: Commencement date Status Title and objective
Process improvement 1. January 2004 Ongoing Study the best combination of cold rolling reduction ratio and annealing requirement in order to improve productivity and extend the product thickness range.
2. January 2004 Ongoing Study to solve the steel coil annealing sticking in order to upgrade surface quality.
Product development 3. January 2004 Ongoing Develop EDDQ CR by using IF steel as the raw material. 4. Janumy 2004 Ongoing Develop industrial machinery heavy-duty roller chain by using alloy medium carbon steel.
5. June 2004 Ongoing Develop high-grade surface quality GI product
for electrical home appliances. The Group has invested approximately RM6.5 million in R&D activities over the last 3 financial years ended 30 November 2003 and the financial period ended 31 May 2004, representing approximately 0.25% of the Group’s total revenue over the period. The main achievements in the R&D activities of the Group over Ihe lasI 3 financial years ended 30 November 2003 and the financial period ended 31 May 2004 are as follows: (i) developed medium carbon CR sheet for producing roHer chain of bicycles and motorcycles; (ii) developed DQ CR products used for producing, among others, oil speaker frames; filters and (iii) developed DDQ CR products for producing fire extinguishers and wheel barrow trays; (iv) developed the permanent bright type ofPPGI; (v) developed aluminium colour coated sheet for producing high-grade construction material; (vi) developed drawing quality galvanised steel sheet for producing satellite antenna plates; and (vii) develooed hi.h corrosive resistant PVDF tvne ofPPGI used bv DOwer oIants.
3,5 Technology At present, the production processes of CR, GI and PPGI products are at a relatively advanced and mature stage. Certain equipment and machines of the Group use technologies which have to an extent been improved and rermed over time. Among these include the continuous hot-dip galvanising line utilised by the Group in the manufacture of its GI and PPGJ products. There is however a need to upgrade andlor acquire new equipment and/or machinery for ex.pansion and to ensure continued competitiveness, efficiency and costs savings in its manufacturing line. The Directors of the Company will continually assess the need for such investment In technology and will address these needs in the future plans of the OHB Group. VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
3.6 Awards On 16 January 2001, Omasteel was awarded ISO 9002 by BM Trada Certification Ltd for meeting the requirements of ISO 9002 for manufacturing of CR products which expired on 31 December 2003. In February 2003, Ornasteel successfully obtained the ISO 9001:2000 certification for manufacturing of CR products which expires on 16 February 2012. On 16 January 2001, Group Steel was awarded ISO 9002 by 8M Trada Certification Ltd for meeting the requirements of ISO 9002 for manufacturing of GI and PPGI products which expired on 31 December 2003. In May 2003, Group Steel successfully obtained the ISO 900 I:2000 certification for manufacturing of GI and PPGI products whicb expires on 1 May 2012.
3.7 Intellectual properties Other than copyright protection, trademark and domain name registration to eslablish and protect its intellectual property and internet domain name, the Group does not own any other intellectual property. (i) Copyright The Group’s copyright in relation to the content of its website ..www.omagroup.com.my” and its brochures is protected under the Malaysian Copyright Act 1987. Under the Malaysian Copyright Act 1987, copyright is the exclusive right to control in Malaysia the reproduction in any material fonn, the perfonnance, showing or playing in public, tbe broadcasting, the communication by cable and the distribution of the copies to the public by sale, rental, lease or lending, of the whole or substantial part thereof, either in its original or derivative fonn. The copyright shall subsist dnring the life of the autbor and fifty years after his death. The OHB Group’s customers are primarily located in Malaysia. However, the Group also exports to other jurisdictions such as, among others, China, Thailand, Indonesia, Vieblarn, Canada and Australia. The availability and extent of protection of the Group’s intellectual property including its brochures in those other jurisdictions would depend on the intellectual property laws in those jurisdictions whicb may vary depending on the applicable laws in those jurisdictions. (ii) Domain name The domain name ..www.ornagroup.com.my.. is registered WIder OmasteeL (iii) Trademark Application for the trademark “Ever Fresh” has been filed by Group Steel on 26 February 2002 under Class 6 at the Registrar of Trademarks in Malaysia. The application has been approved and is currently pending
registration. 4. VULNERABILITY 4.1 Competitioll and market access As a manufacturer of CR, GI and PPGI coils, the Group faces competition from other manufacturers of similar products. There are a few major players in the iron and steel industry in Malaysia with similar core business operations as the OHB Group.
