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Novo Group To Get New Support Amid China Steel Doldrums
Corporate Digest | 06 September 2012
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By: Daxx Chong
Articles (58) Profile

At the height of the Great Financial Crisis, China launched a Rmb4 trillion stimulus package to minimise the impact on its economy. A large portion was directed to fixed asset investments such as housing and infrastructure, prompting the country’s steel industry to expand its capacity significantly to meet the higher demand.

Fast forward to now, amid continued lacklustre exports to its western trading partners, the Chinese government has decided to steer the economy from an investment-led model to one that is consumption-based. For the steel industry, this change in fortune has pushed it into an over-capacity environment.

As shown in graph 1, despite steel price trending on a decline since the start of this year, steel production continued to scale new highs as new capacity comes online following expansion plans during the investment binge.

Graph 1: Production at new highs despite price trending down

In a recent interview with Shares Investment, Novo Group – a supply chain manager for the steel industry – shared insights from the ground. “Steel millers had purchased iron ores as raw materials for production at a higher cost. Now that steel price has fallen, their sales are translating into losses,” commented Novo’s group financial controller Raymond Chong.

For Novo, its business has likewise been impacted. For FY12, the company slipped into the red from profits of US$4.5 million to losses of US$1.9 million as turnover shrank 34.6 percent from US$501.6 million to US$327.8 million. Among its different segments, its core raw material business was hit hard as income fell 41.2 percent from US$377.4 million to US$222 million. “Steel millers are looking to cut production and demand for iron ore has declined. Activities are expected to remain low for the rest of the year,” said Chong. “For this period, we will be prudent and focus on back-to-back sales (whereby supply is only sourced after a deal is secured) as this allows us to control our inventories.”

Considering the challenges in the steel industry, Novo’s earlier decision to branch out into tinplate manufacturing could provide some support in the near future. Moreover, the group has recently extended into the food and beverage packaging as it sees an increasing gap between the demand for high quality processed food and beverage and supply of high-end tinplate products for the packaging of processed food and beverage. Specifically, it established a joint venture firm with Tianjin Yida Investment – a company that has experience in tinplate processing, can making, food packaging and manufacturing of food and beverage.

On the tinplate manufacturing venture, which was first announced in May 2011, construction of a factory project in Jiangsu is near completion and commercial production is expected to begin before December this year. According to Chong, the factory will have an initial capacity of 150,000 metric tonnes and will be ramped up to 300,000 metric tonnes after phase two by 2013.

While there may be no sign of light in the tunnel for the China steel industry, Novo could perhaps find some glimmers from its new ventures.

With a long-standing interest in economics and finance, Daxx is the Senior Research Editor of Shares Investment.

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Yorkshine Hldgs  -- -- --   
Business: [FY18 Turnover] Trading (-%), tinplate manufacturing (-%).

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