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:
the Malaysian economy;

the global economy;


(iii) the sector outlook;
the manufacturing industry; and

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.
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
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 oftbe 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 corporate 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

(Source: BNM Quarterly BIIlIetin Quarter 2, 2004)

1.3 Industry overview
1.3.1 The manufacturing secror
Growth of the manufacturing sector accelerated since September 2003, underpinned 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 se<:tor, its contribution to GDP growth is expected to

(Source: Economic Report 200412005)
The strong growth in the manufacturing sector was sustained with value added expanding by 12.1% (IQ: 12.7%). Continued robust expansion was seen in both the export-oriented industries (18.3%; IQ: 19.3%), and domestic-oriented iodustries (8%; IQ: 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. [n 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
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 tubes 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.
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%.
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.
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 Gl 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 200 I. The peak in import corresponded willi the high level of consumption in 200I 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 Gl 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 Indllstry)
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 Ihe Melaka state by-laws pertaining to industrial buildings.
The prospects of tile OHB Group are expected to be favourable in light of the overall prospects of the Malaysian and global economic outlook and llie iron and steel industry as set oul 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 manufachlring 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 ofsllstained growth in the second half-year
Overall, the global economic perfonnance 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 Ihe 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 markel 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 of energy.
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
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%).
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.
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 and/or 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.


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