Posted on 06 Feb 2015
Steel industry in Indonesia, Malaysia and Thailand – serving the needs of the construction sector
The construction sector is the largest steel consuming sector in Indonesia, Malaysia and Thailand and is the key sector in the countries' economy.
Malaysia's share of the construction sector in the country's steel demand registered the highest rate, at 69% compared to Indonesia, at 65.8% and Thailand, at 59.7% in 2013.
The growth in construction sector, therefore, is one of the important key drivers for the continuous growth of steel demand in these countries.
Indonesia's steel demand registered 12.7 million tonnes, an increase of 1.5% y-o-y in 2013. Malaysia registered the highest growth rate in steel demand by 12.6% to 10 million tonnes, while Thailand's steel demand grew by 7.5% to 17.6 million tonnes in 2013, amidst a difficult global economic environment.
Indonesia's gross construction output (in billion IDR) surged significantly from 100,000 billion IDR in 2009 to 500,000 billion IDR in 2013, compared to the moderate increase by 100,000 billion IDR in 10 years from 1998 – 2008.
Exhibit 1: Construction indicator in Indonesia
[PICTURE1]
Malaysia's construction sector registered a more stable growth rate at around 8-10% each year. Growth rate in ready mixed concrete production registered an average (CAGR) rate of 8.5%. Malaysia's Construction Industry Development Board (CIDB) reported GDP growth rate for construction sector at 10% in 2013 and 2014.
Exhibit 2: Construction indicators in Malaysia
[PICTURE2]
Thailand's construction sector continues to grow, in line with the country's GDP growth. However, over the longer term, trend of the growth in the sector fluctuates quite a bit. This is because there is a lot of speculative demand within the country. After the two economic crisis that hit the economy, players in the sector seems to be more careful, leading to a more steady growth rate. Self-built-completed houses grew by 4.9% from 2000-2007 and slowed down to 1.4% from 2000-2013. Developer-built-houses growth rate before 2008 was growing at CAGR of 21.6% (2000-2007) and slowed down to CAGR 6.7% (2009-2013). Developer-built-apartments and condominiums, on the other hand, showed an increasing growth trend.
[PICTURE3]
Domestic construction steel production in Indonesia, Malaysia and Thailand is mainly to serve domestic demand in the construction sector. Steel grades and sizes are simple and most of them can be produced domestically. However, there is no standard systems of construction in the three countries, especially in residential buildings, such as window, door etc. As a result, sizes of steel used in the sector vary. This has become a problem for steel supply. Domestic steel producers prefer to produce mass products and do not like to provide various sizes in small volume. Therefore, there is a need to have middle persons such as coil centers, service centers, traders or distribution centers and stockists to do bulk purchase of steel from steel producers and process them into required shapes and sizes for distribution in smaller volume to end users.
Distribution channels for construction steel become complicated and there are many tiers of service centers and stockists. Therefore, prices of steel could add up to 2.5 times of ex-factory prices when it reaches the end users.
Moreover, service centers or stockists often do not understand the requirements of end users and they also do not have full knowledge of steel applications. The service is made as according to the order from customers. As a result, there is little development of the process and business in order to lower cost and to attain better quality of steel used in the construction sector.
Malaysia's government through CIDB has promoted building standard design into the industry by launching Industrial Building System (IBS). Through the IBS Centre, CIDB is promoting the usage of IBS to increase productivity and quality at construction sites using various promotion programmes, training and incentives. It is estimated that total cost of construction can be lowered by 15-20% when IBS is applied. However, the campaign is still in the early stage and the system has not been widely used in the country.
As for Indonesia and Thailand, the governments have not implemented any specific rules or regulations to promote standard systems and designs to improve supply chain in the countries.