Besides local competition, the Group also faces competition from other foreign VI. HISTORY AND BUSINESS OVERVIEW (CONT’D) manufacturers who are able to export their products to Malaysia at a competitive price.
4.2 Supplies The long term viability of the OHB Group depends on the long term sustainable supply and cost of its various supplies. These supplies consist largely of imported raw materials as follows: (i) HRCs and lB Coils Currently, the OHB Group obtains its supply of: (a) HRCs from CSC and a local supplier; and
(b) IB coils from CSC and internally.
The Group imports its supply of steel products exempt from import duties! tariffs pursuant to approved permits issued by the MIT!. At times, the Group faces some short-term delay in obtaining its supply of HRCs locally but the Group is not particularly affected by such delay as it keeps adequate stock of HRCs on its premise. The Group also sources IF steel coils used in the manufacturing of high quality CRCs from csc. IF steel coils are difficult to source from the open market and can normally only be somced from full steel integrators like
esc. (ii) Paints The OHB Group obtains its supplies of paints used in the Group’s PPGI production from Nippon and Becker. The Directors of the Company do not foresee any material disruption to the supplies of paints and should be able to replace one with the other as there is no material difference in quality or pricing ofthe paints from Nippon or Becker. (iii) Zinc The zinc used in the Group’s GI and PPGI production is sourced from various suppliers in Canada, Australia and Korea. As such, the Group is able to avoid any material disruptions in supply. (iv) Chemicals The Group uses various chemicals in its manufacturing process, particularly in its push pickling line and the electrolytic cleaning line during the production of CRCs and the various chemical coatings applied on the galvanised steel coils during the GI and PPGI manufacturing process. These chemicals are supplied from various suppliers, both locally and from Singapore to avoid any material disruptions in supply. 4.3 Market While the Directors of the Company believe that the Group has set oul and successfully implemented its marketing plans and strategies, it is nevertheless still vulnerable to changes in the market condition and perception of its present market. The Group recognises this vulnerability and has taken steps to mitigate its exposure to such vulnerabilities by, among others, diversifying by exporting to other geographical markets such as the South East Asian countries, namely Thailand, Vietnam and Indonesia. With ASEAN Free Trade Area (“AFTA”) in place, the VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
Group’s competitive advantage compared to non AFTA member countries has increased. The Directors of the Company hope that with such initiative, Ihe Group would eventually be able to diversify itself well enough to overcome such vulnerabilities. 4.4 Dependency on licences and permits, and material agreements The Group’s business and profitability will depend on the ability of the Group to maintain and/or renew such licences and permits as set out in Section 7.3 of Part V of the Prospectus, and the material agreements as set out in Section 7 of Part XIV of the Prospectus, on terms and conditions which are not detrimental to the Group’s business. ITHE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK] VI. HISTORY AND BUSINESS OVERVIEW (CONT’D)
5. MAJOR CUSTOMERS The following are the OHB Group’s top 10 customers for the financial year ended 30 November 2003. The total revenue from these 10 customers contributed approximately RM337 million to the OHB Group’s total revenue representing approximately 39% of the Group’s total revenue for the said financial year. Contribution to the Group’s total revenue for the finandal year/period eoded Length or Name of customer 30 Novemhe< 2003 31 May 2004 relationship % % years Leader Steel Service Centre Sdn Bhd 5.85 4.59 4 Ooi Joo Kee and Brothers Sdn Bhd 4.91 7.40 5 SMPC Industries Sdn Bhd 4.44 2.96 9 China Ordins Corporation 4.31 2 Southern Pipe Industry Sdn Bhd 3.96 4.15 7 Tan Giap Steel Centre Sdn Bhd 3.83 6.55 9 CSGT 3.65 2 Alpine Pipe Manufacturing Sdn Bhd 3.18 1.82 4 Tashin Steel Sdn Bhd 2.52 5.33 3 China Iron & Steel Industry And Trade 2.39 2 Group Corporation The Group is not dependem on any single customer for its business. 6. MAJOR SUPPLIERS The following are the OHB Group’s top 10 suppliers for the financial year ended 30 November 2003. The total purchases from these suppliers amounted to approximately RM654 million representing approximately 96% of the Group’s total purchases for the said financial year. Contribution to the Group’s total purchases for the financial year/period ended Length or Name of supplier 30 November 2003 31 May 2004 relationsbip 0;” % years CSC 51.97 53.02 9 Megasteel 29.63 28.00 S Becker 2.65 3.13 2 Pasminco Metals Pty Ltd 2.57 0.61 5 Petronas Dagangan Berhad 2.07 1.90 JO Tenaga Nasional Berhad 2.01 1.67 JO Nippon 1.87 0.49 6 Teck Cominco Metal Ltd 1.52 2.23 5 Sorin Corporation 1.14 306 5 MOX Gases Sdn Bhd (formerly known 0.28 0.21 6 as MOX Gases BerlIad) (a subsidiary of MOX) The Group’s dependency on its suppliers is hIghlighted in Section 12 of Pall IV of this Prospecrus. VTI. INDUSTRY OVERVlEW, PROSPECTS AND FUTURE PLANS I. INDUSTRY OVERVIEW The OHB Group is principally involved in the manufacturing of CR, GI and PPGI products. These products are then sold to other manufacturers and service centres both locally and overseas. Therefore, the prospects of the OHB Group can mainly be linked to the growth of the following: (i) the Malaysian economy;
(ii) the global economy;
(iii) the sector outlook; (iv) the manufacturing industry; and
(v) the iron and steel industry.
