Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW o VITAL FACTOR CONSULTING Creating Winning Business Solutions Vital Factor Consulting Sdn Bhd (Company No.: 266797.T) 75C & 77C Jalan 5522119 Damansara Jaya 47400 Petaling Jaya Selangor Darul Ehsan, Malaysia Tel: (603) 7728-0248 Fax: (603) 7728-7248 Email: enquiries@vilalfaClor.com Website: www.vitalfaclor.com 25 April 2013 The Board of Directors Leon Fuat Berhad Wisma Leon Fuat No. II, Lorong Keluli IB Kawasan Perindustrian Bukit Raja Selatan 40000 Shah Alam Selangor Darul Ehsan
Dear Sirs Independent Assessment of the Rolled Steel Industry iu Malaysia The following is an Independent Assessment of the Rolled Steel Industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd for inclusion in the prospectus of Leon Fuat Berhad (herein together with all or anyone or more of its subsidiaries will be referred to as Leon Fuat Group or the Group) in relation to its proposed listing on the Main Market of Bursa Malaysia Securities Berhad. I. BACKGROUND AND INTRODUCTION • The principal business activities of Leon Fuat Group are in trading and processing of steel products specialising in rolled long and flat steel products. As such, the focus of this report is on the Rolled Steel Industry in Malaysia. 2. MACROECONOMIC INDICATORS 2.1 Key Macroeconomic Indicators for Malaysia Malaysia’s Real GDP Growth 8% .
7.2% Group, whose main market is in 6%
• Businesses, including Leon Fuat
5.6% 5.0 ~ 6.0%5.1%4.8%Malaysia are affected by the
economic well-being of the nation. 4″1<1 This is commonly reflected in the
country’s gross domestic product 2% (GOP) performance. 0% 1­
2008 2010 2011 2012 20131 ¥2% ·1.5% Note:f= Forecast. (Source: Bank Negara Malaysia)

 

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Overall, Malaysia’s key economic indicators in tenns of rea! GDP grew at an average annual growth rate (AAGR) of 4.0% between 2008 and 2012. An exception to the growth during this period was a decline in 2009 due to the global economic downturn.
• In 2012, the Malaysian economy registered a real GDP growth of 5.6% driven by resilient domestic demand despite the weak external environment. The strong perfonnance in domestic demand stemmed from sound macroeconomic fundamentals, more diversified and balanced economic structure, stronger and developed financial system, and greater macroeconomic policy flexibility implemented in the country.
• For 2013, real GDP growth for the Malaysian economy is forecasted to grow between 5.0% and 6.0%.

3. INDUSTRY STRUCTURE 3.1 Overall Steel Industry • The Rolled Steel Industry is part of the overall Steel IndustIY, which is depicted in the diagram below: Structure of the Steel Industry
c:::J Leon Fuat Group operates within these sectors • Primary steel products: Processing of iron ore produces pig iron, direct reduced iron, hot briquetted iron or molten iron, which may then be converted into steel for use in producing primary steel products. Steel scrap may also be melted and processed to produce primOI)’ steel products. Examples of primOI)’ steel products include blooms, billets, ingots and slabs.
• Rolled steel products: Refer to primOI)’ steel products that have undergone hot-rolling and/or cold-rolling processes. Examples of rolled steel products include hot-rolled and cold-rolled flat and long steel products.
• Secoudary steel products: Refer to rolled steel products that have undergone further processing and/or have been fonned into fmished products. Examples of secondOI)’ steel products include tubes and pipes, wire and wire products and sheet metal products.

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Steel scrap: Refers to discarded steel prodncts that can be recycled or rensed. Steel scrap is segregated by composition and grade before they are recycled or reused. Examples of steel scrap inclnde obsolete or discarded steel from antomobiles, appliances and construction materials, and wastes, off-cuts or defective items from the production of primary, rolled and secondary steel products.
• Services: Encompass various value-added processes for rolled and secondary steel products such as, among others, slitting, shearing, cutting, bending, levelling, profiling, polishing, galvanising, tin-plating, pre-painting and coating services.
• Leon Fuat Group is primarily involved in the rolled steel products, secondary steel products and services sectors.

 

3.2 Rolled Steel Products • Rolled steel products can be broadly segmented into the following:
• Rolled flat steel products are produced from steel slabs through hot-rolling and/or cold-

 

rolling process. Examples ofrolled flat steel products include: Coils; Plates; Sheets/strips.
Steel plates are thicker than steel sheets while strips are generally sheets that are cut into a narrower width. Rolled coils are generally thin sheets/strips rolled in coils. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Rolled long steel products are commonly produced from steel blooms or billets. Examples ofrolled long steel products include: Rounds; Bars; Wire rods; Sections; Seamless tubes/pipes.
Rounds, bars and wire rods are commonly hot-rolled or cold-rolled into thinner diameters from steel billets. The difference between rounds, bars and wire rods are in the diameters and usage of the products whereby: Rounds have the largest diameters compared to round-shaped bars and wire rods, and are nonnaHy used for producing seamless tubes and pipes; Bars can be in various shapes such as round, square, hexagon, octagon or flat. Round-shaped bars have smaller diameters compared to rounds, and are nonnally used for producing reinforcing bars (rebar)/defonned bars; Wire rods have the smallest diameters and are used for drawing into wires and wire products.
Sections include rails, beams and channels, and are commonly hot-rolled from steel blooms. It can be in various shapes such as I-beams, C-shaped channels, L-shaped angles and others. Seamless tubes/pipes are produced from billets or rounds. • Leon Fuat Group is in the business of trading and processing of rolled long and flat steel products.
3.3 Types of Steel • The three common types of steel are as follows: Common Types of Steel
C=:J Leon Fuat Group is currentlyinvolvedin trading andprocessing these types ofsteel • Carbon steel is a type of steel that has properties made up mostly of carbon and which relies on the carbon content for structure. In addition to iron and carbon, small amounts of manganese, copper, silicon, SUlphur, phosphorus, nickel, chromium, molybdenum and other elements may also be present as alloying elements or impurities. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Carbon steel can be further segmented into the following: Low carbon steel, which is commonly known as mild steel, generally contains less than 0.3% of carbon. Mild steel has low tensile strength but is highly formable and weldable. Medium carbon steel has a carbon content of between approximately 0.3% and 0.6%. The higher carbon content provides this carbon steel with higher tensile strength but lower ductility compared to mild steel. High carbon steel contains between approximately 0.6% and 1.0% ofcarbon. This carbon steel has higher tensile strength and hardness which makes it harder to weld, and lower ductility compared to medium carbon steel. Ultrahigh carbon steel has a carbon content of between approximately 1.0% and 2.0%. Properties for this carbon steel include high wear resistance, tensile strength and hardness. However, this carbon steel is brittle or breakable. • Stainless steel is a type of steel that commonly contains more than 10% of chromium, with or without other alloying elements. Stainless steel is corrosion resistant and capable of maintaining its strength at high temperatures. The common grades of stainless steel include: Austenitic stainless steel, which contains chromium and nickel as major alloying elements. This grade has non-magnetic, high tensile strength and high ductility properties. Ferritic stainless steel, which contains chromium as the major alloying element with low carbon content. This grade is less resistant to corrosion compared to austenitic stainless steel. Martensitic stainless steel, which contains chromium as the major alloying element, similar to fenitic stainless steel, but has higher carbon content. Duplex stainless steel, which comprises the structures of austenitic and ferritic stainless steels with high chromium and low nickel contents. Properties for this grade include resistance to stress corrosion cracking, and higher tensile strength compared to ferritic grades but lower than austenitic grades. Precipitation hardening stainless steel, which contains chromium and nickel, has high tensile strength and moderate corrosion resistance properties. • Alloy steel is a type of steel that has properties made up of a variety of alloying elements to improve its mechanical properties. Common alloying elements include carbon, manganese, silicon, copper, chromium, nickel, molybdenum, vanadium and tungsten. Small amounts of phosphorus and sulphur are also commonly present in alloy steel.
• Leon Fuat Group focuses on the trading and processing of rolled long and flat products of carbon steel, of which the majority are mild steel and complemented by stainless steel and alloy steel.

