Steely Resolve: Millcon Steel Industries

The volume of steel consumed worldwide has been the barometer for measuring economic development. This is because steel is a basic raw material both for the construction industry and for many industrial goods. Steel consumption increases when economies grow due to government investment in infrastructure, housing and transport and corporation investment in factories. Conversely, economic recession typically coincides with a dip in steel production as investments are halted. Furthermore steel grades and stronger alloys are constantly being improved; for example steel rods used as reinforcement material with cement or concrete were improved into ribbed bars then cold twisted deformed bars and now thermo-mechanically treated bars. Technology has also been responsible for shrinking the time needed to transform iron ore to steel to just one day. Steel is the most recycled material in the world, with recycled steel constituting half of steel produced in OECD countries as even after decades of use it can be sent back to furnaces as scrap to be remade into new steel. Steel is also hardly labour-intensive with about 1,000 workers producing 1 million tonnes. Steel as a basic industry generates significant upstream and downstream employment with around 4 persons employed in other industries per worker in the steel industry. For all its qualities, steel is now referred to as a sunset industry in developed countries, yet in developing countries it is mostly just a dawn. One country showing some steely resolve is Thailand where the steel industry has been buoyant and the party looks like it will continue for some time with the commencement of the ASEAN economic community in 2015.

The Thai steel industry started from the steel re-rolling business, which still dominates Thailand today where rolled steel products account for 21.4 million tonnes per year and semi-rolled products account for 8.8 million tonnes per year. Thailand imported all raw material, semis and finished products for a total of 14.96 million tonnes in 2011. High-grade steel products are typically imported from Japan, South Korea, Taiwan, USA, and Europe, which accounted for 6.59 million tonnes or 45% of overall steel demand. Thailand exported merely 0.73 million tonnes of steel products, with 53% of that going to ASEAN nations. Thailand’s overall steel demand has increased on average 7.3% per year in the past 12 years. 54% of steel is consumed by the construction industry, 16% by the automotive industry, and 13% by machinery and industrial. There are plenty of opportunities in the industries driving steel demand for the steel industry to continue its growth in Thailand.

·         Within construction, massive infrastructure development of the mass transit (MRT) in Bangkok and irrigation systems in Northern Thailand as well as thousands of new condominiums throughout the country are bright spots.

·         Within industry, many Japanese companies are setting a trend of relocating factories to low-cost Thailand and companies generally are investing in new appliances and machinery requiring steel as an input.

·         The automotive industry (Thailand is 8^th largest car exporter worldwide) in particular looks promising with 2.1 million cars being produced in Thailand in 2012 with that number set to rise to 3 million cars by 2015.

·         Steel machinery demand is also projected to increase due to farm machine needs and petrochemical plant needs.

The coming of the AEC in 2015 is expected to support continued Thai steel growth due to rising ASEAN demand, the ongoing THB2 trillion government transport infrastructure investment, and expansion of automotive, construction and machinery sectors. The fact that the ASEAN market is taking its toddler steps towards industrialisation means that there is vast room for growth; ASEAN steel consumption is around 90kg per person per annum compared to OECD countries where it ranges from 200-500kg per person per annum. As such, steel demand from ASEAN nations is expected to increase from 50 million tonnes in 2010 to 200 million tonnes in 2030, a four-fold increase.

One such Thai company that is on course to take advantage of these macroeconomic trends is Millcon Steel Industries, which is Thailand’s second largest steel manufacturer by revenues after multinational Tata Steel’s Thailand operations. The company was founded in 1998 and currently employs around 630 people. They manufacture and distribute steel products, both locally and internationally. Its four main products are concrete steel bars (such as round bars and deformed bars used in the construction industry), high tensile thread steel bars used in construction of high tension work, rolled steels and structural steel products (including hot-rolled coils, cutting products and steel fabrication), and steel pipes used in construction, furniture and spare parts of automotive industries. The company operates two production plants in Bangkok and currently has a market capitalization of around THB3.06 billion. Major institutional investors in Millcon Steel Industries include the Thailand Prosperity Fund II (6.55% share), Aero Sun Investments Limited (6.10%), HSBC Private Bank (3%), and UBS (2.23%). Its production plants utilize machinery and management systems with a Europe standard globally recognized under Automation PLC Rolling Mill and Automation PLC Furnace. The company has also diversified its business to the transport and logistics business under a subsidiary, Million Miles Co Ltd, which provides transportation services to deliver goods for Millcon, enabling them to trim one of their major expenses. Domestically, Millcon Steel Industries has been engaged on several major projects including Suvarnabhumi Airport, Rama VIII bridge, the Bangna-Bangkok Expressway, and the Mass Rapid Transit System. Internationally, they have facilitated construction of the Golden Ear Bridge in Canada, Sutong Bridge in China, Cross City Tunnel in Sydney Australia, and the Sheikh Zayed Bridge in Abu Dhabi.

Millcon Steel Industries is currently trading at THB1.82 on the Bangkok stock exchange.  Revenue has increased steadily from THB9.8 billion in 2008 to THB15.27 billion in 2012. Yet its share price is 25% down from last year due to several years of consecutive losses. Yet these losses are more due to overinvestment rather than structural factors. Millcon Steel Industries invested THB2.9 billion in 2010 on a melting shop to support its long products rolling operations, with capacity of 500,000 tonnes per year. To mitigate dependence on import of raw steel, Millcon initiated the Green Mill Project aimed at producing high-grade raw steel within Thailand. The project has received THB5 billion of financial support from the Thai Board of Investment. The finished products are in high demand from industries such as the automobile industry which require high-grade steel.

Despite the ostensibly negative consecutive losses, there are several positives. The Green Mill Project will be completed this year, enabling local sourcing of high-grade steel as well as more efficient steel production to aid profit margins by a projected 7% this year. Furthermore, revenues should grow 15% this year to around THB16.6 billion due to the elevated rail project in Greater Bangkok and other public infrastructure works as well as an increase in overall steel demand. This is a stock that has long-term potential, especially as the AEC comes into force in 2015 allowing free movement of steel within the 10 ASEAN countries. With the stock around THB1.82 it is a good time to buy into this steel trend and maintain steely resolve as the stock soars to around THB10 by 2015.