Corporate Report- Red Hot

The future growth of Al Jazeera Steel Products Company is expected to stem from its merchant bar mill unit and new markets.

Constant volatility in steel prices, escalating raw material costs and stiff competition may have dampened the spirits of most steel manufacturers in the region, but some are looking past such obstacles to roll out new products and enhance their presence in the international arena. Oman's RO90mn Al Jazeera Steel Products Company is among them.

One of the main factors fuelling Jazeera Steel's optimism is the performance of its merchant bar mill (MBM) unit that was added in 2009, which managed to break even in 2011 within two years of starting commercial production. Annual production at the MBM unit was ramped up by 66 per cent to over 100,000 metric tonnes in 2011 and Jazeera Steel is now targeting a production of more than 125,000 metric tonnes for 2012 at the unit.

In the pipeline are projects like steel making for billet manufacturing and an additional slitting line to manufacture smaller angles and channels from hot roll material along with cut-to-length sheets and plates. The firm is also looking to enhance its presence in markets like Saudi Arabia, North Africa, Asia, Australia and Eastern Europe for its tubular as well as MBM products, for which a start has been made in 2011. Externally, we are working on expanding the distribution of the MBM products and gaining new territories for our tube mill. We are looking at Africa and Iraq as new areas for growth," says Sulaiman al Rubaie, chairman, Jazeera Steel.

With a net worth of about RO33mn and total assets of over RO72.06mn as of September 30, 2011, Jazeera Steel has seen a healthy increase in profits and total turnover year after year since 2007 (barring heavy losses in 2009 during the global downturn) after Kuwait's Global Investment House (GIH) acquired a majority stake in the company. In the first, second and third quarters of 2011, net profit registered a growth of 82.5 per cent, 81 per cent and 76.9 per cent respectively compared to the year-ago periods. Total turnover also increased by at least 30 per cent each quarter as the firm began marketing its MBM products in the international markets.

But net profit margins have not exceeded five per cent through all the three quarters of 2011 due to several factors including rising costs of raw materials, escalating freight charges and increased competition. Bhaskar Dutta, CEO, admits that the fourth quarter has been challenging as the commodity markets worldwide took a beating, but he says there is much reason for optimism. "There is definitely overcapacity everywhere, but the US seems to be doing well since the last quarter of 2011. There is a good outlook for growth for steel manufacturers in the GCC due to the number of infrastructure projects coming up across the region."

Share prices of Jazeera Steel had dipped over 19 per cent in the last year, but in the beginning of 2012 the stock witnessed a sudden spurt in activity, registering the highest number of trades in several months. On January 2, 1.4mn shares were traded in 180 transactions and the stock hit a three-month high of 262bz, rising almost two per cent that day. In a filing with the Muscat Securities Market, the company attributed this activity to the buoyant outlook that shareholders predicted for Jazeera Steel on the back of rising steel prices.

A global footprint

When Jazeera Tubes began operations in 1999, Moosa Abdul Rahman Hassan was the primary owner, having the highest stake in the company. In 2006, during the construction boom in the GCC, the company decided to add a merchant bar mill segment. It turned towards Kuwait's Global Capital Management (GCM), the private equity arm of GIH for capital.

"We saw a great opportunity in investing in one of the leading pipes companies in the region. Jazeera Steel was planning its MBM unit and expanding its existing lines into new countries and we were seeking companies with strong intrinsic value," says al Rubaie. GIH acquired a 51 per cent majority stake in the company in 2007, following which the MBM segment was established and commercial production began in the fourth quarter of 2009.

Jazeera Steel moved into the UAE and also went on to list its shares on the Dubai Financial Market (DFM), making it one of the few stocks that are listed on both MSM and DFM. "Jazeera Steel emerged as a joint stock and with its expansion into other GCC markets like Saudi Arabia and the UAE, the principals wanted it to take on a pan-GCC identity. Hence they wanted it listed in Dubai as well," says Dutta. Jazeera Steel's presence in the UAE did affect its profitability during the 2009 downturn, but Dutta points out that when business slowed down in Dubai, the Abu Dhabi market started picking up.

In 2011, once the MBM segment broke even, Jazeera Steel moved to markets like Canada, North America, Australia and Europe. It currently exports its MBM and tube mills products to 25 countries. Dutta says this expansion was carried out bearing in mind that the local market was too small to depend on for growth. In markets like North America, Canada and Europe, the cost of production for local producers are high which increases the prices of the finished goods and gives the GCC manufacturers a competitive edge.

The local market contributes around 16 per cent of Jazeera Steel's overall revenue, while 40 per cent comes in from the UAE. Saudi Arabia contributes around 12 per cent, while the rest of the GCC and MENA region accounts for 16 per cent of the revenue. Exports outside the GCC and MENA accounts for the remaining 16 per cent.

The tube mills business currently contributes two-thirds towards Jazeera Steel's overall revenue, but the MBM business is expected to see higher growth in the coming days. Dutta sees the contribution of MBM going up to 40 per cent by 2013. The tube mills and MBM unit have an annual production capacity of 300,000 metric tonnes each. The company boasts four tube making units and three galvanising units that encompasses technology from the US, Thailand and India.

