Steel – a hot issue

SADDLED with an unbalanced domestic liberalised steel sector and the
unfavourable bilateral Free Trade Agreements (FTAs) between Asean and
China, Malaysian steel players appear to be operating in an increasingly
uncompetitive environment, exacerbated by hikes in electricity tariffs,
natural gas prices and sub-standard products in the market. Mid and downstream steel manufacturers as well as foreign steel companies are also crying foul over a petition by Lion Group's unit Megasteel Sdn Bhd,
the country's sole hot-rolled coils (HRC) producer seeking a safeguard
measure on HRC. Many players say the petition will benefit and continue
to protect only one segment of the industry's value chain. Interestingly,
these developments are happening in the thick of a split in the
country's steel fratenity, which has resulted in two camps - the
30-year-old Malaysia Iron and Steel Industry Federation (MISIF) and the
barely one-year-old Malaysia Steel Association (MSA). “The current developments engulfing the local steel sector will likely restrict the overall positive growth this year,” MISIF president Chow Chong Long tells StarBizWeek recently. [You must be registered and logged in to see this image.]
Lopsided policy In
terms of the liberalisation policy and FTAs, Chow laments that the
Government has overlooked the entire value-chain of the steel industry. “MISIF was not consulted when the Asean-China FTA (ACFTA was the first FTA) was signed. “Subsequent
FTAs signed mainly replicate ACFTA whereby the Government offered
materials/products produced by upstream players (particularly HRC) into
Highly Sensitive (HS)/Sensitive (SL) lists with high duties reducing at
longer timeframe, meaning slower liberalisation as compared with
downstream players who had to contend with normal track or fast track.” He
adds that MISIF would prefer a cap of 5% instead of zero for all steel
products that are produced locally in view of more favourable logistic
and payment terms as compared with imports. As a result of faster
liberalisation for downstream finished steel products in contrast to
slower liberalisation for the upstream steel products, Chow also claims
that downstream activities are facing stiff competition from China which
have larger economies of scale. “This way of liberalisation is illogical as protection is granted to only upstream company. “In
contrast, it should be granted to value-added midstream and downstream
companies, or that liberalisation should be applied evenly across the
whole value chain.” He also says the market monopoly and local
availability policy with high import duties for flat steel products have
made it an arduous task for steel players to defend the domestic market
from cheaper imports of finished products. In Malaysia, locally
manufactured finished steel products are unable to compete against
similar imported finished products, which have either zero or low import
duty. According to Chow, MISIF may need to review downward its
local steel sector growth forecast at 5% to 7.5% this year given the
recent hike in electricity, gas and proliferation of the sub-standard
steel products. “The production cost of steel product
manufacturers will increase by 2% to 5% with the hike in electricity
tariffs and natural gas prices by an average of 7.1% and 28% effective
June 1,” says Chow. [You must be registered and logged in to see this image.] The
production cost of steel product manufacturers will increase by 2% to
5% with the hike in electricity tariffs and natural gas prices.
The
Government will also further increase RM3 per mmbtu of natural gas
every six months, which will increase electricity tariffs
correspondingly by at least 5% each time. Steel industry players
are also concerned over the use of sub-standard steel products
especially in the construction industry which create unfair market for
serious quality manufacturers. More importantly, it is putting the lives of people using such poor materials at risk. Unprecedented measure? Another issue over the past four months is Megasteel's petition for a safeguard measure on imported HRC. Chow who is also group chief operating officer of Southern Steel Bhd,
an upstream steel player, says he is against the petition as it is made
without consultation or consideration for the rest of the steel
industry players. Megasteel has the monopoly for the supply of
HRC and has enjoyed heavy protection for over a decade. Presently import
duty for HRC is 25%, lowered from the previous 50%. [You must be registered and logged in to see this image.] The challenges in the industry are mostly rising raw materials and energy costs.
