THE tonnes per annum.
The situation in China is not rosy either, and the country is only using 800 million tonnes of its production.
But fresh impetus may be nigh with China’s Ministry of Industry and Information Technology committing to publish a new 2015-2017 action plan by June to tackle its engorged steel sector.
Just last week, the ministry’s head of raw materials, Luo Tiejun, revealed that China plans to cut as much as 80 million tonnes of production capacity over the next three years.
But this will only take off 27% of its 300 million tonnes of excess capacity. Industry participants and analysts do not believe this will have a large impact on other producers beyond curbing dumping activities.
“The positive impact [of this production cut] will be felt later rather than sooner (one to two years),” Malaysia Steel Works (KL) Bhd (Masteel) managing director and chief executive Datuk Seri Tai Hean Leng tells The Edge.
“The Chinese government is serious about tackling the problem of excess steel production in China, but the reduction will be gradual, as the displaced workers have to be redeployed.”
But RHB Research analyst Ng Sem Guan cautions that this is not the first time China has said it would slash capacity. “Execution is key,” he says.
“This is certainly a good piece of news if the new policy can resolve the excess capacity, hence the stoppage of dumping. Yet, we think it may take time before we actually see the full impact.”
He points out that 80 million tonnes is only a fraction of China’s capacity and will not solve the global glut problem. It would only help reduce dumping.
On top of that, the benefits are likely to be more apparent in China’s domestic market, according to the Malaysian Iron and Steel Industry Federation (Misif).
“By cutting 80 million tonnes, it will only solve China’s domestic market [problems] but not [that of] export markets because China’s economy is headed for a hard landing with slow economic growth,” says Misif president Datuk Soh Thian Lai.
He adds that while China is taking measures to address the oversupply, it is unlikely to be able to do so in a short period.
“It won’t reduce Malaysia’s price suppression threat from China because China’s low-price regime and focus on exports to clear its excess capacity cannot be solved by the Chinese authorities so soon. China’s steel mills will still consider Asean as their main market. Last year, China exported around 24 million tonnes of steel to Asean — about 2.4 million tonnes specifically to Malaysia,” he says.
Soh stresses that more trade measures against cheap imports from China are crucial if local steel mills are to see any marked advantage.
While China produces about half of the world’s steel, producers there also have a price advantage as they receive a 9% to 13% export rebate.
The spot price of steel billets on the London Metal Exchange fell 39% in February to US$297 per tonne as Russian steel flooded the global market on the back of a weak rouble.
Analysts share Soh’s sentiment, calling on the Malaysian government to take some trade action against China.
In January, the Ministry of International Trade and Industry (MITI) conducted an anti-dumping probe but found that steel rebar (concrete reinforcing bars) imports from China and South Korea is not causing the local players material injury. Thus, it was decided that no import duties would be imposed on steel rebar.
“Since 2012, imports have been on the rise, but prices have been falling over the years. They have fallen below that of exports as at April 2013, and if import volumes continue to strengthen, it is not good news for prices,” says an analyst.
The question is, how much of capacity cut in China is needed to reduce its exports.
“Given its huge excess capacity, the likelihood of China reducing its exports remains to be seen,” says a Lion Group spokesperson.
According to the American Iron and Steel Institute, 2014 saw China’s steel exports reach a record 93.8 million tonnes, up 51% from 2013.
“Overall, if China can cut back on its steel production, it would be beneficial for other steel producing countries, including Malaysia. If China’s domestic steel consumption increases, it will reduce its exports, which will mean less turbulence in the market,” says the Lion Group spokesperson.
However, last week, at a conference in Perth, Australia, China Iron and Steel Association deputy secretary-general Li Xinchuang said his country’s steel output would shrink as demand has peaked. He forecast production to fall to 814 million tonnes in 2015 from 823 million tonnes last year.
The price of iron ore — the raw material for steel production — has also fallen 36% since last September, to US$61 (RM224) per tonne last week, indicating weak demand for steel.
This, coupled with “insidious trade circumvention practices”, is the reason for China’s aggressive exports worldwide in the past 18 months, says Masteel’s Tai. But there is a silver lining, he adds. “Most mills in Malaysia use the electric arc furnace (EAF) steel-making technology that utilises scrap and electricity as the primary feedstock.”
China’s domestic heavy scrap prices have fallen 31.8% since April last year, to RMB1,595 (RM955) per tonne lately, allowing EAF producers to regain some edge.
“The Malaysian steel associations, namely Malaysia Steel Association and Misif, have been diligently engaging the government through MITI to enact policies to negate the effects of trade circumvention,” says Tai.
“If the correct policies can be put in place swiftly, the industry can rapidly turn around.”
This article first appeared in The Edge Malaysia Weekly, on April 6 - 12, 2015.
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