News Room - Business/Economics

Posted on 31 Dec 2007

Can Malaysia cope with new benchmark price?

WITH the automatic price mechanism (APM) for cement effective tomorrow, construction players and steel millers in Malaysia are now bracing for a similar APM on steel bars and billets.

Many quarters want the Government to quickly address mounting concerns over current tough business conditions. These include the prevailing tightness in steel supply among contractors while escalating raw material prices like iron ore and scrap metal are squeezing the operational costs and margins of steel millers.

According to an industry source, the Government understands the predicament of local contractors (who blame steel millers for artificially reducing supply) and steel millers (who say they have been increasing supply but are facing margin squeeze).

The Government is said to be seriously considering the proposal by Malaysia Iron and Steel Federation (MISIF) for an APM on steel bars and billets.

“Although no date has been set, there is strong indication that there will be an APM for the steel sector in future,” he added.

An APM on steel bars and billets may not be entirely “acceptable” to the construction industry.

“The success of APM on cement – subject for revision in 2009 – will be the benchmark for the Government to introduce an APM on steel bars and billets,.” he said.

Come 2008 and beyond, the pressure on the steel and construction sectors will intensify with the rolling out of projects under the Ninth Malaysia Plan (9MP) as well as developments in the Iskandar Development Region, Northern Corridor Economic Region, Eastern Corridor Economic Region, and soon-to-be-launched Sabah Economic Region.

The construction wave has also swept Singapore, given its mega projects like the Marina Bay Residences at Marina Boulevard, Marina Bay Financial Centre and packages on the Marina Bay Sands Integrated Resort.

Malaysia's production of steel bars and wire rods jumped 17% year-on-year (y-o-y) while in Singapore, steel imports from Malaysia grew 53% y-o-y to S$213mil in the second quarter 2007.

The source pointed out that the Government's latest move to raise the ceiling price for steel bars and billets by just 20% from RM1,635 and RM1,389 per tonne had somewhat failed to address the problem of rising costs faced by industry players.

Meanwhile, the price of steel is expected to be on the uptrend in 2008 as China continues to tighten its enforcement on closure of small steel mills, creating a global supply shortage situation.

Average prices for steel bars and wire rods in August 2007 have risen by about 13.4% and 13.9% year-on-year to US$551 tonne and US$561 per tonne respectively. 

According to the National Development and Reform Commission, China closed down 18.4 million tonnes of outmoded iron and steel production capacity in the first half 2007. 

This is part of the country's plan to phase out 100 million tonnes of obsolete iron capacity and 55 million tonnes of steel capacity by 2010, as its steel makers consume too much energy. 

That has resulted in serious pollution.

Since May 21, 2007, China has reduced tax incentives for steel exports in its move to slow down steel production and encourage consolidation among larger steel producers. 

It also imposed export tariff of 5% to 10% on steel products in mid-2007 and increased 10% to 15% tariffs on semi-raw materials exports. 

These measures caused a surge in China steel exports of 21.3 million tonnes, up 132% y-o-y in anticipation of lower margins after the hike. 

Chinese steel production started to ease in July 2007 by 2% from June's record high of 42 million tonnes.