Anxiety grows ahead of Miti’s decision on steel safeguards


  • Steel rebar prices have surged since preliminary safeguards were imposed, says PKMM
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This article first appeared in The Edge Malaysia Weekly, on March 27 - April 2, 2017.

 

MORE industry players are voicing their concerns about safeguard duties on some steel products ahead of the April 10 deadline for a final decision by the Ministry of International Trade and Industry (Miti) on two ongoing investigations.

It is learnt that the Malay Contractors Association Malaysia (PKMM) had written to Miti on Feb 23 to protest safeguard duties on steel concrete reinforcing bar (rebar) imports. The other investigation concerns steel wire rod (SWR) and deformed bar-in-coil (DBIC) imports.

The letter, sighted by The Edge, says the preliminary safeguard duties imposed last September had pushed up rebar prices and squeezed its 20,000-odd members who are mainly small and medium contractors.

“On average, the price of steel bars after the imposition is around RM2,450 per metric ton (MT) compared with RM1,620 per MT before,” PKMM writes. “We require more working capital to purchase steel bars now and as the majority of our members are small contractors, they are facing a financial crisis.”

PKMM’s letter, copied to the construction industry’s umbrella body, Master Builders Association Malaysia (MBAM), joins the pushback against the safeguard duties. Several listed construction firms have also registered their protest.

In separate letters to MBAM last month, Bina Puri Holdings Bhd and Crest Builder Holdings Bhd also expressed concern over the safeguard duties on rebar. Both warned of escalating costs for public works, such as the mass rapid transit (MRT) project, causing delay and hurting construction firms that are already grappling with tight cash flow.

MBAM had filed its final written submissions on the rebar safeguard duties to Miti in late February. The Steel Wires Association of Malaysia (SWAM) had also done the same for the SWR and DBIC safeguard investigation.

These investigations commenced following petitions filed by the Malaysian Steel Association (MSA) in June last year. The petitions claimed that surging imports of these steel products between Oct 1, 2012, and Sept 30, 2015, had severely impacted domestic producers by way of lost market share, forcing them to scale back operations and downsize their workforce.

The petitioners asked for safeguard duties to be imposed to remedy the problem. Following a public hearing last August, on Sept 27, Miti made a preliminary determination to impose provisional safeguard duties of 13.42% on rebar imports and 13.9% on SWR and DBIC imports, except for specific types used in the automotive, electric and electronic, oil and gas and earthquake-proof construction sectors.

These duties were for 200 days from Sept 26 for rebar and from Sept 27 for SWR and DBIC. The final determination on whether the safeguards will be in place longer is expected by April 10 at the latest.

Jason Teoh & Partners acted for MBAM and SWAM while Lee Hishammuddin Allen & Gledhill represented MSA.

 

High stakes

The stakes are high either way. Miti’s final decision next month will have implications for a number of companies listed on Bursa Malaysia and the impact of safeguard duties on imports reach far beyond Malaysian shores.

The MSA’s petitions collectively represented subsidiaries of Lion Group, Southern Steel Bhd, Ann Joo Resources Bhd, Kinsteel Bhd and Malaysian Steel Works (KL) Bhd.

According to the petitions, the companies represented by MSA account for 73.4% of total domestic output of rebar and 100% of local SWR and DBIC production.

For the petitioners, what is at stake is a strategic industry that is the backbone of Malaysia’s economic growth, especially in supporting infrastructure and property developments.

“Without reprieve through the imposition of safeguard measures, the petitioners will be forced to cease business operations, as currently the domestic industry is already impaired,” says the petition for safeguard duties on rebar imports.

The petition further argues that the absence of a viable domestic industry will cause undue dependence on imports, which would be subject to global volatility and supply fluctuations, and would not be in the public interest.

On the other side, MBAM represents 80% of listed construction companies while SWAM’s members include subsidiaries of at least five public-listed companies — Perwaja Holdings Bhd, Chin Well Holdings Bhd, Engtex Group Bhd, Leader Steel Holdings Bhd and YKGI Holdings Bhd — that manufacture products ranging from steel wire mesh and fendings to fasteners such as nuts, bolts and nails.

