Melwire invests in the construction boom and dviersification

The family controlled steel building materials manufacturer is quietly weaning off from the protectionist trade policy that fattened it

Pillai family-controlled Melwire Rolling, a $130 million revenue company thriving in a closed steel building materials market, is investing in the very construction boom likely to precipitate the end of protectionism. Its long-term diversification strategy could be the foil for such an eventuality. Melwire imports steel billets mostly from India and Ukraine. Its furnaces burn 25,000 litres of fuel daily, fashioning billets into construction materials like angle bars, flat bars, iron rods, pipes and tubes for the domestic market under the Melwa brand, at its 50-acre facility in Ekala. The facility has an annual capacity of 240,000 tonnes.

Melwire is investing $34 million to increase annual capacity up to 480,000 tonnes by the end of 2017 to exploit a construction boom, almost doubling its revenue to $240 million by 2020. “I believe the construction boom will last another 15 years,” says Muruga Pillai, a Director at Melwire. He manages the business with four of his brothers.

The company, and 14 others like it, compose a protected industry, and the construction boom is all for them. Steel building material imports are restricted by a 35% duty and Rs30/kg cess, a form of tax. Muruga is confident that the industry will continue to be protected. He believes government policy will always favour domestic companies over imports.

“China enjoys scale and produces steel building materials with a value addition of around 10-15%. We average around 30%, which means we cannot compete with their prices,” Muruga says.

But, if domestic building material costs were to rise, the government may be forced to open the market for cheaper imports.

Melwire’s four-storeyed headquarters is lost in a bustling street in Kotahena

Sri Lanka is expected to be a construction hub over the next few years. The Colombo Port City on 269 ha of reclaimed land alone will see growth in new apartments, office complexes and hotels. According to Jones Lang LaSalle, a property consultancy, the port city will have 5.6 million square meters of built-up space.

The government is offering several concessions, including relaxing rules of foreign ownership of land, to attract investors. They may also be willing to absorb high domestic steel building material prices against cheaper imported alternatives, but only to a point.

If raw material and oil prices remain stable over the next few years, domestic companies like Melwire will have little to worry about. Global raw steel prices are nearly four times lower since peaking at $1,200/MT in 2008 to little over $310/ MT at end-June 2017, range bound for over a year. Demand is expected to remain flat in 2017 and 2018. A glut is keeping oil prices low. But, if these prices move up, domestic manufacturers will be forced to increase prices, and this could make cheaper alternatives more enticing to investors. Another possibility is that, with Beijing dominating infrastructure development in Sri Lanka, it may want cheaper, and timely, supply shipped from China for its projects here.

While Muruga is confident that the government will protect the industry, he knows this can easily change.

After the 30-year war ended in 2009, the government relaxed restrictions on building material imports to facilitate construction. The steel industry banded to lobby the government to reverse its decision. The government agreed to reinstitute import tariffs provided that Melwire and the others invested sufficiently on capacity expansion to meet demand. The stakes are much higher now.

Melwire has benefitted from protection. Since it’s a private company, its book value is not known. All its investments are financed by steel wealth.

The business commissioned its first production facility in Ekala in the early 1990s with an annual production capacity of 18,000 tonnes. It expanded capacity in three phases to 240,000 tonnes by 2010. The company is also investing $100 million to develop six star-class hotels on land owned by the company.

Over the years, the family has acquired freehold land with its steel wealth. The hotel properties include two in the West Coast, one each in the South (Kosgoda) and the East (Yala), and two in the hills (Kandy and Nuwara Eliya). The properties will have a combined room count of 725. Hilton Group, a global hotel management firm, will manage the properties, three of them under the Double Tree brand (376 rooms), with the first two opening in 2020 and the last in 2024. “This is the largest expansion for a global hospitality firm in the history of Sri Lanka,” Muruga says.

The five Pillai brothers were originally in the business of weaving textiles, supplying Sri Lanka’s clothing makers and exporters. In the late 1990s, the government slapped a duty on cotton yarn imports, increasing the mill’s raw material costs. At the same time, clothing makers were allowed to import Chinese fabric duty-free. The Pillai brothers, and several other fabric makers, were priced out of the market overnight.

Luckily, Muruga convinced his brothers to invest in a steel mill a few years earlier. When the fabric industry came crashing down, the Pillai brothers were already deeply entrenched in the steel industry, thus avoiding a calamitous reversal of fortunes. Nearly 30 years later, Melwire Rolling, the family’s flagship business, claims leadership in the steel building materials market. The family shuns the spotlight and leads frugal lives. Its four-storeyed headquarters is lost in a bustling street in Kotahena.

Ironically, Muruga loathes protectionism in another form. The Pillai brothers’ steel business, although protected from imports, is often confronted with an uneven playing field here. Their biggest competitor, Ceylon Steel, enjoyed state patronage as a public corporation. The corporation got tax holidays when it was privatised to a Korean firm in the late 90s, which were extended when it was sold to Dubai-based Onyx Holdings in 2009. Muruga says Melwire never received tax concessions. “We paid taxes from day one, which are now at 28%,” he says. In 2017, the budget proposed an import tax on raw materials but exempted Ceylon Steel, but this was quickly removed after Melwire objected to the unfair practice.

Competition was so intense that Melwire couldn’t stop production to upgrade machinery and add new capacity. The Pillai brothers had to install new machines while the facility remained operational. This increased expansion costs by 20-30%. But the loss would have been greater had it stopped production. “We would have had to offer incredible discounts and credit terms to win over lost customers,” he says.

The company aspires to become a one-stop shop for large scale infrastructure projects. The synergies it could create from this could give it a cost advantage

It was buyers that destroyed Sri Lanka’s fabric industry, not government policy. Sri Lanka’s clothing makers competing on a global scale couldn’t rely on domestic textiles. There were issues with both quality and price. Imports from China were far superior.

Melwire is investing in capacity building and laboratories for testing and quality assurance. Its new production line will deploy the latest Swedish and Italian technology. But, these alone may not be enough, so the company is taking more precautions. It has diversified its product portfolio to include plywood, pipes and tubes, and interior finishing materials like brass fittings. It has claimed market leadership in all these products. The company aspires to become a one-stop shop for large scale infrastructure projects. The synergies it could create from this could give it a cost advantage.

Muruga admits this strategy. Melwire’s next investment will be a game-changer for the family-business, but he stops short with the details. “Just wait and see,” he says with an affable laugh. If things go badly, the company has a safety net in the six Hilton-managed hotels it’s currently building.