1.1 The Malaysian economy The Malaysian economy strengthened further, with growth in real GDP increasing at a faster pace of 8% in the second quarter of 2004, from 7.6% in the frrst quarter. Growth continued to be broad based, led by the manufacturing and services sectors. The strong growth in the maoufacturing sector was snstained at 12.1% (IQ 2004: 12.7%). Both the export-and domestic-oriented industries registered strong expansion of 18.3% and 8% respectively. In tbe export-oriented industries, higher growth was recorded in the electronics, chemical products and rubber products industries. Strong expansion was seen in the electronics industry, particularly from high demand for consumer electronics and conununication devices. This had positive spillover effects on growth in the chemical products industry, particularly resins and plastic products, which supply inputs to the electronics industry. Meanwbile, sustained external dentand for gloves continued to support the expansion in the rubber products industry. In the domestic-oriented industries, robust growth in domestic demand underpilUled the expansion in the food products, fabricated metal products, and iron and steel as well as transport equipment industries. The construction sectOr contracted by 1.7% due to lower civil engineering activity. which was partly mitigated by higher activities in the residential and non-residential segments. Low interest rates, higher incomes amidst favourable commodity prices and a stable job market supported the demand for residential property. Overall, construction activity is expected to benefit from the additional allocation of RM I0 billion for development expenditure Wlder the Eighth Malaysia Plan. Despite the ongoing fiscal consolidation, domestic demaod growth strengthened further in the second quarter of 2004, with further expansion of private sector activities. Growth in private consumption expanded strongly by 11.4% (IQ 2004: 8.4%), supported by higber disposable income, improved consumer confidence, low inflation and interest rates, as well as stable employment conditions. In line with the goverrunent’s commitment to fiscal consolidation, public consumption increased moderately, while public investment continued to be pared down. Gross fixed capital formation continued to register a strong growth of3.5% (IQ 2004: 3.5%), underpinned entirely by stronger private investment activities as Federal Government’s development expenditure continued to decline. The fiscal deficit was 4.5% of GDP in the second qnarter. Intlation remained low at 1.2% in the second quarter. New capacily expansion in sectors experiencing strong growth, stable labour market conditions and increasing competitive pressures, contributed to\vards reining in price pressures in a strong growth envirorunent. VU. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) Balance of payments developments also reflected more buoyant economic conditions. The large trade surplus narrowed slightly (2Q 2004: RM18.1 billion; IQ 2004: RM 19.3 billion), as imports of intermediate and capital goods rose in response to strengthening investment and capacity expansion. The growth in gross exports by 22% was due to stronger expansion in exports of manufactured goods and commodities. The trend of stronger growth in manufactured exports reflected strong extemal demand for eleclronics and electrical products, chemicals and rubber products. With the exception of palm oil and saw log exports, which were driven entirely by strong prices, higher exports of other major agriculture commodities and minerals were due to both higher prices and volume, especially for rubber, crude oil and natural gas. The stronger expansion in gross imports by 32.1 % reflected mainly Slronger consumption demand and private investment, rising manufacmring production as well as increased outsourcing for lower cost inputs from regional countries for the electrical and electronics industry. In tandem with strong external demand for electronic products, imports of intermediate goods recorded a strong growth of 31.6%. Consonant with the upward trend in private investment growth, imports of capital goods expanded further by 27,6%. Increase in capital imports is reflective of capacity expansion in the mannfacturing and oil and gas sectors. Imports of consumption goods increased rapidly by 26.5%, reflecting stronger growth in domestic consumption. Another significant development during the quarter was the strong growth in imports for re-expol1S which involved packing and assembling activities at distribution parks located in the free commercial zones at the major ports. Exclnding re-exports, imports rose by 30%, The international reserves of BNM