At the end of 2010, total production at Jazeera Steel stood at 211,647 metric tonnes. For 2011, production at the MBM unit went up by 40,000 metric tonnes while at the tube mills production went up by 14,000 metric tonnes, says Dutta.

Financial Performance

The financial performance of Jazeera Steel has followed the performance of steel in the commodities market. After the company broke even in 2001, net profits ranged from periodical highs to substantial losses, but real growth came after the takeover by GIH that enabled it to procure additional finance and set up its own MBM unit. Jazeera Steel, which posted a loss of RO307,000 in 2005, went on to register a net profit of RO522,000 in 2006. Net profit doubled in 2007 to RO1.63mn and rose 5.4 per cent to RO1.71mn in 2008. The global downturn in 2009 resulted in the company again incurring a loss of RO774,000, which resulted in salary cuts and suspension of dividends.

There was a strong rebound in 2010 when the company posted a net profit of RO1.9mn on a total turnover of RO64.91mn rising 62 per cent from a year ago on the back of increased demand for restocking in the neighbouring markets and a revival of markets worldwide. Annual production went up by 53 per cent to reach 211,647 metric tonnes and a cash dividend of nine per cent or (9bz) was declared for the year.

The MBM unit broke even in 2011, following which the company entered the North American, Canada, Australia and European markets. This has fuelled consistent profit and revenue growth. For the first quarter of 2011 net profit grew 82.5 per cent to reach RO1.01mn on a total turnover of 22.5mn that rose 46.1 per cent from a year ago.

During the second quarter, Jazeera Steel saw its net profit increase 81 per cent to RO1.09mn aided by the MBM attaining almost full capacity utilisation. Total turnover for the period stood at RO22.14mn rising 33 per cent from the year ago period. During the third quarter, net profit rose again 76.9 per cent from a year ago to RO650,239 on total turnover of RO21.7mn that increased 49.9 per cent.

Net profit margin, however, stood at 4.46 per cent, 4.92 per cent and 2.99 per cent for the first, second and third quarters respectively. Profits have not risen substantially quarter over quarter. According to the company's published first half results, productivity at the mills and dispatch of products for the first six months was disrup-ted to some extent by political instability in the region. For the third quarter, Dutta points out that the construction business slows during Ramadan.

As of September 30, 2011, total production at Jazeera Steel stood at 201,090 metric tonnes. The fourth quarter has been difficult for steel makers worldwide as the commodities markets took a beating, says Dutta. A dividend has been planned for 2011 and for 2012 company executives expect Jazeera Steel to fare well in light of the rising steel prices as seen at the beginning of this year.

Weathering volatility

The main challenge for Jazeera Steel are volatile steel prices and dumping by some countries causing an oversupply situation in the GCC. Jazeera Steel faces stiff competition from companies like Arabian Pipes and local producers in the US, but Dutta says dumping of finished goods from China, India and Turkey has made matters worse. "With more than 80 per cent of the raw materials being imported at higher prices, it becomes very difficult to fight it out with them," he says.

An increase in steel prices might enable the manufacturer to raise prices for its products, but it also results in escalating the cost of raw materials. Raw materials make up for about 80 per cent of Jazeera Steel's overall expenditure.

This, coupled with the rising freight costs, has made it a challenge to export to both GCC and international markets, says Dutta. Sameer Kattiparambil, analyst, EFG-Hermes, says the company may not have much pricing advantage in the international arena due to stiff competition.

In an effort to offset the rising costs of raw materials, Jazeera Steel has adopted a bulk purchase strategy and relies heavily on market intelligence to anticipate the next price increase. Raw material is stocked up accordingly. The cost of manpower has gone up, but Dutta says the best way to counteract this issue is to concentrate on increasing productivity and enhancing training for skilled manpower. The company is also looking to slowly move towards automated processes that can reduce the cost of manpower.

Despite challenges, Jazeera Steel is looking to push forward in the international markets, with plans to enhance its presence in the middle region of Saudi Arabia, along with scouting for new opportunities in African markets and Iraq. When it comes to enhancing its presence in the West, Dutta is a bit cautious. "We are still determining the financials and competition scenario in these markets. We are moving slow and steady on this front to see how well we can progress despite the challenges."

For 2012, production at the MBM unit is expected to go up by 25 per cent while at the tube mills production enhancement will be about ten per cent. Later this year, the MBM unit will move to a 24-hour operation system from the current 12-hour one to enhance capacity utilisation. With steel prices already on the rise over the last two months and industry onlookers predicting a further increase, Jazeera Steel executives are positive on the outlook for 2012.

A look at the path that Jazeera Steel has followed to establish its footprint reveals that the driving force for success is not just about ambitions. Cautious footwork and calculated risks are equally imperative to ensure sustenance and continued growth in the home and international markets, a formula that Jazeera Steel seems to have mastered.

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Corporate Report- Red Hot
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