Wednesday 17 Apr 2024
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This article first appeared in The Edge Malaysia Weekly on November 20, 2023 - November 26, 2023

STEEL players have welcomed the government’s decision to impose a two-year moratorium on all expansion and diversification of manufacturing activities in the iron and steel industry, saying the move will allow them to reconfigure their businesses.

The government is also considering exemptions from the moratorium on projects for the production of complex iron and steel products with high added value that support the missions and aspirations of the New Industrial Master Plan (NIMP) 2030.

Malaysia Steel Association (MSA) vice-president Datuk Seri Tai Hean Leng says the moratorium will allow the local steelmakers to have a “time out” to assess their businesses and capitalise on the direction that the government is taking, as outlined under various policies.

The Madani government has introduced a bunch of new road maps to reform and restructure the Malaysian economy, including through NIMP, the National Energy Transition Roadmap and the revised 12th Malaysia Plan (12MP).

“The moratorium will also allow Miti (Ministry of Investment, Trade and Industry) to ‘operationalise’ salient precepts from NIMP 2030 for its licensing of new steel capacities and financing support for decarbonisation pathways,” Tai tells The Edge.

To recap, on Nov 14, Deputy Minister of Investment, Trade and Industry Liew Chin Tong told the Dewan Rakyat that the government had implemented a two-year moratorium on the expansion and diversification of the country’s steel-making industry, effective Aug 15, 2023.

The moratorium covers all inquiries, assessments of current applications, new applications, licence transfers, expansions, regularisations and diversifications for manufacturing licences in the iron and steel industry. It also involves a freeze in the issuance of certificates for exemption from manufacturing licence (ICA10) under the Industrial Coordination Act 1975 (Act 156) for manufacturing activities, including non-ferrous recycling activities.

The deputy minister said applications for steel manufacturing licences that are aligned with the agenda of NIMP, however, can be considered for exemption from the moratorium. This includes complex iron and steel products equipped with low-carbon or carbon-reduction technologies.

The moratorium was introduced in the light of the significant excess capacity faced by the regional steel industry, Liew told the Dewan Rakyat. He said the total capacity for iron and steel products in Southeast Asia is expected to increase twofold to 150 million tonnes by 2026.

Publicly available data show that the apparent steel consumption (ASC) of the six largest economies in Southeast Asia was about 80 million tonnes a year. This shows that there is a severe overcapacity of iron and steel products in this region.

Looking at Malaysia particularly, over the five-year period from 2018 to 2022, the country’s ASC peaked at 9.78 million tonnes a year in 2018, declined 5.8% year on year to 9.21 million tonnes in 2019, before plunging 26% y-o-y to 6.81 million tonnes in 2020 due to the Covid-19 pandemic. The country’s ACS then increased 3.2% y-o-y to 7.03 million tonnes in 2021 and 6.9% y-o-y to 7.52 million tonnes in 2022, according to statistics produced by the Malaysian Iron and Steel Industry Federation (MISIF).

In a commentary published in The Edge on Nov 13, Liew stated that Malaysia’s steel production capacity in 2021 stood at 16.1 million tonnes per annum, being the third largest producer in Southeast Asia behind Vietnam and Indonesia. This shows there is overcapacity in steel manufacturing in the country.

At the same time, however, there is a gap in the supply of flat steel in Malaysia, according to Liew, as long products had dominated steel production in the country for an extended period of time. Long products are typically used in the construction sector, while flat products are more widely used in the manufacturing sector.

As the government is committed to transforming the manufacturing industry to reach greater heights, the country’s steel manufacturing industry needs to move up the value chain by producing steel products that are not locally available to reduce the dependence on imported steel and to ensure the availability of raw materials for the local industries that consume steel.

MISIF president Datuk Lim Hong Thye echoes this sentiment when contacted by The Edge. He says many steel products, especially those of higher grade and hot rolled coils (HRC), are not being produced in Malaysia.

“Malaysia is facing severe excess capacity in many areas like the production of rebar, wire rods for construction usage and cold rolled flat products. But Malaysia is also in a very peculiar situation where we don’t have a single tonnage of HRC production, the main flat steel product. So, we hope the government can use this moratorium to address this issue,” says Lim.

Miti’s deputy minister Liew said any new manufacturing licence applications for iron and steel production would be evaluated based on 12 parameters set out under NIMP. However, the details are still being ironed out.

On this, MISIF’s Lim proposes a strict enforcement of conditions to be imposed on manufacturing licences issued for those products that are already in a serious overcapacity situation. He also proposes that the government bring the banks together to work with existing steel mills that are willing to reinvest to move up the value chain by producing higher-grade steel that is currently being imported. “A reasonable time frame, conditions and incentives should be worked out,” he adds.

Meanwhile, MSA’s Tai says that to address the oversupply of long products, the association proposes that the government impose a carbon tax to streamline the supply of low greenhouse gas emissions long products in the local market. “Implement the Carbon Border Adjustment Mechanism (CBAM) to ensure the import of long products from high GHG emissions foreign steel mills are restrained,” he suggests.

He adds that the government should enact a Malaysian Green Steel Standard to ensure only mills that have demonstrated substantive efforts to comply with the ESG framework to decarbonise their processes and green their supply chain will be the preferred steel products for the local market.

It is not all doom and gloom for the local steel-making industry however. While many steel mills in the country are grappling with overcapacity and inefficient operations, Eastern Steel Sdn Bhd has been doing rather well. The company is a joint venture between Hiap Teck Venture Bhd (27.3% stake) and Shanxi Jianlong Industry Co Ltd.

Eastern Steel successfully ignited a two million tonne blast furnace at its Kemaman plant in August 2023, which increased the JV entity’s steel production to 2.7 million tonnes, as part of a RM3 billion investment that started in 2021.

“This expansion in capacity, together with the progressive completion of the plant’s auxiliary facilities, will lead to a multifold increase in the JV entity’s revenue with significant cost savings from the greater economies of scale,” states Hiap Teck in its 2023 annual report.

According to the company, Eastern Steel recorded revenue of RM2.24 billion for the financial year ended July 31, 2023, with a profit after tax of RM163.06 million. In FY2023, Hiap Teck’s share of profit from Eastern Steel amounted to RM44.52 million.

Looking ahead, Malaysia’s ASC is anticipated to grow by 4.1% to 7.8 million tonnes in 2023 and another 4.1% to 8.1 million tonnes in 2024. Although still below pre-pandemic levels, the ASC is expected to continue growing in tandem with the country’s development.

Open communication and collaboration between industry stakeholders and the government will be crucial to ensure the moratorium positively impacts the industry’s overall trajectory, says Calvin Ooi, executive director of Leon Fuat Bhd. “We are open to constructive dialogue with the relevant authorities to ensure the moratorium serves the best interests of the industry and supports initiatives that contribute to its long-term sustainability and growth.”

He adds that incentivising diversification in the steel industry through targeted financial incentives such as tax breaks and subsidies are key to encouraging steel millers and traders to broaden their product portfolios.

Ooi also proposes regular industry assessments to proactively identify potential oversupply situations, allowing for timely adjustments to policies and strategies based on dynamic market conditions. “This approach, tailored to the trading and processing nature of companies like ours, will contribute to a resilient and innovative steel industry,” he says.

 

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