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 4. DEMAND AND SUPPLY CONDITIONS • As Leon Fuat Group is primarily involved in trading and processing of rolled steel products, the focus on the demand and supply conditions in this report is on rolled steel products.
4.1 Consumption of Steel Products • The apparent consumption of steel products is a direct representation of the level of demand for steel products including rolled steel products in Malaysia. Apparent Consumption of Steel Products in Malaysia  AAGR  2007-11  2007  2008  2009  2010  2011  %  Apparent Consumption ..  7.7  8.5  6.6  8.3  8.2  1.7
Note: All units in million (annes except percentages. (Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Ehd) • Between 2007 and 2011, apparent consumption of steel products in Malaysia increased at an AAGR of 1.7%. The apparent consumption of steel products declined from 8.5 million tonnes in 2008 to 6.6 million tonnes in 2009 due to the slowdown in the Malaysian economy brought about by the global financial crisis. Following the recovery in the Malaysian economy in 2010, the apparent consumption of steel products rebounded to reach 8.3 million tonnes. In 2011, apparent consumption of steel products remained fairly constant at 8.2 million tonnes.
4.2 Production of Hot-Rolled Steel Products • Local production of hot-rolled steel products are one of the factors used to assess the supply of the said materials, which are distributed or processed by operators such as Leon Fuat Group. The local production of hot-rolled steel products based on quantity is displayed below: Local Production orHot-Rolled Steel Products AAGR 2007-11 2007 2008 2009 2010 2011 Long Products* .. 3.5 3.7 3.7 3.6 3.6 Flat Products .. 2.3 1.9 1.4 1.4 1.5 Total …………………………………. 5.9A 5.5A 5.1 5.0 5.1 %  0.5 -10.2  -3.3
Notes: All units in million tonnes except percentages; *Exclude seamless tubes; A Total does not add-up due to rounding. (Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd) Leon Fuat Berhad Page 60f29 Industry Assessment 98 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Local production of hot-rolled steel products registered a negative AAGR of 3.3% between 2007 and 20 II. This was mainly due to the weak perfonnance of the local production of flat steel products, which recorded a negative AAGR of 10.2% between 2007 and 20 II.
• Despite the general economic improvement in 2010 compared to 2009 based on GDP in Malaysia, the local production of flat-rolled steel in 2010 did not show any growth compared to 2009. This may be attributed to the reduction or exemption of import

duties on flat steel products which encouraged the purchase of imported flat steel products in place of locally produced flat steel products. On 1st August 2009, the Government introduced regulatory changes to the iron and steel industry by implementing the following measures: Import duty reduction for flat steel products from 50% to 25%. This will be further reduced to a range between 0% and 10% by 2018; Import duty exemption for flat steel products that meet the following criteria: used as raw materials for the production of fmished goods for the export market; are products for which grades and specifications are not produced locally; used as raw materials for non-dutiable finished goods. • In view of the above measures, the import duty on flat steel products of iron and noo­alloy steel has been reduced to a range between 10% and 20% as at 31 January 2013.
• The Ministry of International Trade and Industry has announced that starting from I February 2013,18 grades of hot-rolled steel coils are no longer eligible for import

duty exemptions with some exceptions such as raw materials used for the production of finished goods for the export market and non-dutiable fmished goods. These 18 grades of hot-roBed steel coils are available through local production. This is part of the Malaysian Government’s intention to enforce mandatory standards of hot-rolled steel coils to prevent below-par products from entering the market and prevent unfair trade practices. (Sources: Ministry of International Trade and Industry, Royal Malaysian Customs Department) 4.3 Production of Selected RoBed Iron and Steel Products • The supply of rolled iron and steel products based on local production has an impact on the business operations of operators who are involved in the trading and/or processing roBed steel products, including Leon Fuat Group. • The local production of selected rolled iron and steel products in recent years was as follows: Leon Fuat Berhad Page 70/29 Industry Assessment 99 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Local Production of Selected Rolled Iron and Steel Products AAGR  2008-12  2008  2009  2010  2011  2012  %  Steel Bars and Rods  Sales Value (RM million) ..  6,362.5  3,894.2  5,001.0  5,555.7  6,305.9  -0.2  Production Quantity (‘000 Tonnes) ..  2,368.4  1,964.4  2,337.3  2,872.9  2,703.9  3.4  Hot-Rolled Steel Coils  Sales Value (RM million) ..  5,162.1  2,563.7  3,390.9  3,815.2  2,829.6  -14.0  Production Quantity (‘000 Tonnes) ..  2,026.5  1,370.1  1,632.7  1,927.1  1,192.7  -12.4  Cold-Rolled Steel Coils  Sales Value (RM million) ..  2,787.7  1,300.4  1,629.8  1,820.0  1,929.4  -8.8  Production Quantity (‘000 Tonnes) …  949.8  506.5  773.6  694.9  726.1  -6.5  Iron and Steel Sheets  Sales Value (RM million) ..  726.3  421.3  502.1  485.6  340.7  -17.2  Production Quantity (‘000 Tonnes),.  271.4  156.9  298.7  194.6  131.5  -16.6
(Source: Department a/Statistics) • All of the selected rolled iron and steel products showed negative AAGR between 2008 and 20 12 based on sales value.
• As reflected in Section 4.2. the weak performance of the local production of flat steel products, which include hot-rolled and cold-rolled steel coils, sheets and plates, may be attributed to the reduction or exemption of import duties on flat steel products which encouraged the purchase of imported flat steel products to replace locally produced flat steel products.

