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Monday, January 23, 2017

Silver lining for the local steel industry?

Saturday, 21 January 2017


Malaysian Iron and Steel Industry Federation (Misif) president Datuk Soh Thian Lai

THE worst appears to be over for the global steel sector, including that in Malaysia, after having experienced a five-year slump in global steel prices.

Steel prices have normalised following China’s decision to slash its output and clamp down on illegal mills, coupled with Malaysia’s safeguard measures, which gave local steel players some breathing space, according to Malaysian Iron and Steel Industry Federation (Misif) president Datuk Soh Thian Lai.

However, Soh says the road ahead for steel millers is still fraught with challenges and uncertainties.

“How this is going to play out will depend a lot on China’s economy and its steel industry,” he says.

In a nutshell, the Chinese government is committed to reducing its steel production capacity via the consolidation of steel groups and providing financial support of 100 billion yuan for worker retrenchment schemes.

Last year, China focused on clamping down on its “zombie” plants, but this year, it is expected to target operational capacity.

The republic is also providing fiscal support to its construction sector, which has buoyed domestic industrial metal demand, especially through public-private partnerships in infrastructure such as airports, water, rail, power, roads and bridges that will continue at least until end-2017.

“These changes are a turnaround from the massive overcapacity of the recent years, with China coming under fire for dumping steel into the global markets, thus depressing prices.

“As the excess steel capacity in China would take some years to resolve, we are unlikely to see sharp increases in the global steel price this year,” adds Soh.

On the home front, Soh says the Government’s encouragement and promotion of the industrialised building system, renewed push on the “buy Malaysian products first” policy, especially in the construction industry, and high-impact projects will help bolster the domestic steel industry.

Any increase in infrastructure spending (demand pull factors) will see increasing demand for steel products and a multiplier effect on the national economy.

In addition, the authorities should limit unfair imports through continuous regulatory development and enforcement, including by moving rapidly to curtail and prevent import circumvention and dumping of products into the country.

“These measures and incentives will enhance the capacity utilisation of local steel manufacturers going forward,” says Soh.

Local steel bars and wire rods are currently trading at RM2,200 to RM2,400 per tonne and RM2,250 to RM2,350 per tonne, respectively.

The lure of foreign investors

Interestingly, despite tough operating conditions, Soh says the RM41bil local iron and steel industry is still attractive to investors, particularly foreign companies.

A Chinese steel plant, Alliance Steel (M) Sdn Bhd, is currently under construction at the Malaysia-China Kuantan Industrial Park in Kuantan, Pahang.

Alliance Steel is a subsidiary of Guangxi Beibu Gulf Iron and Steel Co Ltd from China and will be investing RM4.2bil in a modern integrated steel plant to produce high-carbon steel bars, wire rods, H-shaped steel and steel building materials with a production capacity of 3.5 million tonnes.

Also, in a visit by Prime Minister Datuk Seri Najib Tun Razak to China last November, a framework cooperation agreement was signed between the Sarawak state government, Hebei Xinwuan Steel Group and MCC Overseas Ltd on the proposed development of an integrated steel plant in Sarawak.

This will result in a steel-making complex comprising a five-million-tonne steel plant, a cement plant, a coke oven plant, a cold rolling plant, and a welded pipe plant in three phases.

Even loss-making Perwaja Holdings Bhd has found a new partner in China’s Tianjin Zhiyuan Investment Group Co Ltd, where the Chinese partner will reportedly inject RM1.8bil and be the major shareholder. This is part of a proposed regularisation of Perwaja Group.

Recently Hiap Teck Venture Bhd, via Eastern Steel Sdn Bhd, inking a memorandum of understanding with Chinese steel products producer Ansteel Group Corp’s unit, Angang Group Hong Kong Co Ltd, to explore, discuss and negotiate areas of cooperation between their units.

“Therefore, some steel players are able to have access to imported materials, and banks have also shown interest in providing loans for their businesses,” Soh says.

Industry consolidation

Soh also says that mergers and acquisitions (M&As), joint ventures (JVs) and consolidation exercises are normal in the world’s iron and steel industry.

Misif and the local authorities are encouraging the consolidation of the iron and steel industry to gain greater economies-of-scale and entities that are more efficient, environment-friendly, energy-efficient and able to withstand competition at home and gain better access to the global market.

For example, local steel manufacturers are interested to have JVs with Chinese steel players to synergise their operations and venture into other areas of infrastructure and industrial development.

“These tie-ups would facilitate new technological and product development, export market expansion opportunities and human capital development for the industry to move forward.

“We hope that the industry players will view this positively to refocus their business model and strategy,” he adds.

But more importantly, foreign investors should show interest to venture into high-value-added products, which do not compete with similar products or capacity available in Malaysia.

“Such an undertaking will bring a positive change in the local steel industry landscape and create new and downstream activities in various sectors.

Safeguard measures

Analysts say one poser to an early stage of earnings upcycle is the status of the Government’s provisional safeguard duties on imported steel bars and wire rods, which will be determined in April.

The safeguard duties of 13.9% for imported steel coils and 13.4% for imported reinforced steel bars introduced in September last year are meant to address the plight of local steel millers who are facing severe margin compression and losses, given the influx of cheaper steel imports, mostly from China.

The provisional safeguard measures imposed in September 2016 on steel wire rods and steel bars would last for 200 days.

“The local industry has already been impacted due to the cheap imports from China. Without the safeguard measures, the local industry will be threatened and its sustainability and profitability at stake,” says Soh.

KAF Investment Bank says the decision by the Government on whether to approve or abort the safeguard measures is crucial for local steel players because “so far, it has helped to sustain the current steel price levels”.

The prospects of the local steel sector look positive this year, following the safeguard measures which led to lower China steel imports resulting in a stabilised price mechanism that could generate reasonable profits for the local steel millers.

Between 2013 and 2015, local players were seen incurring losses of up to RM2bil from the global steel price slump and cheaper steel imports.

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