strengthened further in the second quarter of 2004, increasing by RM9.7 billion (USD2.5 billion) to stand at RM204.8 billion (USD53.9 billion) as at 30 June 2004. The increase in reserves during the quarter arose mainly from the continued high repatriation of export earnings, inflows of FDI and portfolio funds and drawdown of external loans, The reserve level has also taken into account the quarterly foreign exchange revaluation adjnstment amounting to a loss ofUSD506 million. The reserves increased further to RM206.9 billion (USD54.4 billion) as at 14 August 2004, reflecting the sustained repatriation of export earnings and inflows of portfolio investment. The reserves level is sufficient to finance 7.2 months of retained imports and is 5 times the short-term external debt. (Source: BNM Quarterly Bulletin Quarter 1. 1004) 1.2 Global economy In the second quarter of 2004, the global economic activity remained firnt. sustained by strong growth in USA, continued economic revival in Japan and Europe and broad-based expansion in Asia. Meanwhile, growth in the People’s Repnblic of China (P. R. China) mode11lted but continued to remain at a high level. In USA, growth remained strong albeit at a less rapid pace in the second quarter, supported by higher business investment and inventory rebuilding while efficiency in energy usage mitigated the adverse impact of higher energy prices on consumer spending. Against the backdrop of sustained economic expansion and upturn in inflationary expectations, the Federal Reserve increased rates in June, signalling a less accommodative Slance in monetary policy. In the Euro area, despite weak consumer spending and uncertainty on structural reforms, economic recovery continued to be sustained by fiscal stimulus and strong export performance, Growth in the United Kingdom registered its fastest expansion in nearly four years, spurred by high consumer spending and strong activity in the services, manufacturing and housing sectors. In Japan, despite some moderation in capital spending, stronger export demand continued to drive economic recovery, while growth from domestic Vll. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) sources remained encouraging with private consumption improving in response to more stable labour market conditions. In the Asian region, growth momentum remained robust during the second quarter, mainly supported by resilient export performance of the technology sector and strong intra-regional trade. Inflation in the region trended markedly upwards during the quarter, mainly reflecting higher food prices and persistently high global crude oil prices. In Indonesia and Philippines, weaknesses in domestic currencies added further inflationary pressures. Meanwhile in Hong Kong China, deflationary trends further dissipated, following rising consumer spending, robust growth in the tourism industry and declining unemployment rate. Despite rising inflationary pressures, interest rates in the region remained relatively low, in view of ample liquidity in most of the regional economies. Meanwhile, global equity market strength abated during the second quarter due to concerns on cOTporate earnings and interest rate hikes while Asian equity markets were also affected by concerns about a possible sharp slowdown in P.R. China. Going forward, global economic expansion is expected to moderate somewhat as further momentum would likely be influenced by the extent to which consumption in industrialised countries would be affected by continued high oil prices. Meanwhile, growth prospects in the Asian region are expected to remain favourable amid buoyant intra-regional trade and strong underlying domestic demand in most regional economies. (Source: BNM Quarterly Bulletin Quarter 2,2004)
1.3 Industry overview 1.3.1 The manufacturing sector Growth of the manufacturing sector accelerated since September 2003, undeTpinned by double-digit and broad-based growth in both export and domestic-oriented industries. Favourable external environment with continued strong growth in China, coupled with the firm recovery in USA and sustained recovery in Japan, fuelled the higher demand for manufactured goods, particularly for electronic products. Meanwhile, growth in domestic-oriented industries strengthened on the back of the improved economic performance. With these positive developments driving the manufacturing sector, its contribution to GOP growth is expected to lllcrease. (Source: Economic Report 200412005) The strong growth in the manufacturing sector was sustained with value added expanding by 12.1% (1Q: 12.7%). Continued robust expansion was seen in both the export-oriented industries (18.3%; 1Q: 19.3%), and domestic-oriented