 

 

4.4 Imports and Exports of Iron and Steel Products • The performance of the Rolled Steel Industry based ou import and export values of iron and steel products in recent years was as follows: Imports and Exports of Iron and Steel Products AAGR 2008-12 2008 2009 2010 2011 2012 % Import Value (RJ.V billion) .. 24.2 15.8 18.2 21.5 22.7 -1.6 Import Quantity (‘000 Tonnes) .. 9,174.4 4,130.2 5,283.9 5,264.0 6,856.8 -7.0 Export Value (RM billion). 10.4 8.8 8.4 10.1 9.9 -1.3 Export Quantity (‘000 Tonnes) .. 2,967.2 3,213.7 2,822.9 3,379.2 3,206.4 2.0 (Source: Department o/Statistics) 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • In 2012, import value and export value of iron and steel products amounted to RM22.7 billion and RM9.9 billion respectively. Between 2008 and 2012, the import value of iron and steel products decreased at an AAGR of 1.6%. Based on quantity, imports of iron and steel products registered a negative AAGR of 7.0% between 2008 and 2012.
• Between 2008 and 20 J2, the export value of iron and steel products recorded a negative AAGR of 1.3%. In terms of quantity, exports of iron and steel products grew at an AAGR of2.0% between 2008 and 2012.

 

4.5 Imports and Exports of Selected Rolled Iron and Steel Products • Growth in imports and exports of rolled iron and steel products signifies an increase in local and external demand for these products. In turn, this would benefit operators that import these products to expand their product portfolio and operators that service overseas markets.
• The performance of the Rolled Steel Industry based on import and export values of selected rolled iron and steel products in recent years was as follows:

Imports and Exports of Selected Rolled Iron and Steel Products AAGR 2008-12 2008 2009 2010 2011 2012 % Flat-Rolled Products Import Value (RM billion) .. 11.7 7.7 10.2 10.8 10.2 -3.4 Import Quantity (‘000 Tonnes) .. 2,991.4 2,432.0 3,116.1 2,655.5 2,927.8 -0.5 Export Value (RM billion) .. 3.1 1.7 2.0 2.1 1.7 -13.2 Export Quantity (‘000 Tonnes) .. 797.7 531.0 516.7 487.7 390.5 -16.4 Bars. Rods, Angles. Shapes and Sections· Import Value (RM billion) ……. 3.3 2.1 3.0 3.6 4.4 6.9 Import Quantity (‘000 Tonnes) … 918.4 727.9 1,060.2 1,019.2 1,380.1 10.7 Export Value (RM billion) .. 1.8 1.2 1.2 1.1 08 -18.5 Export Quantity (‘000 Tonnes) .. 503.3 579.7 507.6 408.0 294.8 1 -12.5 Note: * Include sheet piling. (Source: Department ofStatistics) • The import value and export value of flat-roBed iron and steel products, and bars, rods, angles, shapes and sections (including sheet piling) of iron and steel declined in 2009. This was in line with the global financial crisis. However, the import and export values of flat-roBed iron and steel products rebounded in 2010 and grew further in 20 II.
• In 2011, the growth in the import value of flat-roBed iron and steel products was in line with the growth in user industries primarily those in the manufacturing sector. The growth in 2011 for the export value of flat-roBed iron and steel products was primarily due to an increase in exports of these respective products to the three largest countries namely Indonesia, Singapore and Thailand.

Leon Fuat Berhad Page 90f29 Industry Assessment 101 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • On the other hand, import value of bars, rods, angles, shapes and sections (including sheet piling) of iron and steel recovered in 2010 while export value of these products remained fairly constant in 2010 and declined to RMI.l billion in 2011. The decline in export value was primarily due to a drop in export to Vietnam from RM444.0 million in 2010 to RMl72.6 million in 2011. The export value of bars, rods, angles, shapes and sections (including sheet piling) of iron and steel declined further to RMO.8 billion in 2012, primarily due to a decrease in demand from the five largest export countries for these respective products comprising Indonesia, Singapore, Thailand, Australia and Vietnam.
• Between 2008 and 2012, the quantity of imports offlat-rolIed iron and steel products recorded a negative AAGR of 0.5% while imports of bars, rods, angles, shapes and sections (including sheet piling) of iron and steel grew at an AAGR of 10.7%. On the other hand, the quantity of exports of flat-rolIed iron and steel products, and bars, rods, angles, shapes and sections (including sheet piling) of iron and steel registered negative AAGR of 16.4% and 12.5% respectively between 2008 and 2012.

5. DEMAND DEPENDENCIES • The performance of the RolIed Steel Industry is mainly dependent on its major user industries. Some of the major user industries of rolled steel products include the folIowing: Automotive; Construction; Electrical and electronics; Manufacturing.
5.1 Automotive Sector Automotive Sector Indicators AAGR  2008-12  2008  2009  2010  2011  2012  %  Number of Motor Vehicles  Produced and Assembled  (‘000 Units) ………………………….  530.8  489.3  567.7  5335  569.6  1.8  Sales Value of the  Manufacture of Motor  Vehicles (RA1 billion)…………….  15.7  13.8  20.5  17.3  18.5  4.2
(Sources: Department ofStatistics, Malaysian Automotive Association) • Between 2008 and 2012, the number of motor vehicles produced and assembled, and sales value of the manufacture of motor vehicles grew at an AAGR of 1.8% and 4.2% respectively. Leon Fuat Berhad Page 10 of29 Industry Assessment 102 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Generally, the automotive sector uses rolled flat products, therefore continuing growth in this indnstry sector will fuel demand for these types of steel products. 5.2 Construction Sector Construction Sector Indicator AAGR  2008-12  2008  2009  2010  2011  2012  %  Nominal GDP (RM billion) …..  21.2  23.2  25.9  28.3  34.9  13.3
(Source: Bank Negara Malaysia) • The nominal GDP of the construction sector amounted to RM34.9 billion in 2012 with an AAGR of 13.3% between 2008 and 2012.
• As the construction sector is one of the key user-industries for rolled long steel products, growth in this industry in Malaysia would continue to generate demand for these types of steel products.

