The following information is extracted from the Independent Market Research Report titled “Independent Assessment of the Rolled Steel Industry in Malaysia” prepared by Vital Factor Consulting Sdn Bhd for inclusion in our prospectus dated 13 May 2013.


Overall Steel Industry

The Rolled Steel Industry is part of the overall Steel Industry, which is depicted in the diagram below:

Structure of the Steel Industry

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 primary steel products.

Rolled steel products: Refer to primary steel products that have undergone hot-rolling and/or cold-rolling processes.

Secondary steel products: Refer to rolled steel products that have undergone further processing and/or have been formed into finished products.

Steel scrap: Refers to discarded steel products that can be recycled or reused. Steel scrap is segregated by composition and grade before they are recycled or reused.

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.

Rolled Steel Products

Rolled steel products can be broadly segmented into the following:

Segmentation of Rolled Steel Products

Rolled flat steel products are produced from steel slabs through hot-rolling and/or cold-rolling process.

Rolled long steel products are commonly produced from steel blooms or billets.

Leon Fuat Group is in the business of trading and processing of rolled long and flat steel products.

Types of Steel

The three common types of steel are as follows:

Common Types of 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.



DEMAND AND SUPPLY CONDITIONS

i) 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
2007 2008 2009 2010 2011 AAGR
2007-2011 (%)
Apparent Consumption 7.7 8.5 6.6 8.3 8.0 1.7

Note: All units in million tonnes except percentages.
(Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd.)

Between 2007 and 2011, apparent consumption of steel products in Malaysia increased at an Annual Average Growth Rate (“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.

ii) Production of Hot-Rolled Steel Products

Local production of hot-rolled steel products is 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 of Hot-Rolled Steel Products
2007 2008 2009 2010 2011 AAGR
2007-2011 (%)
Long Products * 3.5 3.7 3.7 3.6 3.6 0.5
Flat Products 2.3 1.9 1.4 1.4 1.5 -10.2
Total 5.9^ 5.5^ 5.1 5.0 5.1 -3.3

Notes: All units in million tonnes except percentages;
* Exclude seamless tubes;
^ Total does not add-up due to rounding.
(Source: Secondary Market Research undertaken by Vital Factor Consulting Sdn Bhd.)

Local production of hot-rolled steel products registered a negative AAGR of 3.3% between 2007 and 2011. This was mainly due to the weak performance of the local production of flat steel products, which recorded a negative AAGR of 10.2% between 2007 and 2011.

iii) Production of Selected Rolled 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 rolled steel products, including Leon Fuat Group.

The local production of selected rolled iron and steel products in recent years was as follows:

Local Production of Selected Rolled Iron and Steel Products
2008 2009 2010 2011 2012 AAGR
2008-2012 (%)
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 Tonners) 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 Quatity ('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 of Statistics)

All of the selected rolled iron and steel products showed negative AAGR between 2008 and 2012 based on sales value.

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.

iv) Imports and Exports of Iron and Steel Products

The performance of the Rolled Steel Industry based on import and export values of iron and steel products in recent years was as follows:

Imports and Exports of Iron and Steel Products
2008 2009 2010 2011 2012 AAGR
2008-2012 (%)
Import Value (RM billion) 24.2 15.8 18.2 21.5 22.7 -1.6
Import Quantity ('000 Tonners) 9,174.4 4,130.2 5,283.9 5,264.0 6,856.8 -7.0
Export Value 10.4 8.8 8.4 10.1 9.9 -1.3
Export Quantity 2,967.2 3,213.7 2,822.9 3,379.2 3,206.4 2.0

(Source: Department of Statistics)

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 2012, 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 of 2.0% between 2008 and 2012.

v) 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
2008 2009 2010 2011 2012 AAGR
2008-2012 (%)
Flat-Rolled Products
Import Value (RM billion) 11.7 7.7 10.2 10.8 10.2 -3.4
Import Quantity ('000 Tonners) 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 Tonners) 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 Tonners) 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 0.8 -18.5
Export Quantity ('000 Tonners) 503.3 579.7 507.6 408.0 294.8 -12.5

Note: * Include sheet piling.
(Source: Department of Statistics)



DEMAND DEPENDENCIES

The performance of the Rolled Steel Industry is mainly dependent on its major user industries. Some of the major user industries of rolled steel products include the following:



COMPETITIVE ANALYSIS

a) 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:

In such an environment, the industry is subjected to normal supply and demand conditions moderated by the price mechanism.

b) 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:

c) Operators in the Industry

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. Some of the operators that provide steel processing services, including slitting, shearing or cutting in Malaysia.

In 2012, the total estimated revenue of the 50 companies involved in steel processing was approximately RM5.8 billion. 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.



BARRIERS TO ENTRY


THREAT OF SUBSTITUTES

There are alternative materials that can be used as substitutes for steel, including non-ferrous 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:

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.



INDUSTRY PROSPECTS AND OUTLOOK

The outlook of the Rolled Steel Industry is dependent on the following factors:



THREATS AND RISK ANALYSIS


MARKET SIZE AND SHARE

i) Market Size

In 2011, 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.

ii) Market Share

In 2011, 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.

* Please read this section in conjunction with Section 7 from page 93 to page 121 of Leon Fuat Berhad's Prospectus dated 13 May 2013.