How can Thai steel be made into a viable industry?
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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Thailand's steel companies have gone through hard times recently, losing large amounts of money.
Skyrocketing raw materials costs, megaproject delays, a fall in steel goods production have all contributed to steel company problems.
Nakornthai Steel became famous during the 1997 Asian Financial Crisis when owner Sawasdi Horrungruang defiantly vowed: "Mai mee ! Mai neeh ! Mai jai !" [I don't have money! I'm not going anywhere! I'm not paying!]
Nakornthai Strip Mill Plc (NSM) has finally emerged from bankruptcy courts and merged with rival G Steel owned by Somssak Leewadtrakul.
Today's article looks at both recent history in the Thai steel industry and the plans ahead for the new Steel alliance between NSM and G Steel.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. For how many years has NSM been losing money?
2. What is the importance of the two companies G Steel and NSM?
3. What percentage of GSM is G Steel expected to own within 18 months?
4. How will the GSM purchase and alliance with G Steel affect the competitiveness of the two companies?
5. How much additional investment does NSM need to finish facilities to produce "high-grade steel primarily used in the auto and electrical-appliance industries" ?
6. Did Nakornthai Strip Mill Plc (NSM) make or lose money in the first half of this year? How much? What caused this loss?
7. What about last year? Did the company lose as much?
8. What percentage of NSM's steel is typically exported?
9. Recently, has the percentage of NSM's exported steel increased or decreased? Why?
10. What steel exports to Europe are being planned for the future?
11. What has to be done to get permission to export to Europe?
12. Have many countries met the EU quality standards received certification?
Bangkok Post Article: October 16, 2006
NSM future looks bright despite loss
Company's finances may go back to blackBUSRIN TREERAPONGPICHIT
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Steel tycoon Sawasdi Horrungruang diluted his stake in his last steel flagship as part of a new debt restructuring scheme subject to Bankruptcy Court approval.
"Without me, the company's finances will be able to turn into the black in the second quarter of next year after they have been in the red for two consecutive years,'' said Mr Sawasdi.
In September, G Steel Plc agreed to purchase a mixture of existing NSM secured debt and equity for approximately US$180 million, funded by up to $120 million in new debt and $60 million in new G Steel shares. The debt is expected to be converted to equity within 18 months, after which G Steel will own 33% of NSM.
The alliance of the country's two largest hot-rolled steel makers would create synergies in terms of operation and cost management, which could boost its competitiveness in the world market, according to Sicco Securities.
Although both companies are hot-rolled steel-coil manufacturers, they have different products and technology. This would allow the company to tap into several specialised markets, analysts said.
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Furthermore, Mr Sawasdi had initiated a plan to invest in new facilities that would allow NSM to produce high-grade steel primarily used in the auto and electrical-appliance industries.
"Currently, our basic facilities are nearly completed for producing the numerous types of high-grade steel,'' said Mr Sawasdi, who stepped down as company chairman after the reorganisation.
The company would only need a US$20-million investment to complete its high-grade production line, he added.
"I just hope the new management will see the greater opportunity to carry on my plan,'' he said.
The alliance would boost the combined company's total capacity to 3.8 million tonnes of steel a year. About 1.2 million tonnes stem from NSM, which plans to double its capacity.
The company still planned to run at full capacity of 1.2 million tonnes next year, up from one million tonnes estimated this year, said Preeprem Malasitt, a senior commercial manager of NSM. Sales would reach one million tonnes this year in line with rising output target, he added.
Even so, the skyrocketing costs of raw materials, a rapid decline in finished goods and the political deadlock caused the company to lose 3.2 billion baht in the first six months of this year. Last year, NSM recorded a net loss of 720.94 million baht.
A delay in the implementation of megaprojects has definitely affected our business,'' Mr Preeprem said. "However, to manage costs efficiently, we need to increase our capacity to meet the economy of scale with a surplus shipped overseas.''
NSM has set a target for 70% of its steel to be sold domestically, with the rest exported. Exports currently account for up to 40% of total output, however, due to a domestic consumption slowdown.
The healthy growth in export demand should help NSM to gain a higher margin from the second half of the year than it earned in the first six months, thus compensating the shrinking demand in the domestic market.
Steel exports, particularly high-grade steel, look promising to the European Union. So NSM has made an all-out effort to improve its quality to receive the CE mark, which signifies that its steel meets EU standards.
The NSM has received the CE mark certification for some categories due to a proven quality of products. The company has a large number of regular clients from European countries.
"There is less competition in this market segment,'' said Mr Preeprem. "Only Japan is granted the certification. So, it will be easier for us to gain market share.''
The steel market would become more sophisticated for both consumers and producers, he added. The information sharing and collaboration among local producers is expected to help ease oversupply and over-investment risks.
Vocabulary
bankruptcy - the end of a company's life, the legal process in which a company is dissolved or reorganised so it can continue business
hot rolling - a steel manufacturing process used to produce sheet metal and other intermediate products (See Wikipedia on steel and hot rolling)
a strip mill - (See Wikipedia on steel mill)
diluted his stake - owns less of the company
flagship - the most important company in a group of companies
debt restructuring scheme - reorganising the debt and equity financing of a company to save it from bankruptcy (the end of the company's life)
in the black, turn into the black, go back to black - become profitable
secured debt - borrowing money by pledging assets that will taken by the lender if the loan is not paid back
political deadlock - political problems that cannot be solved, that never seem to end
an all-out effort - tried as hard they could to succeed
CE mark certification - the European Union quality standard
market segment - a group of customers that have special needs, a smaller market within a larger market
Answer Key:
1. For how many years has NSM been losing money?
For two years.
2. What is the importance of the two companies G Steel and NSM?
They are the "two largest hot-rolled steel makers" in Thailand.
3. What percentage of GSM is G Steel expected to own within 18 months?
33%
4. How will the GSM purchase and alliance with G Steel affect the competitiveness of the two companies?
The alliance should increase the companies' competitiveness on international markets by:
a. Creating "synergies in terms of operation and cost management."
b. Each company can better focus on the markets and technologies it is more specialised in.
c. NSM might focus on export markets and G Steel the domestic market.
5. How much additional investment does NSM need to finish facilities to produce "high-grade steel primarily used in the auto and electrical-appliance industries" ?
It needs a $20 million investment.
6. Did Nakornthai Strip Mill Plc (NSM) make or lose money in the first half of this year? How much? What caused this loss?
It lost 3.2 billion baht due to:
a. Skyrocketing costs of raw materials
b. A rapid decline in finished goods.
c. The political deadlock.
d. A delay in the implementation of megaprojects.
7. What about last year? Did the company lose as much?
No, it only lost 720.94 million baht.
8. What percentage of NSM's steel is typically exported?
30%
9. Recently, has the percentage of NSM's exported steel increased or decreased? Why?
Recently, the percentage exported has increased because of "shrinking demand in the domestic market."
10. What steel exports to Europe are being planned for the future?
High-grade (high-quality) steel.
11. What has to be done to get permission to export to Europe?
NSM has to meet EU standards. NSM has to get a "CE mark certification" indicating that its steel products meet quality standards.
12. Have many countries met the EU quality standards received certification?
No, only Japan.