5.3 Electrical and Electronics Sector Imports and Exports of Electrical and Electronic Products AAGR 2008-12 2008 2009 2010 2011 2012 % Import Value…………. 189.6 159.3 189.4 178.1 175.0 -2.0 Export Value………….. 255.4 227.8 249.9 237.3 231.2 -2.5 Note: All units in RM billion except percentages. (Sources: Department o/Statistics, Ministry of International Trade and Industry) • The electrical and electronics sector is Malaysia’s largest export oriented sector. In 2012, imports and exports of electrical and electronic products amounted to RM175.0 billion and RM231.2 billion respectively.
• Between 2008 and 2012, the electrical and electronics sector recorded negative AAGR of 2.0% and 2.5% based on import and export values respectively. Generally, the electrical and electronics sector uses rolled flat products.

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 5.4 Manufacturing Sector Sales Value of the Manufacturing Sector AAGR  2008-12  2008  2009  2010  20tt  2012  %  Sales Value (RM billion) ..  579.3  469.4  536.5  590.1  622.3  1.8
(Source: Department a/Statistics) • The manufacturing sector is large and this is supported by sales value of RM622.3 billion in 2012. This sector grew at an AAGR of 1.8% between 2008 and 2012.
• Some activities within the manufacturing sector have a direct impact on the Rolled Steel Industry. These activities, which involves the conversion of rolled steel products into secondary or finished steel products, include the following:

Sales Value of Selected Manufacturing Activities AAGR 2008-12 2008 2009 2010 2011 2012 % Manufacture of Structural Metal Products .. 1.5 1.7 1.5 1.9 2.0 7.6 Manufacture of Tanks, Reservoirs and Containers of Metals.. 1.0 0.7 0.7 0.9 0.8 -6.6 Forging, Pressing, Stamping and Roll-Fanning Metal via Powder Metallurgy Process.. 2.7 2.1 2.2 2.2 2.5 -1.5 Manufacture of Tin Cans and Metal Boxes 2.0 2.0 1.9 2.0 2.1 1.0 Manufacture of Wires, Wire Products and Metal Fasteners.. 4.2 3.4 3.8 4. I 4.0 -I.l Manufacture of Other Fabricated Metal Products, Not Elsewhere Classified* . 1.0 1.1 1.1 1.4 2.0 Notes: All units in RA1 billion except percentages; * Includes, among others, sales, vaults, furnaces, stoves and metal sanitary ware. (Source: Department a/Statistics) • Generally, the manufacturing sector uses mostly flat-rolled steel products. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 5.5 Global Prices of Steel Products • The global prices of steel products would affect the demand for rolled steel products, whereby a sustained high global price of steel products may result in lower demand for the said products including rolled steel products. World Prices of Steel Products World Prices of Carbon Steel Products World Prices of Stainless S~l Products 1,000 7,000-Flat Products -Grade 304 long Products , -‘Grilde316 900 6,000 •c c 800 ~•c ~ 700 0
~ 800
500 2,000 Dec,09 Dec,10 Dec-09 Ifl>c-10 Oec-11 Dec-12 AS:oItnEi¢ii’tritii!t Flat Products (USD Per Tonne) 664 L~~!rC;d’~’ei~ij,S’D’P~!i~~e) ‘–~~
~~ii~~~~I~f~~’~~i’~~r’-J.·.·.=.c._·cc••.J Note,’ Grade 304 and Grade 316 are the most common stainless steel grades in the world World Prices ofSelecllld Carbon Stllel Products 1,200 .. Hot-Rolled Coils .-Hot Rolled Plales .. -Cokl-Rolleu Coils
400 Oer–09 D<tc-10 [Aidii~~f-:;::;’~~’~~’ Hot-RQlIed Colis (USD PeT Tonne) “Hot:Roil;;l’ipllrte$(USDPerTcnn~) iCOld’RQfled CQfls (USD Per Tonne)
(Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd) 6. COMPETITIVE ANALYSIS 6.1 Nature of Competition in the Industry • In general, operators in the Rolled Steel Industry in Malaysia face normal competitive conditions, which is similar to a free enterprise environment characterised by the following: There are no undue Government regulations or licensing requirements; The industry is not dominated by a single or small number of operators; Operators may enter and leave the industry freely; No single or small group of operators is large enough to dictate pricing,
7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • In such an environment, the industry is subjected to nonnal supply and demand conditions moderated by the price mechanism. 6.2 Factors of Competition • As with most free enterprise environment, the factors that are used to compete and to
differentiate one operator from another include the following: Product and service quality; Range ofproducts; Processing capabilities; Economies of scale; Track record and market reputation.
• Product and Service Quality
Product and service quality is an important factor of competition for operators in the Rolled Steel Industry. As steel products are major raw materials used in various key economic sectors including the automotive, manufacturing and construction sectors, the quality of the rolled steel products would have an impact on the quality of secondary and fmished steel products used in a variety ofproducts and applications.
• Range of Products
Operators that provide a wide range of steel products would have an advantage over other operators. An operator that provides options for steel products, in tenns of types, shapes and sizes, is in a better position to attract and cater to the diverse customer preferences and requirements.
• Processing Capabilities
Processing of steel products requires various types of machinery. They include slitting, shearing, levelling, bending, profiling and polishing machinery. Each type of machinery also has various specifications to handle different specifications of rolled flat steel products. For example, operators will require larger and higher specification machinery to slit or shear wider width and thicker gauge rolled flat steel. Also, different specifications of polishing machinery are required to achieve different types of finishing including mirror, matte, brush and satin finish. Operators undertaking profiling will need to use appropriate machinery including computer numerical control oxy-gas, plasma or waterjet cutting machinery. As such, operators that have a wide range of machinery will be in a better position to meet the diverse needs of a larger base of customers to achieve higher processing sales.
• Economies of Scale

