This article first appeared in Forum, The Edge Malaysia Weekly on November 13, 2023 - November 19, 2023

The polycrisis of the pandemic, geopolitical tensions and wars, financial instability and climate change makes it difficult for the steel industry to chart its future. At the recent Malaysian Iron and Steel Industry Federation (MISIF) forum on “Navigating global market dynamics for a sustainable future in the iron and steel industry”, in my capacity as the deputy minister of investment, trade and industry, I shared the government’s view on the importance of the steel industry.

For Malaysia’s steel industry to have a sustainable future, three challenges have to be dealt with collectively by the industry and government, namely, overcapacity in construction steel, green transition and financing transformation.

The overcapacity in construction steel in Southeast Asia requires all stakeholders to work together. As at 2021, the capacity of steel production in Asean stood at 75.3 million tonnes, with Malaysia being the third largest producer with a capacity of 16.1 million tonnes, behind Vietnam and Indonesia.

Based on a South East Asia Iron and Steel Institute (SEAISI) analysis, the steel production capacity in Asean is expected to balloon to 147.2 million tonnes by 2026 as a result of the influx of foreign steel investments into the region, especially those from China.

This can be an issue of concern as we see a slowdown in the construction sector and the subsequent reduction in demand for steel from China. The capacity of China-owned steel firms in Southeast Asia is intended for export to China.

The Chinese economy is increasingly looking like it is operating at two speeds: the construction sector is unlikely to be robust in the foreseeable future but technology, electric vehicles and renewable energy are all doing very well.

Through determined and aggressive supply-side reform, China took out at least 150 million tonnes of steel-making capacity between 2016 and 2020, which is a commendable feat. The Malaysian government will engage China and our Asean neighbours in a collaborative manner to ensure a win-win situation for all, as an attempt to address the issue of construction steel overcapacity in the region.

The government is committed to transforming the manu­facturing industry to reach greater heights, capitalising on emerging global trends. Therefore, the New Industrial Master Plan (NIMP) 2030 is formulated with a mission-based approach in our pursuit of industrial development. Although all four missions are cross-cutting for various sectors, two of them are especially relevant to the steel industry.

It needs to move up the value chain by producing steel products not locally available to reduce dependency on imported steel and to ensure availability of raw material for the local steel consuming industry. The NIMP 2030, which was launched by the prime minister on Sept 1, has made “advancing economic complexity” its first mission.

While long products still dominate steel production in the country, the Ministry of Investment, Trade and Industry (Miti) and its agencies have always promoted and encouraged the development of flat steel to fill the gap in the supply chain. Further, developing steel products would in turn support the growth and development of our local construction, automotive, electric and electronic, machinery and equipment industries.

Malaysia and the world are increasingly vulnerable to climate change and the steel industry, by the nature of the business, contributes very significantly to the nation’s carbon emissions.

Under the industrial processes and product uses (IPPU) sector, iron and steel industry emissions have been the fastest growing since 2014, and currently contribute 26% of the total IPPU emissions and 4% of the overall emissions. In other words, more than a quarter of the emissions from manufacturing are contributed by the steel industry. Thus, it has an outsized responsibility to craft a green transition plan.

Miti and one of its agencies, the Malaysia Steel Institute (MSI), are working with MISIF and the Malaysian Steel Association (MSA) to formulate the “Green Transition Roadmap for the Iron and Steel industry”, which will be aligned to the NIMP 2030.

The greening of the iron and steel industry should not be seen as a burden but an opportunity — a chance to innovate, adapt and secure a future where steel production aligns seamlessly with environmental stewardship. This is a win-win pursuit.

Transitioning to a sustainable, low-carbon economy will not only be good for the environment; it will also create jobs, spur innovation and enhance the industry’s global competitiveness.

The third mission in the NIMP 2030 — Push for Net Zero — aims to decarbonise the country’s industries while capitalising on new green growth areas such as renewable energy, electric vehicles, the circular economy as well as technology and services in carbon capture, utilisation and storage (CCUS). To achieve a net-zero carbon future for our industries, the nation must adopt comprehensive and bold policies.

The NIMP 2030 will prepare the industry by developing a decarbonisation pathway that utilises various measures such as implementation of energy efficiency and waste management initiatives, electrification of processes, and adoption of renewable energy and technology, supported by a robust regulatory framework.

Environmental, social and governance (ESG) initiatives have become a part of regulatory requirements and procedures for production, trade and investment, especially those who want to enter the European Union market.

Due to the regulatory changes in many countries, investors are also progressively taking ESG considerations into account in their selection of locations to invest. Malaysia’s leadership in driving ESG in the manufacturing sector is therefore timely as businesses need to be equipped with the ability to comply with the trade and investment policies that emphasise compliance with sustainability and ESG principles by our trading partners.

ESG is more than just sustainability or reducing carbon emissions. It is also about the “social” component, which involves better treatment of employees. Are our workers being paid well? Are they working in an appropriate environment? Is their productivity boosted by adoption of technology and automation? These are questions to be addressed when we discuss ESG principles.

However, all of the initiatives and measures under NIMP 2030 would be almost unattainable without one key enabler — the financing ecosystem. It goes without saying that transforming our economy and industries requires substantial financial investments to fund new technologies and innovation, and to adopt new business practices.

The NIMP 2030 has identified the mobilisation of the financing ecosystem as one of its four key enablers to achieve its industrial transition goals.

At present, through Bank Negara Malaysia, the Low Carbon Transition Facility (LCTF) has been established to support small and medium enterprises in adopting sustainable and low carbon practices. SMEs in all sectors that are committed to transform their business operations towards low carbon operations and have such a plan should apply for the LCTF. The plan should include improving energy efficiency, increasing the use of sustainable material for production, and obtaining sustainability certification.

It is also encouraging to know that based on Bank Negara’s 2022 report, 50 out of 66 financial groups are already offering green products and solutions, with more than RM110 billion financing allocated for ESG until 2025.

This shows that the financial market is proactively offering incentives to businesses implementing environmentally friendly supply chain management, promoting the integration of sustainability throughout the industrial ecosystem.

NIMP 2030 also looks to increase the utilisation of the capital market to cater for the different financing needs of companies across their growth cycles. Once the industry has the ability to access a wider range of capital and funding sources, it can strengthen its business practices, aligned to the goals and missions of NIMP 2030.

Industry players should also be ready to embrace the needed change, and be given adequate support. As the banks and major corporations move to focus on Scope 3 emissions, the financing of the industry will become an even larger challenge unless the industry players take proactive steps to reduce carbon emissions in all parts of the supply chain.

For the steel industry to act more proactively and effectively, it is also time for MISIF and MSA to consider consolidation or a merger.

It is also important to note that Minister of Investment, Trade and Industry Tengku Zafrul Tengku Aziz has decided to establish an independent committee chaired by HSBC Malaysia CEO Datuk Omar Siddiq to look at realigning the direction of the iron and steel industry with the current policy objectives of ensuring that the industry remains relevant and sustainable.

It is hoped that this committee can support the development of short-, medium- and long-term initiatives for the entire value chain of the iron and steel industry, so that it can secure a strong position in Malaysia and regionally.

Liew Chin Tong is deputy minister of investment, trade and industry

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.