Not so long ago, the global steel industry was in doldrums, crippled by pricing pressure as a result of oversupply and stagnant demand growth. Steel-producing countries reacted by erecting various fences and retaliatory measures to safeguard their respective domestic industries. Under such gloomy conditions, the steel industry had to undergo massive structural changes, which led to the consolidation of steel giants in Europe, Japan and Korea. Now, the global steel industry is bubbling with activity, buoyed by rising steel prices, strong global demand and shortage of ferrous raw materials. For the first time in 20 years, there is demand growth all over the world for steel. Amidst such euphoria in the global steel industry, how will our local steel industry fare? What are its prospects and who are the beneficiaries in the medium term?
The steel industry in Malaysia can be categorically subdivided into two main segments, namely the long products and the flat products. Long products include billets, bars, wire rods, sections, nails, wire mesh, bolts, nuts, etc. which are predominantly used in the construction industry. On the other hand, flat products are products consumed mostly by the manufacturing, construction and oil & gas sectors like hot-rolled plates and sheets, cold-rolled coils, tubes, pipes, boiler and pressure vessels, etc.
Not unlike its global counterparts, the local steel industry is cyclical, regulated and highly capital-intensive. During its early formation years, it has centered mainly around the country’s construction and infrastructure needs, as production of long products like bars and wire rods dominated the local scene. However, in recent years, the emphasis on the manufacturing sector as the next engine of growth has spurred the demand for higher value-added products, especially in the flats segment. The introduction of Megasteel, the only producer of hot-rolled products in the country, signifies the government’s intention to ensure a ready supply for the development of the manufacturing and construction sectors and thus, removing its vulnerability to imports. The structure of the steel industry in Malaysia by product type and number of establishments is shown in Table 1 below.
Table 1: Structure of the steel industry in Malaysia
Consumption of steel in Malaysia grew rapidly from the late-1980s to mid-1990s, fuelled by strong growth in both the construction and manufacturing sectors and driven by public and private sector infrastructure projects. However, steel consumption peaked in 1997 at 8.3 mln metric tones (MT) as the economic crisis of 1997-98 rendered the growth of steel consumption to a virtual standstill. Recovering from the industry’s worst recession, aggregate steel consumption (ASC) rebounded from its depths in 1998 of 4.6 mln MT to register 7.0 mln MT in 2002. Another noteworthy observation is that the consumption of flat products has grown in tandem with the industrial progress of the country and currently makes up 49% of the country’s aggregate steel consumption (see Chart 1 below).
Chart 1: Aggregate Steel Consumption ('000 MT)
Exports & Imports
With the exception of a few downstream products, Malaysian steel products were hardly exported in the past. This was due largely to the local industry being primarily domestic-oriented and that domestic consumption was adequate to absorb local production. Furthermore, various safeguard measures erected by large steel-consuming countries also contributed to the low levels of exports. Nevertheless, out of the 1.4 mln MT of exports in 2002, which were valued at RM2.9 bln, flats made up 78% (1.1 mln MT) – see chart 2. In terms of imports, a large proportion was for flat products (HR and CR sheets and oils, plates, etc.), which were not produced locally. Out of the total steel imports in 2002 of 3.2 mln MT, valued at RM9.42 bln, rolled flats accounted for 2.5 mln MT (78%) – see chart 3.
Chart 2: Exports
Chart 3: Imports
Production & Key Industry Players
At present, the bulk of the Malaysian steel is produced using the electric-arc-furnace (EAF) route, remelting scrap iron, or scrap-substitutes like DRI and HBI to produce molten steel. Molten steel is then cast to form semi-finished steel products such as billets, bloom and slabs. Billets and blooms are rolled to produce bars, wire rods and steel sections while slabs are rolled to produce plates, hot-rolled coils and sheets. Further downstream, wire rods are drawn to produce secondary wire products like bolts, nuts, screws and nails while hot-rolled coils are used to produce cold-rolled coils and subsequently, tinplates, galvanized sheets, pipes and drums.
