This article first appeared in Forum, The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

The anticipated revival in China’s property and construction sector after the strict Covid-19 measures were lifted did not materialise. At the same time, because of production “quotas” by steel companies, especially at the provincial level, steel production is expected to have increased by 5% in 2023 to 1,065 million tonnes, without any policy controls from Beijing. China’s steel exports are expected to hit a record high of 89 million tonnes in 2023, according to SteelMint, an industry website (see illustration).

This overcapacity leading to a surge in steel exports has a knock-on effect in Southeast Asia, including Malaysia. In the short term, we can expect markets in the region to be flooded with cheap Chinese steel, some sold at prices below the cost of production, through the practice of “dumping”. Will this be a repeat of the China steel export tsunami in the mid-2010s (“boron alloy steel” passed as construction steel with various subsidies) that was dumped around the world? In the longer term, this overcapacity calls into question the strategy of allowing an unparalleled expansion in steel production capacity in the region by Chinese-owned entities.

According to the latest data gathered by the South East Asia Iron and Steel Institute (SEAISI), it is estimated that by 2029/30, total production capacity will reach 182.5 million tonnes, if all the announced capacity is installed. This is more than 2.3 times today’s capacity at 78.1 million tonnes.

Of course, not all of the announced projects in the region will be actualised, especially given China’s weak property and construction sector that is not likely to recover anytime soon and given that many of these projects were announced with the intention of serving the Chinese iron and steel market.

Even if some of these projects fail to materialise, it is of no comfort to the existing steel players in the region. In 2022, Asean-6 steel demand was 75.1 million tonnes, with a crude steel capacity of 78.1 million tonnes. Production was 50.5 million tonnes and capacity utilisation was 64.6% (below the healthy level of 80%). Imports were 43.8 million tonnes or 58% of Asean steel demand.

In Malaysia, the situation is even more dire for the local steel players. In 2020, SEAISI completed a case study on the impact of a new large-scale steel mill entering the Malaysian long steel products sector. The Malaysian long steel products (bars, wire rods) sector was already at overcapacity in 2018. Domestic demand was 5.4 million tonnes, capacity was about 10.6 million tonnes, while production was 3.6 million tonnes. The utilisation rate was only 33.6%.

A new entrant into the market with a huge capacity of 3.5 million tonnes emerged in 2018. What happened was a massive price competition, followed by a surge of steel exports from Malaysia to neighbouring countries. Worse still, the top four listed long products (upstream) sector players lost RM853 million (~US$199 million based on the foreign exchange rate at the time) over six quarters. From 2018 to 2022, the total losses for the big four local steel mills amounted to RM1.35 billion. The risks associated with such losses led to financial difficulties for the producers, their inability to raise funds, potential job losses and social issues in the country. At the same time, the new entrant into the market is enjoying a 15-year tax holiday from the government.

It is also important to note that as part of the 3.5 million tonne capacity of the new entrant, about two million tonnes is supposed to be for medium and large sections. However, due to unknown reasons, very little or no sections are currently being produced and demand is now met through imports.

The new entrant in Malaysia uses the blast furnace (BF) technology, which is much more polluting than the electric arc furnace (EAF) technology being used by some of the local players. BF systems are more than three times more pollutive than EAF systems. This obviously has implications not only on Malaysia’s pathway to net zero by 2050 but also the aspiration of Pahang, where this new entrant is located, as espoused by the Regent of Pahang recently at COP28 for the state to achieve net zero by 2030.

What can and should be done in Malaysia and in the region to address these serious issues faced by the iron and steel sector? It is good that the Ministry of Investment, Trade and Industry (Miti) has implemented a two-year moratorium, starting Aug 15, 2023, on any future steel plants in the country to allow for reassessments to address the challenges faced by the industry and to update the industry’s direction in line with the New Industrial Master Plan (NIMP) 2030.

During this moratorium, Miti can undertake to do the following:

(i) Even the playing field between the Malaysian players and the new entrant, including evaluating whether the new entrant has complied with the conditions of its manufacturing licence and investment incentives;

(ii) Provide a road map for domestic players to produce higher value-added products that are currently not being produced in Malaysia, including for the automotive sector;

(iii) Consider introducing “green” initiatives to further accelerate the market adoption of “green steel”, such as certification for “green” steel to be used by the construction sector in the country and coming up with a framework to introduce a carbon tax for the heaviest of polluters in this sector; and

(iv) Coordinate with other Asean countries in terms of new investments in the iron and steel sector to reduce the amount of projected overcapacity.

It is encouraging that Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz recently established an independent committee to provide strategic inputs on the iron and steel industry. This committee is chaired by HSBC CEO Datuk Omar Siddiq. Both of us are members of this committee and we will also give our input on the future of this sector.

The iron and steel industry in Malaysia and the region should be seen as a strategic sector that forms part of the economic security and supply chain resilience landscape moving forward, including as a hedge against geopolitical and regional security uncertainties.

Yeoh Wee Jin is secretary-general of the South East Asia Iron and Steel Institute. Dr Ong Kian Ming is a former deputy minister of international trade and industry.

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