industries (8%; lQ: 7.6%). Despite high investment in capacity expansion, the overall capacity utilisation rate remained high at 81 %, with export-and domestic-oriented industries operating at 85% and 74% respectively. The sustained strong expansion in the export.oriented industries was underpinned mainly by higher production in the electronics (32.7%), chemical products (18.7%) and rubber products (20.9%) industries. In particular, the electronics industry was supported by the strong global demand for semiconductors, due mainly to the wider applications of chips in communications and consumer electronics, such as Digital Video Disc players and digital cameras. This also had a spillover effect on the chemicals 67 VII. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) 1.3.2 industry especially industries which supply inputs for electrical and electronics products such as plastics and resins. As a result, output in the chemicals industry expanded further by t8.7% (IQ: 16.9%; growth exceeding 20% in 2003). The rubber products industry continued to record strong growth, supponed by sustained export demand for rubber products such as examination and surgical gloves for the food, medical and industrial users. Meanwhile, the domestic-oriented industries strengthened further, due largely to strong growth in the food products (8.4%), fabricated metals (27.8%), and iron and steel (9.2%) as well as transport equipment industries (8%). Higher output in the food products industry largely reflected stronger private consumption, whereas the underlying strength of the metals industry arose from strong external demand from USA and Thailand. The transport equipment industry expanded moderately, benefiting from higher domestic sales of passenger vehicles. (Source: BNM Quarterly Bulletin Quarter 2. 2004) Output of construction-related industries expanded strongly by 20.5% for the first six months of 2004 (January-Jillle 2003: 7%), driven by favourable external demand for steel rubes and pipes. Production of fabricated metal products, in particular, rose sharply by 31.2% (January-Jillle 2003:6%) while iron and steel increased at a moderate growth of 7.1% (January-June 2003:8.7%). (Source: Economic Report 2004/2005) The Iron and Steel Industry The production of steel products in Malaysia cOIlUIlenced with the rolling of steel bars in the I960s to fulfil the needs of the construction sector. Today, tile country has 7.2 million MT of rolling capacity (2000:6.7 million MT). The additional capacity of 0.5 million MT comes from Amalgamated Steel Mills Bild’s plant in Banting, whicll cOIlUIlenced operations in early 2003. Tile existing capacity for rolled-longs is more than sufficient for Malaysia’s domestic requirement as the consumption of longs stood at 3.6 million MY in 2002. Steel production was at a low 6.4 million MT in 1998, due to the financial crisis of 1997-98. As the economy recovered in 1999, steel production picked up, growing 20% to 7.7 million MY. In year 2000, production improved further to 9.6 million MT with escalating domestic demand. The trend has been the same over the past two years with production increasing to 9.9 million MT in 2001 and 10.9 million MT in 2002. Tile increase in the production of steel from 2000 onwards can be attributed to a Ilike in demand following recovery of the economy and to the additional production of flats from Megasteel ‘s new HR plant, which cOIlUIlenced operations in 1999. The production of rolled flats on the other hand, has increased sharply from 1999. Flats produced locally doubled from 0.6 million MT in 1999 to 1.2 million MY in 2000. Production continued to improve, escalating to 2.7 million in 2001 and 3.5 million MT in 2002. To a large extent, the hike in production of flat products in recent years is due to the coming on-stream of Megasteel’s high capacity HR plant in 1999. As a result, the production of HR sheets and strips has grown from 231,000 MT in 1999, to 738,000 MT in 2000, on to 850,000 MY in 200 I and 1.4 million MT in 2002 Prior to 1999, all flat products were imported. VII. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) Overall capacity utilisation for the steel industry improved to 54% in 2002, from 50% in 2000 and 35% in 1998. Capacity utilisation for primary products has remained fairly constant at 60%, while that for rolled longs dropped to 44%. For flats, the capacity utilisation in 2002 increased significantly to 64%. CRCs The production of CR sheets stood at 551,000 Mf in 2002, up 25% from 440,000 MT \0 200 l. Based on an installed capacity of 730,000 MT, the utilisation rate was a high 75% in 2002. Prior to 1991, there was no local production of CR sheets in the country and all of Malaysia’s requirements of CR sheets had to be imported. Between 1991 and 1997, production increased by more than 10-fold from 47,000 MT in 1991 to 485,000 Mf in 1997. In 1998, production fell 32% to 330,000 MT. It picked up again in subsequent years, growing 24% and 19% on an anonal basis to 410,000 Mf in 1999 and 488,000 MT in 2000 respectively. Imports of CR sheets peaked in 1999 at 945,000 Mf (after the economic downturn) and have since then declined gradually. The decrease in imports is partly due to softer demand frnm the local automotive industry. Like many other domestic-oriented industries, the automotive industry was severely affected by the 1997-98 downturn. But even though the market for automobiles picked lip in recent years, imports have continued to decline. In 2002, imports of CR coils stood at 709,000 MT. Like most other steel products, CR sheet and coils are meant primarily for domestic consumption. Hence, only small quantities are exported. But in 1998 and 1999, exports were strong because of the weak domestic conditions. Exports of CR sheets and coils rose 55% to 110,000 MT in 1998, before hining an all-time high of 231,000 MT in 1999. Exports dropped sharply in subsequent years as domestic demand picked up. In 2002, exports accounted for a meagre 16,000 MT. Coated Metallic Sheets Production of coated metallic sheets (excluding GI and tinplate) grew steadily from 1994 and 2000. Starting with a mere 60,000 MT in 1994, production jumped almost six-fold to a high of 340,000 Mf in 2000. There was a moderation in 2001 but production increased 53% in 2002 to 291,000 MT (2001:190.000 MT). Imports peaked in 1997 at 219,000 MT before declining sharply to 58,000 in 1999. In 2000, imports more than doubled to register 181,000 MT before easing to 51,000 MT and 89,000 MT in 2001 and 2002 respectively. Exports of coated sheets picked up sharpty from 1998, to reach a peak of 226,000 MT in 2000, before moderating to 151,000 MT in 2001 and 176,000 MT in 2002. Prior to 1997, exports of coated metallic sheets were insignificant. Galvanised Sheets GaJvanised sheets are essentially steel-based products. The only difference lS that they are coated with a thin layer of zinc instead of tin. Domestic producers use the “hot-dip” method of galvanising to make final products (either coils or cut sheets) that are used primarily for roofmg. Local producers have generally been able to cater to the needs of the local building and construction industry except for very heavy and light gauges and extra wide sheets, whose specifications are outside the scope of their capacities. Painted galvanised sheets (colour bonds) are also produced locally as are spangleless sbeets, which are widely used as covers for electric items and consoles. VII. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) Production of galvanised sheets generally fluctuates within a narrow band. It peaked in 1997 at 340,000 MT, before declining 30% to 235,000 MT in 1998. Production picked up again in the next two years to record 293,000 MT in 2000. In 2002, production of GI sheets stood at 288,000 MT (2001: 276,000 MT). Like production, imports too plunged in 1998 to a low of 73,000 MT. However, imports escalated as consumption picked up in subsequent years to record a high of 492,000 MT in 2001. The peak in import corresponded with the high level of consumption in 2001 at 528,000 MT. In 2002, imports declined dramatically to 162,000 MT and consumption eased to 351,000 MT. Exports of GI sheets were inconsequential prior to 1997. In 2000, exports were at an all-time high of 285,000 MT, up almost 140% from 120,000 MT in 1999. Exports of GI sheets moderated to 240,000 MT in 2001 before declining sharply to 99,000 MT in 2002. (Source: Malaysian Iron and Steel Industry Federation -6th Report: Status and Outlook ofthe Malaysian Iron and Steel Industry)
1.4 Laws and Regulations The Group’s operations are generally governed by the MITI, the Industrial Coordination Act 1975, Factories and Machinery Act 1967, the Environmental Quality Act, 1974 and the Melaka state by-laws pertaining to industrial buildings. 2. PROSPECTS The prospects of the OHB Group are expected to be favourable in light of the overall prospects of the Malaysian and global economic outlook and the iron and steel industry as set out below. As the Group does not sell its products directly to end users but sells its products to other manufacturers and service centres who are involved in various manufacturing related industries, its sales are reliant on the growth of the manufacturing industries. Increases in demand within industries such as furniture, crude palm oil, home appliances and hardware would see positive growth for the Group’s products.