Operators involved in trading and/or.processing of rolled steel products that have the capabilities to purchase these products in bulk would have stronger negotiation power to obtain better commercial tenns from suppliers in terms of product costs, credit tenns and other aspects. Operators would then be able to lower or maintain their selling prices to attract customers. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Track Record and Market Reputation Track record and market reputation are important for operators in the Rolled Steel Industry. Customers that require assurance of product and service quality would normally select operators with an established market reputation and track record. 6.3 Operators in the Industry • In 2012, there were approximately 30 mannfacturers of rolled steel products. Some of the manufacturers of rolled steel products in Malaysia include the following (listed in alphabetical order): Amsteel Mills Sdn Bhd (part of Lion Industries Corporation Berhad); Antara Steel Mills Sdn Bhd (part of Lion Industries Corporation Berhad); Ann Joo Resources Berhad; Kinsteel Bhd; Malaysia Steel Works (KL) Bhd; Megasteel Sdn Bhd (part of Lion Corporation Berhad); Melewar Industrial Group Berhad; Southern Steel Berhad.
Note: This is not an exhaustive list. (Source: Vital Factor Consulting Sdn Bhd)
• Some of the operators that are involved in trading of rolled steel products in Malaysia include the following (listed in alphabetical order): Amsteel Mills Sdn Bhd (part of Lion Industries Corporation Berhad); Ann Joo Resources Berhad; Ana Yak Siang Hardware Sdn Bhd (part of AYS Ventures Berhad); Aspac Alliance Steels Sdn Bhd; Edaran Maju-Muda Sdn Bhd; Lee Chuan Guan Steel Sdn Bhd; Leon Fuat Group; SMPC Corporation Bhd; Tashin Steel Sdn Bhd (part ofPrestar Resources Berhad); WZ Steel Berhad; Yontai Hardware Sdn Bhd; Zinco Manufacturing Sdn Bhd. Note: This is not an exhaustive list. (Source: Vital Factor Consulting Sdn Bhd)
• In 2012, there were approximately 50 companies involved in steel processing. They include operators providing slitting, shearing and cutting services to external customers as well as sell products that they had slit, sheared or cut. However, there may be companies who undertake in~house slitting, shearing and cutting exclusively for their internal use. Such companies are not included in the above. Some of the operators that provide steel processing services, including slitting, shearing or cutting, in Malaysia include the following (listed in alphabetical order): Ann Joo Resources Berhad; Bright Steel Service Centre Sdn Bhd (part of Lion Corporation Berhad); Chao Bee Metal Industries Berhad; 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions JFE Shoji Steel Malaysia Sdn Bhd; Leon Fuat Group; Murni Plus Industry Sdn Bhd; Nicom Steel Centre (Malaysia) Sdn Bhd; SMPC Corporation Bhd; Sumiputeh Steel Centre Sdn Bhd; Tashin Steel Sdn Bhd (part of Prestar Resources Berhad); Zinco Manufacturing Sdn Bhd.
Note: This is not an exhaustive list. (Source: Vital Factor Consulting Sdn Bhd) • In 2012, the total estimated revenue of the 50 companies involved in steel processing was approximately RM5.8 ~illion. However it must be noted that the estimated total revenue of these 50 companies included revenue generated from steel processing activities as well as other business activities.
• Based on Leon Fuat Group’s revenue of RM274 million for processing of steel

products for FYE 31 December 2012, the Group represented approximately 5% of the total estimated revenue of the 50 companies involved in steel processing. 7. GOVERNMENT REGULATIONS AND INCENTIVES 7.1 Government Legislations and Policies • Some of the regulations and policies applicable to the Rolled Steel Industry are listed below: 7.1.1 Manufacturing Licence • Application of a manufacturing licence under the Industrial Coordination Act 1975 is mandatory for companies with shareholders’ funds of RM2.5 million or more, or engaging 75 or more full-tbne paid employees.
• According to the Malaysian Investment Development Authority, the provision of steel processing services requires a manufacturing licence as these services are classified as

metal fabrication activities which fall under the wider umbrella of manufacturing activities. (Source: Malaysian Investment Development Authority) 7.1.2 Import Licence • Operators that wish to import certain iron and steel products are required to obtain an import licence (also known as approved permit) from the Ministry of International Trade and Industry. Leon Fuat Berhad Page 16 of29 Industry Assessment 108 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Some of the iron and steel products that require import licences are as follows: Flat-rolled iron or non-alloy steel products -hot-rolled, not clad, plated or coated -of a width of 600 mm or more; Flat-rolled iron or non-alloy steel products -cold-rolled (cold-reduced), not clad, plated or coated -ofa width of 600 rum or more; Flat-rolled iron or non-alloy steel products -clad, plated or coated -of a width of600 mm or more; Flat-rolled iron or non-alloy steel products -not clad, plated or coated -of a width of less than 600 rum; Seamless iron (other than cast iron) or steel tubes, pipes and hollow profiles.
(Source: Ministry ofInternational Trade and Industry) 7.1.3 Import Duty • Generally, most rolled steel products are subjected to import duty requirements. • On 1″ August 2009, the Government introduced regulatory changes to the iron and steel industry by implementing the following measures: Import duty reduction for flat steel products from 50% to 25%. This will be further reduced to a range between 0% and 10% by 2018; Import duty exemption for flat steel products that meet the following criteria: used as raw materials for the production of finished goods for the export market; are products for which grades and specifications are not produced locally; used as raw materials for non-dutiable finished goods. • In view of the above measures, the import duty on flat steel products of iron and non­alloy steel has been reduced to a range between 10% and 20% as at 31 January 2013. • The Ministry of International Trade and Industry has announced that starting from 1 February 2013, 18 grades of hot-rolled steel coils are no longer eligible for import duty exemptions with some exceptions such as raw materials used for the production of finished goods for the export market and non-dutiable fmished goods. These 18 grades of hot-rolled steel coils are available through local production. This is part of the Malaysian Government’s intention to enforce mandatory standards of hot-rolled steel coils to prevent below-par products from entering the market and prevent unfair trade practices. (Sources: Ministry of International Trade and Industry, Royal Malaysian Customs Department) 7. INDUSTRY OVERVIEW (Cont’d) o
7.1.4 7.2 7.2.1 7.3 8. 8.1 VITAL FACTOR CONSULTING Creating Winning Business Solutions Scheduled Controlled Goods • Under the Control of Supplies Regulations 1974, operators involved in the wholesale of mild steel round bars, which are categorised as scheduled controlled goods, are required to obtain a wholesale licence. (Source: lv/inistry ofDomestic Trade, Co-operatives andConsumerism) Government Incentives Import Duty and/or Sales Tax Exemption on Machinery, Equipment, Spare Parts and Consumables • A company that has a manufacturjng licence may submit an application for an exemption from import duty and/or sales tax on machinery, equipment, spare parts and consumables to the Malaysian Investment Development Authority (MlDA) under the following conditions: Machinery, equipment, spare parts and conswnables which are not produced locally, and are imported directly by manufacturing and agricultural sectors; Machinery, equipment, spare parts and consumables which are purchased from local manufacturers. (Source: Malaysian Investment Development Authority) Environmental Regulations • Operators that are involved in processing steel products commonly generate waste in the form of steel scrap. This does not result in any environmental impact as steel scrap may be collected and sold to scrap dealers for recycling. BARRIERS TO ENTRY • As Leon Fuat Group’s principal business activities are in trading and processing of rolled long and flat steel products, this section focuses on the barriers to entry for trading and processing of steel products. Capital and Set-up Costs • The barriers to entry for new entrants that wish to undertake trading and processing of steel products based on capital requirements (excluding land and building) are low to moderate. • The capital cost of setting-up a small-scale establishment in the trading and processing of steel products would be approximately RM5 million (excluding land and building). This would include: I shearing machine; 1 slitting machine; I bandsaw machine; 2 -3 forklift.
7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions However, this does not include the cost of purchasing stocks and providing credit tenns to customers. Purchases of stocks and the provision of credit terms may be up to RMlO million for a small operation. • An establishment of this size is estimated to generate approximately RM20 million per year in revenue.
• However, small establishments may face difficulties in competing against larger establishments that are eqnipped to snpply a range of steel prodncts inclnding varions types, shapes and sizes, and also benefit from economies of scale.
• As a result, a much higher capital and set-up costs would be required to enable higher sales to be obtained, and for the establishment to be able to benefit from economies of scale.