Scrap, the main ingredient in this process, is largely imported from countries like the EU and the US as domestic supply is insufficient to cater for the needs of the local industry. Currently, only Perwaja Steel (PS) and Amsteel Mills (AM) produce DRI and HBI at their plants in Kemaman and Labuan respectively. As DRI and HBI command a premium over scrap due to its ‘cleaner’ content, a large proportion is exported to countries like Vietnam, Korea, China and Taiwan.
There are 6 billet producers in the country, namely PS, AM, Southern Steel (SS), Malayawata (MW), Malaysian Steel Works and Antara Steel (AS), with a combined rated capacity of 4.4 mln MT per annum. In general, billet production is targeted mainly for domestic use and thus, exports have been relatively small until recently. These billets are used in rolling mills to produce bars, wire rods and steel sections. In 2002, Malaysia’s total rolling capacity for finished long products was about 7.2 mln MT, with bars and wire rods contributing 6.1 mln MT. The major rolling mills are AM and AS (now under Lion Industries), SS, PS and MW. Due to its sheer size, Lion Industries now controls approximately 30-35% of the domestic steel bars market and 30-40% of the domestic wire rods market. The other major player in the wire rods segment is SS.
In the flats segment, Megasteel, with a rated annual capacity of 2.5 mln MT, is the sole producer of hot-rolled coils (HRC) and plates in the country. Due to its monopolistic position and the assistance of import duties, it currently has a stranglehold on the domestic flats business. Its major clients are the two existing producers of cold-rolled coils (CRC), namely Cold Rolling Industry Malaysia (CRIM) and Ornasteel. With a combined capacity of 680,000 tonnes, both presently enjoy a virtual duopoly in their market segment, supplying about 40% of the domestic demand while the balance is imported from countries like Japan, Korea, Taiwan and Russia. However, Megasteel’s imminent entry to this segment shall shake-up the present dynamics of the market. The supply of HRC and CRC are also crucial to the downstream manufacturers of tubes, pipes, boiler and pressure vessels and steel servicing centres like Choo Bee, Hiap Teck, Maruichi (now known as Melewar Industrial Group), Southern Pipes, Wah Seong and KNM.
To protect the local steel industry, particularly that of the flats segment, the government raised import duties in March 2002 to a maximum of 50% on a total of 199 flat steel products such as HRCs, CRCs, electro galvanized (EG) and galvanized iron and steel pipes. Companies wishing to import these products were also required to seek special import licenses or approved permits (AP). The hike is significant as previously, HRCs were subjected to a maximum of only 25% tariff, CRCs to a maximum of 10% and steel pipes to duties of around 20% or less. Exemptions are given to some industries such as the automotive, electrical and electronics, oil and gas, shipping, iron and steel furniture, and companies located in the free-trade zones and export-based companies. Exemption has also been given to industries that are unable to source their products locally but they must submit applications to the government for licenses that exempt them from the tariff.
In the long products segment, the government has also erected some restrictions by imposing ceiling prices for retail purchases of steel bars and billets. At present, the government-controlled retail prices for steel reinforcement bars and billets are approximately RM1,242 and RM905 per MT respectively.
(A). Global Steel Demand
Global steel demand is rising on the back of accelerated infrastructure activity in China, Russia and India, housing boom in the US and white goods resurgence in Europe. In the US, the demand is led by the booming housing industry while the auto industry is showing signs of a recovery. In India, China and Asean countries like Vietnam and Thailand, the demand is led by capital investment activities in infrastructure while strong internal demand is seen in countries like Russia and Eastern Europe.
Chart 4: Average World Steel Prices (USD/tonne)
(B). Increase in Global Steel Prices
Record levels of global steel production (960 mln MT in 2003) have drained all available supplies of ferrous raw materials, pushing steel prices up dramatically. The cost of raw materials has gone up substantially – 18% for iron ore and more than 20% for coking coal. International scrap prices have surged by USD180/MT to about USD350/MT in just the last six months. As a result, international prices of HRCs, CRCs and wire rods have shot up to dizzying heights – see chart 4 above.