2.1 The Malaysian and Global Economic Outlook Expectations ofsustained growth in the second half-year Overall, the global economic performance in the first half of 2004 has surpassed expectations. GDP growth was higher than expected in the first half·year and more balanced across regions. While indicators point towards some moderation in global growth in the second half-year, global growth is expected to remain strong, supported by continued growth in consumer and investment demand. In the United States, positive labour market conditions suggest more self-sustaining growth in the secondhalf year. In Asia, recovery in Japan is ongoing while growth in P. R. China remains high. Continued expansion in intra-regional trade and domestic demand as well as favourable outlook for the global economy would continue to support growth in the regional economies. Global economic conditions have become more challenging with higher energy prices, rising interest rates and some slowdown in the major economies. Our assessment is that the impact of these risks on global growth in 2004 would be modest. While oil prices are expected to remain high due to concerns on supply disruption, the global economy has a greater capacity to manage high energy costs in view of better economic conditions, higher incomes, improvements in job prospects and more efficient use ofenergy. Gradual interest rate increases towards a more neutral stance would ensure growth is sustained in the United States. Current indications of a soft landing to be achieved in 70 YD. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) P.R. China and sustained domestic demand in regional economies will be positive for Malaysia. Overall, the balance of risks indicates sustainable growth prospects going forw3Id. This favourable external environment is expected to further reinforce domestic demand growlh in Malaysia. Forward-looking indicators continue to support strong and sustainable growth in the domestic economy. lbe Index of Leading Indiealors also suggesls that the economy will further expand in the second half·year. In the manufacturing sector, demand for semiconductors is expected to remain strollg given the increasing application of chips in a broad range of applications, particularly those which are consumer driven. Malaysia is posilioned 10 benefit from growtll in consumer elec[fonics alld communicalions, due to the large sh:lre of Malaysia’s electronics OurpUl used in these appliealions. In the services seclor, expansion in the wholesale and retail trade, hotels and restaurants, and transportation and communication sub-seelOrs is likely 10 conrinue with strong tourist arrivals and expanding rrade and manufacturing-related services. Improved consumer and business confidence, favourable commodity prices, stable employment conditions and rising incomes are expected to support further growth in private consumption and investment. Given the high savings, rising incomes and liquidity in the banking system, there is potential for higher consumption to support growth without undermining financing of private investment from domestic sources, Favourable financing conditions and improving corporate profitability as well as sustained growth in extemal demand will support private investment in the second half-year. In the business sector. the forward-looking indicators, loan applications and approvals by the banking system were significantly higher in the second quarter. Overall, growth would continue to be private sector driven with ongoing consolidation by the public sector. The underlying fundamentals of the Malaysian economy continue to remain strong with low inflation. stable labour market conditions, sound :and strong banking system and rising external reserves. Expanding capacity and increasing competitiwness of the domestic economy will contain price pressures in the slrong growth environment. Monetary policy will, therefore, remain accOll1ltlod:lIive. The supportive exlemal environmenc and conducive domestic condilions ensure that growth is likely 10 remain strong in the second half of the year. Following lhe slrong growth performance of 7.8% for lhe first half-year, growth for the year as a whole is expected to surpass earlier estimales. (Source: BNM Qllarterly Bulletin Quar(er 2. 2004j Global and Malaysian Economy in 1005 The growth momentum in the global economy in 2005 is expected to decelerate slightly as major economies tighlen monetary policy to contain inflationary pressures. Concerns over the possibility of higher oil prices and the slowing down of China’s economy are other faclors that can dampen growth. Notwithstanding these uncertainties, it is anticipated that the Federal Reserve (the central bank of USA) would pursue a measured approach in raising interest rates. As for the oil prices hikes, the effort of the Organisatiou of the Petroleum Exporting Countries to raise supply to 26 million barrels per day effective 1 August 2004. will help contain the price increases. Against this backdrop, growth in USA is expected to moderate to 3.5% -4% (2004: 4.5% -4.7%), other emerging markets and developing economies at 5.9″10 (2004: 6%), while Japan is also expected to grow by 2.4% (2004: 4.5%). In contrast, recovery in the Euro uea is anticipated [0 strengthen further 10 post a real GOP growth of 2.3% (2004: 2%) with a gradual pick-up in domestic demand aided by favourable financing conditions. Overall, global growth is projected at 4.4% in 2005 (2004: 4.6%). VII. