STEEL prices depressed by rising oil prices and increased supplies from China have hit HG Metal Manufacturing, with the steel stockist reporting yesterday a 67 per cent fall in full-year net profit.

Earnings for the 12 months ended Sept 30 came to $5.4 million, against a record $16.5 million for the previous comparative 11-month period. The previous financial year was shorter because of its financial year-end change.

But management, which last month warned about the weaker profits, said it is now 'cautiously optimistic' about the company's prospects, and is proceeding with plans to build a sandblasting factory as the erosion in steel prices seems to have stabilised.

'The challenges we face were mainly external. The company ... remains fundamentally strong and committed to our growth objectives which is to create a better balance between trading and the more cyclical-resistant manufacturing operations,' HG Metal's chief executive officer Wee Piew said. HG Metal said FY05 was a 'volatile year' for the steel industry, compared to the 'exceptional' 2004.

While the start this year saw strong demand and rising steel prices, the market took a sharp turnaround the middle of the year. The anticipated recovery took longer than expected due to the high oil prices and sudden increase in steel supply, mainly from China.

Despite the difficult external conditions, turnover rose about 95 per cent to $341 million, up from $175 million.

Demand for steel plates remained strong, accounting for about 47 per cent of total sales. Demand for construction-related products like bars and beams also picked up. The manufacturing division saw an increase in sales, crossing the $20 million mark for the first time. In line with the higher sales volume, distribution and administration costs were also higher. Finance costs rose by 182 per cent, partly due to higher interest rates.

Other operating expenses were also higher due to the stronger US dollar and a provision for the fall in the value of its investment in Ferrochina Ltd, a steel galvanising company based in Changsu, China.

Directors are adopting a cautious stance towards the outlook for FY2006 but 'remain cautiously optimistic about the prospects'.

HG Metal said this is because steel prices have recovered slightly, with China no longer issuing new licences for steel mills, and encouraging the merger of smaller mills and the closure of unprofitable ones.

In addition, overall demand for steel remains healthy, notably from China and the Middle East. Even Singapore is witnessing a pick-up in demand for construction-related steel products as the outlook for the property market improves.

HG Metal is pumping in $3 million to build and equip its new sandblasting factory to cater to shipyards, which require their ship plates to be sandblasted before use. Sandblasting operations are expected to start in the second half of FY06.

The company is proposing a final dividend of one cent and a special dividend of 0.25 cent per share.