Miti has also received feedback from foreign governments in the EU, Japan and Turkey. Players such as the China Iron and Steel Association, the European Steel Association, Arcelor Mittal Brasil and Kobe Steel Ltd have also responded.

Foreign representatives were among the roughly 80 people present at the public hearing last August.

When contacted, MBAM president Foo Chek Lee says safeguard duties on rebar imports will hurt contractors as most contracts no longer make allowance for fluctuations in raw material prices.

According to him, steel components comprise 30% of raw materials in housing projects, and the percentage is higher for steel-intensive works, such as bridges and the light rail transit (LRT) and MRT projects. The increased costs, he points out, will eventually be passed on to end-buyers and the public.

“We also fear that history may repeat itself” if safeguard duties are imposed as the industry may “see another episode of an artificial rebar shortage”, Foo comments.

Meanwhile, SWAM president Ernest Koay Chin Oon tells The Edge that the association’s members are heavily reliant on SWR and DBIC as their raw materials. Safeguard duties would hurt them as they had aggressively pushed into overseas export markets following the introduction of Malaysia’s new steel policy in 2009.

“SWR and DBIC are our raw materials and represent between 85% and 90% of our total costs,” Koay says. “If the safeguard duties are imposed, our costs will increase and we would no longer be able to compete internationally.”

 

MBAM, SWAM submissions

According to Miti’s preliminary determinations in both probes released in September, the investigating authority was satisfied that there was a surge in rebar, SWR and DBIC imports between Oct 1, 2012, and Sept 30, 2015. It was also found that the import surge had directly caused the petitioners to lose market share, crimped their production and capacity utilisation and negatively affected their profitability.

The surge was largely attributed to China, whose steel sector accounts for half the global output. With domestic growth slowing down, China’s steelmakers have been forced to export excess output in recent years, flooding foreign markets and shaking up steel players contending with a spike in competing foreign products.

China’s steel exports hit a record high of 112.4 million tonnes in 2015, although this fell to 108.46 million tonnes in 2016. Last year, China reportedly cut at least 45 million tonnes of steel output capacity and aims for another 50 million tonne reduction this year as it seeks to cut overcapacity in various sectors, including steel.

The final submissions by MBAM and SWAM, however, dispute the causal link between surging imports and injury done to local upstream players. In the documents sighted by The Edge, both counter-argue that the petitioners themselves had imported the products under investigation and had in some cases sold them on domestically.

MBAM contends that an overlapping anti-dumping investigation on imported rebar had found no injury caused to domestic players. That investigation stretched from October 2012 to March 2014 following a petition by Ann Joo Resources.

Citing this finding, MBAM says it stands to reason that the current safeguard duty investigation cannot decide otherwise vis-à-vis the impact of rebar imports on local players.

In addition, the increase in rebar imports in the second half of the period under investigation was because of Putrajaya’s decision to allow rebar to be imported at low or zero duty tariff between March 2014 and June 2015, says the MBAM submission.

“Any increase in rebar imports as a result of the government’s policies to remedy a rebar shortage in Malaysia cannot form the basis for a safeguard duties petition,” MBAM concludes.

That last argument relies on a principle outlined by the WTO Safeguards Agreement, which provides that a surge in foreign imports must be unforeseen in order to justify safeguards as an emergency protection measure.

In its own final submission, SWAM also relies on this principle, citing the government’s decision to allow duty-free imports of SWR from July 2013. It argues that the ensuing increase in SWR imports was clearly foreseeable.

It also cites news reports quoting some of the petitioners as saying they can compete with foreign imports without safeguard duties. SWAM also points out that the petitioners had returned to profitability last year and were no longer suffering injury.

The implication, according to both MBAM and SWAM, is that there is no further injury to be remedied as defined by Article 5 of the WTO agreement, which applies to Malaysia. The article stipulates that “a member shall apply safeguard measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment”.

Furthermore, SWAM says the imposition of safeguards on SWR and DBIC would handicap its members via a double squeeze in both cost and selling prices — there are no duties on competing finished products coming into Malaysia.

“Any imposition of safeguard duties on the products under investigation will have a disastrous effect on downstream manufacturers that are already operating in a very challenging market,” SWAM says.

Against this backdrop and given the high stakes involved, Miti’s decision on the investigations will certainly be highly anticipated.