Megasteel
has proposed to the authorities a safeguard duty rate of 35%, with the
rate gradually reduced over a five-year period, on the imports of HRC. “If
successful, the safeguard duty imposed might also be over and above the
existing import duty of 25% and the import duty exemption approved by
the authorities on some HRC imports. “If there are genuine needs
for safeguard measures, the entire value-chain of the industry must be
consulted and when it is clear the entire industry is dealt with in a
balanced way, MISIF will consider supporting the petition,” adds Chow. Meanwhile, Megasteel Sdn Bhd steel division marketing director Lai Chin Yang says “Safeguard measures are not new in Asia contrary to MISIF's claims. “The
figures are rising steadily over the last 15 years, with Indonesia,
India and the Philippines initiating the highest number of safeguard
proceedings with 33, 11 and 9 respectively,” adds Lai. Indonesia has filed 11 investigations of which five are related to the steel industry. In
particular, it has imposed anti-dumping action on HRC against Malaysia
and six other countries. Indonesia has also tightened its industrial
standards as non-tariff barrier (NTB) against steel imports. Thailand
imposed anti-dumping on HRC from 16 countries, including Malaysia.
“Without safeguard on our HRC, Thailand and Indonesia can freely export
their HRC to Malaysia while Megasteel has the uphill task to export
there and succumb to anti dumping duties and other non tarriff barriers. “In reality, is this fair to us?” Lai
adds that while Megasteel supports the domestic steel liberalisation,
the Government must carefully consider the side effects which are
eroding the competitiveness of domestic steel players. [You must be registered and logged in to see this image.]
Unity in the fraternity As
for unity among local players, Chow says the adage “Growing the
midstream and downstream sectors to grow the upstream sector” should be
the concept of development for the steel industry. In HRC case,
he says the mid and downstream players need to give support to sole
producer Megasteel by giving feedbacks and the producer must be willing
to listen, accept and make efforts to improve the quality, service,
delivery, and pricing, rather than lobbying for protection from the
Government. The Government should also provide incentives to
allow more players rather than granting added protection to a sole
player in the market place to enhance competitiveness not just
domestically, but also regionally and globally. November 2010 witnessed a breakup in MISIF. Lion Group's Amsteel Mills Sdn Bhd, Antara Steel Sdn Bhd and Megasteel Sdn Bhd as well as Kinsteel Bhd, Perwaja Holdings Bhd, Perfect Channel Bhd, Ann Joo Steel Bhd, Ann Joo Integrated Steel Sdn Bhd and Malaysia Steel Works (KL) Bhd (Masteel) quit MISIF to set up MSA under the leadership of Lion Group chairman and CEO Tan Sri William Cheng. Cheng
was quoted as saying that the integrated upstream players can get
better representation in the upstream steel sector via MSA.
Collectively, MSA members represent about 85% of the local upstream
steel industry. Meanwhile, Masteel managing director and CEO Datuk Seri Tai Hean Leng concurs that the challenges in the industry are mostly rising raw materials and energy costs. [You must be registered and logged in to see this image.]
However, the impact of the challenges on steel mills are of varying degrees depending on their processes. On
liberalisation of the sector in Malaysia and Asean, Tai says; “This has
generally caused prices of steel to remain relatively stable for inter
Asia and Asean trade. “This is due to major steel producers like
China, burdened with high cost of production as a result of high
international prices of iron ore and coking coal as well as other low
cost producers from countries such as Turkey which have to contend with
high freight costs.” The advantages of short delivery time, lower
warehousing cost, sale in smaller batches, readily available credit
terms compared with the need for LC for payment of imported goods allow
local steel manufacturers to retain a large portion of their domestic
customers in many cases up to 70%. However, he adds that smaller
producers which are fragmented will find it difficult to export to major
economies due to uncompetitive terms of trade. “The
disadvantages of liberalisation such as export surge are often countered
by invoking WTO rules to prevent injuries to the respective countries'
steel mills,” says Tai. For Masteel, Tai says with its enhanced
upstream steel making production capacity of over 600,000 tonnes by
2012, the company is investing RM100mil to build a new rolling mill to
produce steel bars. Masteel is also deploying a technology
package to reduce its dependency on electricity and natural gas which
are subject to price increases.