Carbon steel fastener maker Chin Well Holdings Bhd has cautioned that it will post lower profits in the financial year ending June 30, 2017 as it struggles with a labour shortage. However, despite the expected drop in profits, the company assures it is not likely to go into the red.
“No matter how bad the economic situation is, we (will) still have profits. It’s just that when the market is good, our profit margin will be higher,” its executive director Tsai Chi Yun tells FocusM
Tsai says despite the challenging economy, the company will remain profitable
She is confident the world’s largest supplier of carbon steel fasteners (nuts and bolts) will remain profitable, mainly backed by its fundamentals, expansion plans into high margin products and strong relationship with its European counterparts
Steel-based players such as Chin Well have been facing various external headwinds for several years such as labour shortages, fluctuations in steel price, the weak economy, decline in orders and an increase in competition from Chinese players.
For the nine months ended March 31, Chin Well’s net profit declined 12.45% to RM41.74 mil from RM47.68 mil a year earlier despite posting higher revenue of RM380.19 mil, up from RM374.79 mil.
Tsai says Chin Well could not accept additional orders and some orders had to be cancelled due to the shortage of labour.
However, she adds that the company has in the recent weeks received approval for new workers and will be able to have enough by the end of September. Chin Well needs 400 workers to ease its production flow. It has about 320 workers at present.
“Currently, we don’t have enough workers to run our factory. They (workers) are switched around to meet production and shipment (orders). Because of the shortage of workers in Malaysia, we have to move a lot of orders to Vietnam. Some customers do not want to buy from Vietnam, that means we lose the orders,” Tsai adds.
Chin Well is also affected by the supply of raw materials. In addition to the current anti-dumping duties, steelmakers also have to pay 13.9% safeguard duty on imported wire rods from China. The wire rods are used as raw material for fasteners.
It will have to pay some RM5 mil for safeguard duty just for Q4FY17. The duty is refundable but Chin Well will only get the rebate in 2018.
The company mainly produces fasteners and wire products. Its wire products comprise gabions (mainly for government projects), fences (mainly for the local market) and wire mesh (mainly for export market).
To manage its raw material supply, Tsai says it is currently looking for new suppliers for wire mesh products, which were previously purchased from China.
It sources the raw materials for its wire products for local consumption from Southern Steel Bhd.
“It is not like we can buy raw materials from any steel mills. There are limited steels mills that we can buy from because of their quality,” Tsai adds.
As for its fastener products, which require high-quality materials, she says Chin Well could not purchase the raw materials from local steel mills. “Currently we buy from Vietnam, Turkey, India and China. China (steel mills) are for items not in the safeguard (duty) range,” she adds.
High margin products
Tsai says Chin Well will be expanding the production of its high margin products in its wire segment such as of fencing, gabions and wire mesh products, with plans to cease the production of galvanised steel wires, which are mainly used as raw material to produce end products. Chin Well’s wire product segment has a production capacity of 4,500 tonnes a month.
“We have plans that in three to five years’ time, Chin Well (wire products segment) will only have downstream, that means we won’t sell galvanised wire anymore,” Tsai adds.
Earlier this year, China introduced a tougher environmental policy, which is expected to result in steelmakers there to incur a higher environmental cost. As a result, there will be a bigger price difference between high quality-manufacturers in China and Chin Well.
While the move is positive for Chin Well, Tsai says that the introduction of the policy will see an increase in price competition, especially if the small and medium factories in China that do not comply with the policy start slashing prices.
This will have an impact on Chin Well’s future earnings, as the Penang-based company’s competitors are mainly from China. Locally, it does not have any direct competitors.
“It is those low quality and price manufacturers, which have no environmental cost, that give us a headache. Consumers in Southeast Asia don’t care that if these manufacturers in China are polluting or not. They are looking for cheap prices.
“This period will be very hard for us because they will reduce prices. They just want to grab as much as possible before the factories close down. However, in the long run, once the factories are shut, we will be happy because all these low-quality items and cheap prices will be gone,” Tsai adds.
Some analysts FocusM
spoke to say that with the environmental policy in place, there will be more merger and acquisition (M&A) activities in China, and this might not bode well for local steel players.
One of them believes with M&A, companies which merge will become bigger and could produce at a lower cost due to economies of scale.
However, Tsai does not foresee an increase in M&A activities in China. Instead, she reckons there will be more bankruptcy and closing down of factories in China.
According to China Iron and Steel Association, nearly 75% of China’s steel enterprises do not meet environmental standards, and they are under heavy pressure to upgrade. It is estimated that compliance costs have risen at least 50%.