(C). The ‘China Effect’
Many have the myopic view that steel exports from China are a threat to local producers as it has the advantage of economies of scale. However, one must understand that not only is China the world’s largest steel producer (220 mln MT in 2003), it is also the greatest steel importer (30 mln MT in 2003). Most of the imports were strip mill products like HRCs and CRCs. Although China was already in surplus in 3 types of steel products, wire rod, merchant bars and reinforcement bars, it is nowhere near self-sufficiency in sheets. The gap between domestic mill shipments and apparent consumption is almost 9 mln MT for HRC, 10 mln MT for CRC and more than 7 mln MT for zinc-coated sheets. As such, there will be a massive import need for flat products in the years to come. This situation will be further exacerbated if domestic production is constrained by current shortage in raw materials and scarcity of shipments to transfer blast furnace feed from Australia and Brazil. Resulting from this, the current import price of HRC in China is approximately US$510 per MT while CRC can fetch a premium price of US$600 per MT. Furthermore, as more and more flat products are diverted to China, the supply for the rest of the world has been squeezed with local producers reportedly unable to source their requirements from international markets. This would, in effect, favour the local suppliers like Megasteel, Ornasteel and CRIM. Local exporters of flat products like Hiap Teck Venture, Wah Seong and Southern Steel would also be a prime beneficiary of this scenario.
(D). Revision of Domestic Ceiling Prices
The recent application to the Domestic Trade and Consumer Affairs Ministry seeking a possible increase of some RM600 per tonne for steel bars, if approved, will significantly enhance the prospects of local steel millers like Malayawata, Southern Steel and Lion Industries. Currently, steel millers have to suffer losses stemming from escalating input costs - steel scrap surging to above US$300 per tonne, and the fact that they are unable to pass on these costs to the consumers due to the ceiling prices. For the time being, steel millers have no choice but to do a balancing act between the production of wire rods, which are non-price controlled, and steel bars, which are price controlled. As it stands, local steel companies are able to export to the region at much higher prices of about RM2000 per MT, far above the domestic ceiling prices. Some have also resorted to export their billets instead, which are able to fetch lucrative prices in the international markets. This indirectly caused the current shortage in steel bars in the construction sector. Thus, it is conceivable that the authorities will approve the proposal in some form or another to relieve the current steel bar shortage and to better reflect the current level of global steel prices.
(E). Anti Dumping and Safeguard Measures
The US has recently removed its tariffs on steel imports (Section 201) and was reciprocated by the EU, who also lifted its import duties on steel products. China followed suit by abolishing its 13-month run of tariffs on steel imports. These moves have created much optimism among global steel companies in the hope of further boosting their sales in these large steel-consuming nations. However, on the domestic and regional fronts, the import duties on flat steel products remain with no specific date for their removal. It is increasingly likely that local safeguard measures be maintained for a considerable period to provide the local steel industry, notably Megasteel, some initial protection.
(F). Domestic Steel Consumption Growth
Steel consumption is projected to grow at an annual rate of 5%, with the ratio of longs to flats falling to about 40:60 by 2007. As Malaysia continues to industrialise, the consumption pattern will progressively favour flats as is evidently seen in other newly industrialised countries. The anticipated increase in flats consumption is also due to the expanding manufacturing sector, being the main driver of industrial development in the coming years. On the other hand, the longs segment will continue to depend on the construction sector, primarily the residential sub-sector as large infrastructure projects will be progressively scaled down under the new administration.
Conclusion and Advice
With global steel prices still hovering at such dizzying heights, supported by strong global demand and escalating cost of raw materials, the prospects for the local steel industry are looking bright. For the longs segment, the possible upward revision of government-controlled ceiling prices for steel bars and billets will boost the short-term margins of steel millers while local producers of flats will benefit from the current global shortage as a result of China’s thirst. The removal of anti-dumping and safeguard measures by large steel-consuming nations may also provide an opportunity for local exporters to expand their markets and relieve their reliance on domestic consumption. All in all, the current dynamics of the global steel industry offers tremendous opportunities in the medium term and local steel players are well positioned to reap the potential benefits. The caveat to this positive outlook is the world economic growth, which as we explain above, is peaking.