Press Metal banks on size and low-cost model

WITHIN a space of seven years, Press Metal Bhd has grown to become the largest aluminium smelter in the region and probably one with the lowest operating cost. Economies of scale, coupled with a low-cost operating model, has helped the company to stay in the black even when commodity prices come under pressure.

It had to deal with some major operational issues along the way. One of it was the when its smelter in Mukah – the first to be built in Malaysia – came to a complete shutdown due to a state-wide blackout last year.

Group chief executive officer Datuk Paul Koon Poh Keong says the incident resulted in an extremely challenging 2013 as it took four months just to reconstruct all of its production pots.

“It took another few more months before we finally achieved full production capacity in March,” he tells StarBizWeek.

However, Press Metal still managed to report a profit of RM11.57mil for its financial year ended Dec 31, 2013 (FY13), although a drastic dip from RM221.83mil (due in part to substantial tax writeback) achieved in FY12.

Its revenue also managed to increase to RM3.12bil from RM2.38bil. So far, profit for its first quarter of this year is up from the corresponding quarter last year, increasing to RM28.03mil from RM25.25mil.

Malaysian Rating Corp Bhd said in January that Press Metal’s capacity loss at Mukah had been partly offset by increased capacity operations at its Samalaju plant.

The Samalaju plant, with a capacity of 320,000 tonnes, is 2.6 times bigger than the one in Mukah which has a capacity of 120,000 tonnes.

Last year, Press Metal provided an estimated RM90mil for both operating losses and assets written off arising from the damage done to its Mukah plant.

It also incurred an additional exceptional loss of RM2.2mil during the re-commissioning stage.

“We had many meetings with the electricity board on how to mitigate the problem. A lot of things are being discussed and put in place, so that even if it happens again, we will have ways of handling it that will avoid a complete shutdown,” Poh Keong says.

One of these mitigating factors, says Poh Keong, is the expectation of greater stable power supply as the 944MW Murum Dam, located upstream of the 2,400MW Bakun Dam, is expected to begin producing power this year.

Press Metal holds a long-term power-purchase agreement with state-owned utility company Sarawak Energy Bhd.

Early foothold

The largest aluminium producer in South-East Asia has come a long way from its beginnings as a local aluminium extrusion company in 1986, with the bulk of its revenue now coming from the upstream business it ventured into in 2007.

It currently boasts a smelting capacity of 440,000 tonnes and an extrusion capacity of 190,000 tonnes per annum.

Looking back, Poh Keong says the decision to build its Mukah plant, which commenced commercial production in 2009, was made so it could gain an early foothold in the upstream business in Sarawak.

He notes that it is difficult for Malaysian companies, traditionally downstream players, to build a smelter due to the huge capital expenditure required.

He reflects that it was a good idea to start on a smaller scale before stepping up to its second plant in Samalaju Industrial Park, Bintulu, an area within the Sarawak Corridor of Renewable Energy in 2011.

“Because it was the first smelter here and because of the huge capex needed, it was not easy. We used a step-up approach, which gave the banks time to understand. We actually mitigated the risk factor along the way for the banks as well as the company,” he says.

Poh Keong’s brother and group executive vice chairman Koon Poh Ming says it took the trouble to go upstream because its downstream business was already well-established.

“We already had the customers downstream, so we could maintain our business. But expansion-wise, we might as well put our time, effort and money into the upstream end,” Poh Ming says, noting the barrier of entry upstream was much higher as it was crucial to secure a long-term energy supply.

Poh Keong says a key driver to Press Metal’s venture into the upstream end was the experience it gained in China’s aluminium industry, which has boomed over the last five to 10 years.

He says it took the opportunity to acquire a smelter with 90,000 tonnes capacity per annum together with a power plant in Hubei, China, in 2006, which served as a very good learning platform and boosted its confidence to build a smelter here.

“Our exposure there is what gave us the technical expertise and operational experience. China has built so many upstream aluminium smelters and it has good technology.”

Moving forward, Poh Keong says it will continue to expand its production volume for its alloy wheel ingots at Samalaju to 60,000 to 80,000 tonnes from 30,000 tonnes currently.

“We started with producing ingots at the new Samalaju plant and will be slowly moving into more value-added products, which require a lot of operational stability,” he says, adding that it expects to generate around RM4bil in revenue this year.

Press Metal is also looking to increase its synergistic relationship with Japan’s Sumitomo Corp and will be finalising its agreement to sell a 20% stake in its Samalaju plant this month.

Further expansion

Saying that a final audit was pending, Poh Keong adds that the final amount paid will be up to US$160mil (RM514mil), with the stake taken up by Sumitomo’s subsidiary, Summit Global Management XII B.V.

He says the amount will be channelled towards repaying its debts, with its gearing ratio standing at 93% post disposal of the 20% stake.

“With this, Sumitomo will own a 20% stake each in both our Mukah and Samalaju plants,” he says. Press Metal owns the remainder stake for its units Press Metal Bintulu Sdn Bhd and Press Metal Sarawak Sdn Bhd.

Poh Keong says further expansion plans are also in the works but depend on the influx of investments and availability of power supply, noting that it still had two-thirds of its 202.34ha Samalaju landbank free.

He adds that a development that is expected to sizeably reduce its logistics costs is the construction of a coastal road from Mukah to Bintulu, which will shorten its product transportation journey from 200km to 70km.

“Once the coastal road and Samalaju port is ready, our logistics cost will definitely go down,” he says.

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