Posted on 16 May 2014
Local steel millers’ profit margins, already under pressure for the past three years, are expected to shrink further, as the global steel sector faces growth in manufacturing capacity at a time when consumption growth is slowing down.
Datuk Soh Thian Lai (pic), the president of the Malaysia Iron and Steel Industry Federation, said that the “excess capacity” could be the single biggest problem facing the industry, noting that the global steel output is expected to increase by 3%, or about 1.65 million tonnes, this year. Most of this new supply is coming from steel mills in China, Soh said.
“This is on the back of 250 million tonnes of existing capacity available in the world, which has not been easily utilised, as the global demand has not grown in tandem with the supply,” he pointed out.
Added Soh: “Our steel millers are currently grappling with surplus supply and the influx of cheap imports, mainly from China, coupled with the domestic industry’s capacity utilisation being very low at the moment. Some millers have incurred losses, while some still have marginal profits.
“In fact, the financial impact of cheap imports from China is causing more damage to local upstream players than our mid and downstream players.”
This is indicative of the recent significant losses by local steel giants Megasteel Sdn Bhd, Perwaja Holdings Bhd and Kinsteel Bhd, while other steel players such as Ann Joo Resources Bhd, Malaysia Steel Works (KL) Bhd and Southern Steel Bhd are still registering profits.
This year, local steel millers’ earnings and margins will also be pressured by weak steel prices, high raw material costs and hikes in electricity and gas tariffs, Soh added.
More importantly, there is an inability among local steel millers to pass on the cost increases to consumers.
Despite the Government’s initiatives on the implementation of some major construction projects, the domestic demand for steel has been mostly fulfilled by cheaper imports, especially of the boron-added-type alloy steel from China.
South-East Asia Iron and Steel Institute chairman Chow Chong Long, meanwhile, said the surplus steel capacity in China had hit 300 million tonnes and was still rising. “This represents almost 70% of the world’s steel surplus, but China-based steel millers are still persistent about producing and selling.
“As a result, they have a capacity utilisation of over 70%, while Malaysian steel millers’ average capacity is about 50%,” he added.
Chow, who is also Southern Steel’s group managing director, pointed out that steel mills generally could not make money at a less than 70% capacity, even “if it is an efficiently-run operation, hence, many local steel mills suffer mostly from low utilisation rather than not being efficient”.
Even in China, the Chinese millers’ refusal to slow down or close their operations have driven the prices of their own steel and that of the global steel to very low levels in the first quarter of this year.
Chow cited that the China Iron and Steel Association members had posted a total loss of about US$369mil (RM1.19bil) in the first quarter of 2014, which is the worst quarter in the past 10 years.
“Under such a scenario, I believe no steel industry can survive if not granted support by their respective governments,” added Chow.
Therefore, for the sustainable health and safety of Malaysia’s steel industry, the enforcement of standards is a must, he said.
“Our Government must not drag its feet anymore, be it on the local or imported steel supply.
“Despite great difficulties, some of us are still profitable. We are not looking for protection but we want the Government to ensure a level playing field, enforce standards strictly, and root out cheating by local and foreigners in trade practices and unfair subsidies by foreign governments.
“So far, the United States, the European Union, Australia, Indonesia and Thailand have slapped many trade actions against China. They cannot all be wrong. Hence, why should Malaysia not be as fast and thorough?” questioned Chow.