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) Entrenched domestic economic activities, coupled with a fairly favourable external environment, are expected to drive growth into 2005. Strong output growth is expected to emanate from all sectors, led by manufacturing and services with an increasingly higher contribution from private sector expenditure. Consequently, Malaysia is set to achieve another year of healthy growth of 6% in 2005. With an estimated population of 26.1 million, per capita income in current prices is projected at RM16,693 (2004: RMI6,098). In terms of purchasing power parity, it is estimated at USDIO,560 (2004: USDlO,163). (Source. EconomIC Report 2004/2005) 2.2 Sectoral Outlook Output growth in 2005 is expected to be broad based with the manufacturing and services sectors remaining the growth drivers. The manufacturing sector is envisaged to expand strongly, propelled by strengthened domestic demand and sustained performance of the external sector. Overall production is expected to grow more than 10%, while exports at 11.3%. Buoyed by the upswing in the electronics market, electronics and electrical (E&E) will continue to grow at a steady rate despite the overstated fears of an electronics slowdown. Domestic-oriented industries are also expected to expand further, particularly in food and transport equipment. The consnuction sector is forecast to increase by 1.8% (2004:0.5%), contributed partly by the civil engineering sub-sector, following the implementation of new and on-going infrasnucture projects such as the Phase Two of the East Coast Highway and TanjlU1g Bin Power Station in Johor. The housing sub-sector is also envisaged to remain robust, underpinned by higher incomes, low interest rates and easy aCCess to loans. The housing sector is expected to be further boosted by the consnuction of 7,000 units oflow-and medium cost houses by Syarikat Perumahan Negara Berhad. (Source: Economic Report 2004/2005)
2.3 The Iron and Steel Industry In year 2002, the consumption of CR steel in Malaysia was 1.24 million MT of which 535,000 MT was supplied locally and 709,000 MT was imported. As for the GI product, the consumption in Malaysia was 352,000 MT of which 190,000 MT was supplied locally and 162,000 MT was imported. The conswnption of PPGl steel in Malaysia was 204,000 MT of which 115,000 MT was supplied locally and 89,000 MT was imported. (Source: Malaysian Iron and Steel Industry Federation -6th Report: Status and Outlook ofthe Malaysian Iron and Steel Industry) With the Malaysian economy forecast to record a GDP growth of 6% in 2005, the OHB Group forecast that the total consumption of CRlGIIPPGI products will sustain its growth for 2005. As for the export market, the Group expects sustained demand for its GI and PPGI products from China with the implementation of several big projects such as Beijing Olympics (2008) and Shanghai World Expo (2010). Furthermore. through CSGT which is one of the marketing arms for the CSC Group, the Group is well positioned to lap into the international market, especially the China market. VII. INDUSTRY OVERVIEW, PROSPECTS AND FUTURE PLANS (CONT’D) 3. FUTURE PLANS The OHB Group intends to further strengthen its position and competitiveness as one of the major steel manufacturers in th.e iron and steel industry by strengthening and expanding its current operations and adding on the production of higher quality steel coils for drawing and deep drawing purposes to cater to the domestic demand which are currently satisfied by imports. The Group is also constantly addressing the need to improve the quality of its products, efficiency of production and reducing its cost of production. The Directors of the Company believe that early research and planning would enable the Group to achieve its future plans. 3.1 Improve productivity The Group has set in place a plan to improve its productivity to be able to meet tbe anticipated increase in demand for its products. Various lines in the Group’s production line have been upgraded and expanded since 2003 and this process would continue up to 2005. At present, the Group’s annual production capacity for its CR product is approximately 444,000 MT and approximately 240,000 MT and 120,000 MT for its GI and PPGI products respectively. The present plan is intended to address any potential bottleneck within the Group’s production lines and 10 concentrale on improving the remaining production lines for both CR products and GI and PPGI products.
3.2 Introducing new and higher quality steel coils The Group plans to diversify its current CR product range to include DQ and DDQ quality products. DQ and DDQ coils are used by manufacturers who require highergrade quality of steel products such as, among others, electrical andlor electronic home apphance makers and automobile part makers.
3.3 New markets The Group plans to develop the Southeast Asian market which has great growth potential with the implementation of ASEAN Free Trade Area and the sales of the Group to this region is expected to grow in the future as the Group bas the advantage ofCommon Effective Preferential Tariff.
3.4 Cost reduction The Group plans to substitute the consumption of LPG to natural gas. With this project, the Group is expected 10 save approximately RM8 million a year. This project is being implemented and is estimated to be completed by end of 2004 or early 2005.
3.5 Future expansion The Group plans 10 expand ils capacity to cover a wider range of CR products particularly the thin gauge CRCs which are at present substantially imported.