8.2 Technical Expertise • The need for technical expertise creates a low to moderate barrier to entry for new entrants particularly in the provision of steel processing services. Operators who are involved in the provision of steel processing services require some technical skills, knowledge and experience in the following areas:
Product shape, size and thickness; Setting the technical specifications; Calibrating the steel processing equipment to achieve maximum production efficiency; Maintenance of the equipment.

• As such, technical expertise required for processing of steel products would pose some barriers to entry for new entrants.

8.3 Track Record and Market Reputation • An established track record and market reputation creates a moderate barrier to entry for new entrants who wish to enter the Rolled Steel Industry. Operators with a proven track record and market reputation would have an advantage over new entrants as these factors provide an indication of the fonner’s ability to provide quality products and services. 9. THREAT OF SUBSTITUTES • There are alternative materials that can be used as substitutes for steel, including non­ferrous metals such as aluminium and titanium, and non-metals such as plastic and wood.
• However, based on current technology, steel would continue to dominate as the material of choice for most of its current applications. This is mainly substantiated by the following reasons:

Leon Fuat Berhad Page 19 0/29 Industry Assessment III 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Steel has been used for a very long time and its properties and applications are well understood, tested and proven; The properties of steel include wear resistance and high mechanical strength; Steel can be recycled and reused; Some of the alternative materials have not been fully tested and understood, and there may be some reluctance on the part of operators to try them out; While some alternative materials could perform better than steel, in most cases their costs may be higher.
• As such, while threats of substitute exist for some applications, generally the threat is low as each type of material has its own special properties, applications and advantages. 10. RELIANCE AND VULNERABILITY TO IMPORTS • The main materials required by operators that are involved in trading and/or processing rolled and secondary steel products are rolled steel products. Rolled steel product refers to primary steel products that have undergone hot-rolling and/or cold­rolling processes. Examples of rolled steel products include hot-rolled and cold­rolled flat and long products such as coils, plates, sheets/strips, bars, rounds, sections and wire rods.
• In Malaysia, Megasteel Sdn Bhd (Megasteel), which is part of Lion Corporation Berhad, is the country’s sole producer of hot-rolled steel coils. Hot-rolled steel coil refers to a coil of steel that has passed through a pair of rollers to reduce its thickness at high temperatures above its recrystallisation temperature. Megasteel does not produce an exhaustive range of hot-rolled coils. Hence, local operators are reliant on imports of hot-rolled coils for grades and specifications that are not produced locally.
• In addition, Megasteel may not be able to meet all the demands for hot-rolled coils and subsequent downstream products derived from hot-rolled coils like cold-rolled coils, plates and sheets. This is substantiated by the fact that in 2012, approximately 3 million tonnes of flat-rolled steel products, which include hot and cold-rolled coils, plates and sheets, were imported. In 2012, Japan was the largest source of imports of flat-rolled steel products based on quantity, representing approximately 26% of Malaysia’s total imports of flat-rolled steel products. This was followed by Taiwan, South Korea and China, which accounted for approximately 22%, 19% and 17% respectively (Source: Department ofStatistics). Thus, local operators are reliant on imports to supplement local production, which amounted to approximately 2 million tonnes in Malaysia in 2012.
• As for rolled long steel products, there are a number of producers in Malaysia such as Amsteel Mills Sdn Bhd and Antara Steel Mills Sdn Bhd (both are part of Lion Industries Corporation Berhad), Kinsteel Bhd and Malaysia Steel Works (KL) Bhd. Hence, local operators are not over-reliant on imports of rolled long steel products. This is substantiated by the fact that local production of long steel products, which include bars and rods, amounted to 2.7 million tonnes while imports amounted to 1.4 million tonnes in 2012. (Source: Department ofStatistics)

Leon Fuat Berhad Page 20 0/29 Industry Assessment 112 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions II. INDUSTRY PROSPECTS AND OUTLOOK • The outlook of the Rolled Steel Industry is dependent on the following factors: Perfonnance of the Rolled Steel Industry; Performance of main user industries; Economic conditions; Global prices of steel products; Government initiatives. 11.1 Performance of the Rolled Steel Industry • The perfonnance of the Rolled Steel Industry in recent years was as follows: Local Production of Rolled Steel Products AAGR 2007-11 (%) Local Production of Hot-Rolled Long Steel Products.. 0.5 Local Production of Hot-Rolled Flat Steel Products… -10.2 (Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd) Imports and Exports of Rolled Steel Products AAGR 2008-12 (%) Imports of Bars, Rods, Angles, Shapes and Sections… 6.9 Imports of Flat-Rolled Iron and Steel Products.. -3.4 Exports of Bars, Rods, Angles, Shapes and Sections… -18.5 Exports of Flat-Rolled Iron and Steel Products.. -13.2 (Source: Department ofStatistics) • Over the years, Malaysia had experienced a decline in production of hot-rolled flat steel products, which may have affected exports of related products. 11.2 Performance of Main User Industries • The outlook of the Rolled Steel Industry is dependent on the perfonnance of its main user industries. Growth in the perfonnance ofthe main user industries will also have a direct and positive flow-on effect to the Rolled Steel Industry.
• The perfonnance ofthe main user industries in recent years was as follows:

AAGR of Main User Industries AAGR 2008-12 (%) Automotive* . 4.2 Construction.. 13.3 Manufacturing.. 1.8 Imports ofE&E Products .. -2.0 Leon Fuat Berhad Page 21 af29 Industry Assessment 113 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions AAGR 2008-12 (%) Exports ofE&E Products…………………………………….. -2.5 Notes: * Based on sales value; E&E = Electrical and Electronic. (Sources: Bank Negara Malaysia, Department ofStatistics, Ministry ofInternational Trade and Industry) 11.3 Economic Conditions • A growing economy provides the impetus for private and public spending, which will have a positive flow-on effect on the Rolled Steel Industry. Between 2008 and 2012, real GDP of the Malaysian economy grew by an AAGRof4.0%; In 2012, the Malaysian economy registered a real GDP growth of 5.6%; As for 2013, real GDP for Malaysia is forecasted to grow between 5.0% and 6.0%. (Source: Bank Negara Malaysia) 11.4 Global Prices of Steel Products • The global prices of selected steel products in recent years were as follows: The global price of flat carbon steel products increased from USD 664 per tonne in December 2009 to USD 733 per tonne in December 2012, thereby increasing at an AAGR of 3.4’%; The global price of long carbon steel products increased from USD 589 per tonne in December 2009 to USD 702 per tonne in December 2012, thereby increasing at an AAGR of6.0%; The global price of stainless steel products (Grade 304) declined from USD 3,053 per tonne in December 2009 to USD 2,920 per tonne in December 2012, thereby registering a negative AAGR of 1.5%; The global price of stainless steel products (Grade 316) declined from USD 4,325 per tonne in December 2009 to USD 4,159 per tonne in December 2012, thereby registering a negative AAGR of 1.3%. (Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd) 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Fluctuations in global prices of steel products would affect the demand for rolled steel products whereby an increase in global prices of steel products may lead to a decline in demand for the said products in general including rolled steel products. A sustained increase in global steel prices may in turn affect operators who are involved in manufacturing, trading and processing of carbon steel and stainless steel. 11.5 Government Initiatives • Various initiatives undertaken by the Government would benefit operators within the Rolled Steel Industry either directly or indirectly resulting from growth opportunities provided to the user industries. • Some of the initiatives introduced by the Government include the following: On-going development of the five regional economic corridors -Iskandar Malaysia, Northern Corridor Economic Region, East Coast Economic Region, Sabah Development Corridor and Sarawak Corridor -signals a potential growth in the economy and property market, which would create demand for construction materials including rolled steel products, in these regions. Under the 10′” Malaysia Plan, a number of development projects have been identified to be carried out during 2011 to 2015. Some of the development projects presented under the 10′” Malaysia Plan include the following: Construction of an integrated transport terminal (ITT) in Gombak. Selangor; Development of five Universiti Teknologi MARA (UiTM) branch
campuses; A total of 78,000 units of new affordable public housing units would be constructed by the Government; Implementation of a mass rapid transit (MRT) system in Kuala Lumpur. In the 2013 Budget, various initiatives have been identified. Some of these initiatives include the following: RMI billion is to be added to the Special Fund for the Building. Improvement and Maintenance of Schools project, which is in addition to the RMI billion allocated for this project in the 2012 Budget; Allocation of RMl.9 billion for the construction of 123,000 units of affordable houses; RMIOO million is allocated to the Ministry of Housing and Local Government for the rehabilitation of 30 abandoned housing projects. Leon Fuat Berhad Page 23 oJ29 Industry Assessment 115 7. INDUSTRY OVERVIEW (Cont’d) o
12. 12.1 12.2 VITAL FACTOR CONSULTING Creating Winning Business Solutions Some of the plans that have been eannarked under the Economic Transformation Programme (ETP). which is a progressive framework identifying various economic sectors and strategies in transfonning Malaysia into a high-income and developed nation by 2020, include the following: The Greater Kuala Lumpur/Klang Valley (KLlKV) development plan which contains various projects that are aimed at, among others, attracting multinational corporations (MNC), revitalising certain locations to enhance attractiveness for residential and commercial purposes, and improving pubHc transportation network systems; Under the electrical and electronics banner, some of the aims include growing automation equipment manufacturing, building electricity transmission and distribution companies, and building an electrical home appliance manufacturing hub. (Sources: loth Malaysia Plan, 2013 Budget, Economic Transformation Programme, Valuation and Property Services Department) • These initiatives would provide growth opportunities for user industries such as the electrical and electronics, manufacturing, construction and infrastructure sectors, which would have a positive flow-on effect to the Rolled Steel Industry. THREATS AND RISK ANALYSIS Global Economy Slowdown • Any prolonged and/or widespread economic slowdown would affect consumer and business confidence and spending. The increasing uncertainty over the global and local economies would further reduce the level of investment in the private sector. This slowdown would ultimately affect the demand for rolled steel products. Mitigating Factors • Various initiatives introduced by the Government such as the 10th Malaysia Plan and ETP will continue to provide opportunities for the Rolled Steel Industry, particularly for operators that service users operating in the National Key Economic Areas (NKEA) sectors such as the electrical and electronic sector.
• These initiatives are expected to generate domestic business activities and domestic consumption, which will in tum help counter the slowdown in the local economy.

Fluctuations in Prices of Steel Products • As steel materials including rolled flat and long steel products, are commodities, the prices of these materials are subject to global market price fluctuations. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • Short-term fluctuating prices create significant problems as operators cannot effectively plan and manage their stocks and product pricing. This is especially problematic when the actual purchase price of raw materials differs from the estimated price when costing processed products. • In addition, the following conditions would also have a negative impact on the Rolled Steel Industry: Increases in the price of steel materials are not easily passed onto customers. Operators may not be competitive if their prices are set too high, or may obtain a low profit margin iftheir prices are set too low; A prolonged decrease in the price of these materials may have a negative
effect on operators by eroding the value of their stocks. Mitigating Factors • Operators that are in a strong financial position may be able to purchase and maintain stocks of key materials to create a cushion against price fluctuations.
• As these materials are commodities, therefore subjected to world prices, all operators that use these materials are equally affected.

