News on Economy and Steel

According to the Department of Statistic’s findings, sales volume of 86 industries out of 116 covered in a survey, Malaysia’s manufacturing sector’s sales value in April 2011 continued to post a year-on-year double digit growth of 15.5 per cent to record RM49.7 billion, as compared to RM43.1 billion in the same month last year. For the 1st quarter period of January-April, the sales value of the manufacturing sector posted a double-digit growth of 11.9 per cent or RM20.6 billion to register RM193.6 billion.

The five major industries whose sales value increased significantly in April 2011 were the manufacture of refined petroleum products, rubber remilling and latex processing, manufacture of other basic industrial chemicals except fertilisers and nitrogen compounds, manufacture of semi-conductor devices, and manufacture of electronic valves, tubes and printed circuit boards.

FMM stated, despite the tough business environment and decline for some sectors, Malaysian manufacturers should be able to maintain their output for the rest of the year.  Many manufacturers have successfully mitigated the tough business environment by emphasising on greater automation which has reduced the dependence on foreign labour. Productivity and efficient use of resources needs to be enhanced.

MITI reported that Malaysia’s Foreign Direct Investment (FDI) this year will exceed the RM29 billion figure recorded last year. The forecast was backed by the impressive FDI figures amounting to RM11 billion recorded in the first quarter of this year.

However, subsidy rationalisation and inflation rate will have an impact on economic growth. Malaysia is gradually reducing subsidies which would cause a slight increase in inflation rate. Malaysia’s inflation rate rose to a 24-month high of 3.2 per cent year-on-year in April after a three per cent increase in March.

A local research firm had also highlighted that the hike in electricity tariff and gas prices will impact the steel, cement and glove manufacturing sectors, as they are noted to be large consumers of energy. It was forecasted that the full-year earnings projections of steel makers might be lowered to be between 17% and 25%, hopefully.

Based on the 2011 Malaysia International Trade and Industry Report, the manufacturing sector is expected to continue to expand this year as a result of higher investment and increased consumption.

MITI said the export-oriented industries were expected to grow with increasing regional trading activities, while higher domestic consumption is expected to benefit the domestic-oriented industries.

Demand will also be raised with the growth in the economies of major export destinations for Malaysian products, especially to ASEAN member countries, Chine, USA and the Europe. This augers well for Malaysia and we hope that the global economy is stable despite some recent setbacks in Europe.

As reported, on the construction side, the iron and steel industry is projected to perform well in 2011 in view of increasing global demand with the anticipated growth in construction activities as well as the implementation of National Key Economic Areas and 10th Malaysia Plan projects.

Since the tabling of the 10th Malaysian Plan(2011-2015) by the Prime Minister on 10 June 2010, for the first five months the implementation has been extremely busy with its management very satisfactory. The government has spent RM10 billion as of May to implement various programmes and projects since starting off the projects in January 2011. “Various initiatives and development projects have been carried out based on the five core strategies that had been set it was stated during a media briefing on 9 June on the progress of the 10MP.

Malaysia is also exploring the feasibility of engaging new Free Trade Agreement (FTA) partners particularly in the Middle East, South Asia and the Americas. MITI said this effort has the potential to expand market access and boost business opportunities for Malaysian exporters and enterprises. “FTAs will remain an integral part of Malaysia’s trade policy and continue to complement efforts at the multilateral level,” said the ministry in the MITI Report 2010.

There is now a big issue and concern with the flat products industry in Malaysia. A safeguard petition was submitted to MITI in 29 April, 2011 by Megasteel Sdn Bhd, the country’s sole producer of Hot Rolled Coils (HRC). Megasteel is asking the Government to impose an additional duty of 35% on imported HRC, which currently attracts an import duty of 25%. The petition was accepted by MITI and an investigation was initiated. A Public Hearing was also held on 28 June, 2011 at MITI, and the petition  received support from the members of the Malaysian Steel Association. There were also strong objections from local downstream steel players(users of HRC), foreign HRC exporters (JFE Steel, Nippon Steel, Sumitomo Metal Ind., Kobe Steel, Nisshin Steel, China Steel Corp, Krakatau Steel, Posco), foreign associations and embassies of countries such as Japan, China, Indonesia, South Korea, Taiwan and Thailand. The investigation is currently going on and the outcome should be known within 90 days from 29 April,2011.  

Also, on the domestic front, Baosteel, the biggest steel manufacturer in China is considering a tie-up with a Malaysian steelmaker, in what could be a major step by a China’s  steelmaker into the overseas steel market. Executives from the Chinese company have been visiting Malaysia to discuss on an investment. It was indicated that the discussions are at an exploratory stage and accordingly, the Company will make the appropriate disclosures at the appropriate time. It should also be noted that several foreign steel companies such as Nippon Steel Corp., JFE Steel Corp., Posco, etc., have already taken a stake in some Malaysian companies.

