Concept Paper for a Steel Tube Manufacturing Plant

Introduction

Steel is a basic building material for more than a century and is used widely. This
concept paper is about the manufacture of a few products made from sheet metal ( as
opposed to long products). The type of products envisaged in this paper are the
following:

a) Steel tubes of diameter 31.8 mm to 125mm ( 1 ¼” – 5”)

b) Hollow sections ranging in size from 1” x 1” to 3” x 4”
c) Open channels like purling, door rail tracks, C-channels etc

Production Facilities

The production facilities mainly comprise a complete 5” tube mill and a slitter. Other
accessories are forklifts, cranes, compressor etc. A 2 acre land with a built up area of
about 50,000 sq ft would be needed to house the production facilities and stocks of
finished goods and raw materials.

The production process is fairly simple and is as follows.

Steel sheet in Slitted into Hoops are fed

Coil form hoops Into tube mill

Sheet is formed
into a tube and
welded

Tubes are Tube is

Warehouse bundled sized/shaped into
final form

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Raw Materials

The raw materials used are as follows:

a) Cold rolled steel sheets

b) Hot rolled steel sheets
c) Aluminium coated steel sheets
d) Zinc coated ( or galvanized) steel sheet

Cold rolled and hot rolled steel sheets can be purchased from local manufacturers like
Ornasteel, Mycron and Megasteel. The coated steel sheets must be imported. There are
import restrictions on the import of steel sheets such as a requirement for AP and high
import duties. These restrictions were imposed in 1998 and are expected to be eased out
within the next few years.

Manufactured Products and Applications

The products to be manufactured would be mainly steel tubes and hollow sections. The
main applications are

a) Structural use
b) Exhaust systems
c) Furniture
d) Bicycles etc

Market

The local market for the range of tubes is estimated at 400,000 tons per annum. In
addition the products could also be exported to countries such as Sri Lanka, Pakistan,
Mauritius etc. At a output of 18,000 mt per annum, the share of the local market would
be about 4.5%.

There are about 10 other manufacturers in the country producing tubes in the same range.
Some of the big ones are Melewar Group, Leader Steel, Hiap Teck Group, Choo Bee
Industries, AISB etc.

We do not anticipate any problems in competing with the big guys as a lean and efficient
organization will always win in the market place.

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Manpower Needs

The total head count including the GM is about 31 persons. The services of key
production personnel can be easily obtained.

Management

Only 3 key managers are required: General Manager, Sales Manager and the
Technical/Production Manager. The profile of the GM and the Technical Manager is
attached as Appendices.

Capital Investment

The total capital investment is estimated at RM8 million. In addition a working capital of
RM8 million would be required.

Profitability

At a production/sales level of 1500 metric tons per month, the cash profit expected is
about RM180,000 per month or RM2.16 million per annum. The production/sales
represents 43% of the plant’s capacity. The cash margin ( sales price over raw material
price) is projected at RM320 per mt.

The breakeven point is 660 mt per month. Alternatively, the cash margin must drop to
RM172 per mt at a production/sales level of 1500 mt to break even.

The cash margin is for hot rolled/cold rolled products. For aluminized products, the cash
margin can be as high as RM800 per mt. We are confident of producing and selling at
least 300 mt of aluminized tubes per month ( for both the local and export market). This
alone would be sufficient to cover the fixed costs ( estimated between RM210,000 –
RM260,000).

A simple ROI is 27% return on investment. A minimum ROI of 15% is achievable.

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Appendix 1

Profile of the General Manager

The GM is Mahandra Rao. Mr Rao is a Chartered Accountant and a member of the

Malaysian Institute of Accountants. He is 50 years old and has served in a variety of
capacities in the professional sector ( public accountants) and also in industry.

Currently he is the General Manager of a steel tube manufacturing plant. He has more
than 6 years experience in managing a steel tube manufacturing plant and actually was
instrumental in bringing to profitability a plant which was on the verge of insolvency.

The plant referred to above is Precision Tube Products Sdn Bhd, based in Pasir Gudang.
He joined the company as a Finance Manager in 1992 and was promoted to General
Manager shortly after. At that time, the company was technically insolvent. By
reengineering the business processes and bringing in new sales personnel, he managed to
achieve the following results.

Year Turnover Net profits

(RM million) (RM million)

1.4.94 - 31.3 95 15.3 1.9

1.4.95 – 31.3.96 19.4 2.1
1.4.96 - 31.3.97 24.9 2.64
1.4.97 - 31.3.98 21.7 0.67

( The paid up capital of the company then was RM 4.5 million.)

Before 1997, the production facilities were very old and inefficient. He and his team still
managed to return the company to profitability and eventually purchased a brand new
mill from Italy in 1997.

Mr Rao left the company in 1998 to pursue his own interest. In March of 2006, he was
invited by the new owner of PTP to join the company as General Manager.