12.3 Slowdown in the Manufacturing and Construction Sectors • The manufacturing sector is a key user industry of flat steel products, while the construction sector is a key user industry of long steel products. Hence, any downturn in these sectors will have a negative impact on the overall Rolled Steel Industry. Mitigating Factors • Companies that supply both flat and long steel products would be in a better position to mitigate the slowdown in anyone of these sectors compared to companies that primarily provide either flat or long steel products. • In addition, both the manufacturing and construction sectors are very large. In 2012, GDP of the manufacturing sector amounted to RM227.5 billion while GDP of the construction sector amounted to R.M34.9 billion (Source: Bank Negara Malaysia). As such, the large size of each sector would provide some cushioning effect to operators during a slowdown. 12.4 Regnlatory Changes to the Steel Industry • Regulatory changes to the overall Steel Industry such as the possible imposition of the following trade restrictions may have an impact on the Rolled Steel Industry: Steel products that are currently exempted from import and export duties may have duties imposed on them. Some of the steel products that are currently exempted from import and export duties include the following: 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions Flat steel products used as raw materials for the production of finished goods for the export market; Flat steel products for which grades and specifications are not produced locally; Flat steel products used as raw materials for non-dutiable finished
goods; All rolled steel products are exempted from export duty requirements. Steel products that are currently subjected to duties, may have additional duties imposed. • The imposition of such restrictions on rolled steel products will have a negative impact on operators within the industry. This is because local operators may have to import affected steel products at higher prices. Mitigating Factors • The Malaysian govermnent had announced in January 2013 the removal of import duty exemptions on 18 grades of hot-rolled steel coils except for those used as raw materials in the production of finished goods for the export market and non-dutiable finished goods starting from I February 2013. Operators, particularly manufacturers that have previously enjoyed the import duty exemption for the 18 respective grades of hot-rolled steel coils would be affected by the removal of these import duty exemptions. However, this policy is less likely to impact on operators who are in the trading of rolled steel products as they were not entitled to previous import duty exemptions on these 18 grades of steel. 12.5 Foreign Exchange Risks • Fluctuations in foreign exchange rates will have an impact on the prices of steel products in overseas markets. This may impact on the profitability of operators within the Rolled Steel Industry. • An unfavourable foreign exchange movement against the Ringgit would either reduce demand, as prices would need to be increased, or cause operators to suffer a drop in profits ifthey decide to absorb the price increases. Mitigating Factors • The exchange rate of the Ringgit currently operates on a managed float following the removal of the exchange rate peg to the US Dollar on 21 July 2005. Bank Negara Malaysia monitors the value of the Ringgit relative to a trade-weighted index of Malaysia’s major trading partners. Promoting stability of the exchange rate remains a primary policy objective. (Source: Bank Negaro Malaysia)
• Bank Negara Malaysia’s primary policy objective of promoting the stability of the

exchange rate will provide some mitigation against foreign currency risk. 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions • An operator that earns revenue denominated in a foreign currency may mitigate against foreign exchange risk by using its foreign currency earnings to pay for purchases denominated in the same foreign currency. This could provide some form of natural hedging against foreign exchange fluctuations. 12.6 Competition from Local and Foreign Operators • There are various types of operators in the Rolled Steel Industry in Malaysia, including operators involved in manufacturing, trading and processing of rolled steel products. As manufacturing, trading and processing commonly involve the use and supply of similar types of materials, these operators would to a certain extent compete with one another for the same groups of customers. • Operators of rolled steel products may also compete with foreign operators through imports: In 2012, Japan was the largest source of imports of flat-rolled steel products based on quantity, representing approximately 26% of Malaysia’s total imports of flat-rolled steel products. This was followed by Taiwan, South Korea and China, which accounted for approximately 22%, 19% and 17% respectively. As for rolled long steel products, China was the largest source of imports based on quantity, representing approximately 47% of Malaysia’s total imports of rolled long steel products in 2012. This was followed by South Korea, which accounted for approximately 20%, while Japan and Thailand accounted for approximately 9% each. • In 2010, there were 629 manufacturers of basic iron and steel products in Malaysia (Source: Department of Statistics). The total number of operators would increase considerably if traders and processors were to be included. Manufacturers of basic iron and steel products mainly produce primary, rolled and secondary products, while processors mainly undertake value-added services such as slitting, shearing, cutting, bending, levelling, profiling, polishing, galvanising, tin­plating, pre-painting and coating. • The large number of operators would increase competition within the industry, which may erode margins. Mitigating Factor • As the Rolled Steel Industry in Malaysia, with an estimated market size of RM40 billion in 2011 based on apparent consumption, services a large base of user industries, there are sufficient business opportunities and demand to sustain a fairly large number of operators in the industry. 7. INDUSlRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 13. DRIVERS OF GROWTH • Some of the drivers ofgrowth for the Rolled Steel Industry are as follows: Socio-economic growth such as GDP growth will drive business and development activities such as construction and manufacturing, which will in turn increase demand for rolled steel products. Government initiatives as reflected in the 10′” Malaysia Plan and ETP will continue to provide growth opportunities for operators within the Rolled Steel Industry via the implementation of various development plans that would benefit the user industries, such as the construction and manufacturing sectors. Liberalisation of the overall Steel Industry will encourage operators to enhance their competitiveness. Liberalisation encourages not only improvements in product and service quality, but also encourages operators to address international markets. Growth of user industries represented by increased business activities for operators in industries such as construction and manufacturing. This will provide the impetus for growth in the Rolled Steel Industry. 14. CRITICAL SUCCESS FACTORS • Continuou~ supply of materials: The continuous supply of steel products is critical for operators that are involved in trading and processing of steel products to ensure uninterrupted supply.
• Range of products: Operators that are able to supply a range of steel products in terms of types, shapes and sizes are in a better position to cater to diverse customer requirements.
• Quality of products and services: To ensure business sustainability, operators must be able to continually meet and deliver quality products and services to their customers. Operators that have obtained fonnal quality accreditations are able to provide proof of product or service quality, which would provide assurance to their customers.
• Track record and market reputation: Operators with an established track record and market reputation would be in a better position to win the confidence and trust of potential customers and, at the Same time, create customer loyalty to sustain and grow their business.

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 15. MARKET SIZE AND SHARE 15.1 Market Size • In 20 II, market size of the Rolled Steel Industry in Malaysia based on apparent consumption was estimated at RM40 billion. (Source: Vital Factor Consulting Sdn Bhd) Note: Apparent consumption is calculated based on production plus imports less exports. 15.2 Market Share • In 20 II, Leon Fuat Group had a market share of approximately 1% of the Rolled Steel Industry based on the Group’s revenue from trading and processing of rolled steel products. We, Vital Factor Consulting Sdn Bhd, have prepared this report in an independent and objective manner and have taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, and primary market research. OUf assessment is for the overall industry and may not necessarily reflect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers of this document. This report should not be taken as a recommendation to buy or not to buy the shares of any company. Yours sincerely
Wooi Tan Managing Director

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