The demand for steel has been sluggish for the 2nd quarter. Currently, the concern among the business people is the delay in the implementation of the ETP projects especially those related to construction. There has been a lot of news on the programs, but however, these projects need to be implemented by the Government without much delay.

In the international arena, at the 26th annual Steel Success Strategies XXVI Conference in New York on 20 June, 2011, it was noted that, up to the end of the last quarter, a flurry of trade petitions were filed by steel producers. It was also stated that a major steel producing country, China, which has refused to participate in global trade on a level playing field is positioning the world economy for disaster. China was always been advised to “start playing by the rules”. Unless the companies decide to compete on a global basis—country to country, area of the world to area of world—and play by the rules, at some point in time there will be hell to pay. It was remarked that China’s “protectionist” practices of subsidization and state ownership might have had their place at the onset of China’s industrial revolution, but as the country comes into its own it needs to follow the same rules as other manufacturing hubs worldwide. It appears that unfair trade practices have become a top threat to some steelmakers in developed countries.

It was also highlighted that global competitors are continuing to lay hands on raw material resources. It was highlighted that China’s thrust to source raw materials around the world intensifies. One of the big challenges for a successful global steel company is to respond to the emergence of a more competent and confident China.

It was also remarked that there will be the “haves” and the “have-nots”. The “haves” are those companies that own raw material resources, such as iron ore mines, scrapyards or coke ovens. Going forward, the “have-nots” will be greatly disadvantaged.

Internationally, in the industry, buyers today are avoiding debt and focusing on managing their costs and inventories, and that orders can be canceled if the outlook changes for the worse. However, this isn’t the case with imports. Traders, who are importing aren’t just doing traditional back-to-back business, but are also offering more trading services, such as inventory management control and working with customers to hedge markets. These services strengthen traders’ relationships with local steel industries, as they work with domestic producers on supply chain issues.

A prominent steel magnate, cautioned that the path of recovery is not straightforward and that the global economy remains “fragile,” especially in the developed world. In the developed world, macroeconomic indicators are still taking two steps forward and one step back.  

In Europe, the economic crisis in Greece remains a primary concern. In the US the gross domestic product slowed in the first quarter. The developed world is experiencing a weak construction sector. The construction sector accounts for more than 40 percent of world steel demand. The developed world may not return to pre-crisis levels until 2015 or “slightly beyond”.

Despite all the problems, global steel production totaled a record 1.4 billion tonnes in 2010. The global steel industry is seeing a “definitive shift” toward China and other growth markets, as China continues to move to develop urban areas. This trend should drive infrastructure development and steel demand.

However, the global steel market is increasingly characterized by volatile raw material costs, which have seen formerly low-cost countries such as China, India and Brazil become increasingly high-cost environments.  Raw material volatility could last “for some time.”

The prominent steel magnate remarked that “During these times of continued economic uncertainty, let us not forget that despite the considerable challenge of the past few years, steel remains a global growth industry with plenty of potential and opportunity ahead. As the landscape has changed, we have to learn to live with a new level of volatility. That means figuring out how to live with shorter price cycles without losing focus on long-term strategy”. Very well said, but how do we prepare for this ?

For major steel producers investing in upstream integration by acquiring iron ore and coking coal mines strengthens their position in raw materials. Upstream integration is a critical part of a company’s strategy, and becoming one of the “haves”.

According to World Steel Association, crude steel production rose by just under 3 million tonnes month-on-month in May 2011. Most of the 64 countries reporting to the association produced more steel in May than in April. China produced 60.2 million tonnes of crude steel in May, up from 59 million tonnes in April and 55.9 million tonnes in May 2010. Japanese steel production appears to be recovering following the earthquake and tsunami on March 11. Japan’s steelmakers produced 9 million tones of steel in May, up from 8.4 million tones in April.

China Steel Corporation(CSC), Taiwan said that the risk of China producing too much steel for its needs remains a concern. The government and steel producers in China must coordinate “to control the outflow so it (excess steel) doesn’t disturb the market. China Steel Corporation is pursuing sustainable growth on both the supplier and customer sides of the business. The company has to secure raw materials in the most effective way possible, despite the great appetite for the same materials by competitors in China, it said. China Steel Corporation remarked “We need product, we need processes, and we need enabling technologies in order to serve our customers”. CSC wants to develop a “super steel” that creates a cleaner environment and a better life,” adding:”It sounds like a fairy tale, but we are doing it.”