KUALA LUMPUR: Local steel players, who are already struggling to cope with a global oversupply of steel, will have to brace themselves for more competition in their own backyard soon.

China-based Guanxi Beibu Gulf Iron & Steel Investment Co Ltd, through locally-incorporated Alliance Steel (M) Sdn Bhd, is investing RM3.5 billion to set up the country’s largest steel mill in Gebeng, Kuantan, which will have an annual capacity of 3.5 million tonnes producing long steel products.

Even though only 10% of the production is slated for the local market and the rest for export to Asean, local steel players are concerned, and with good reason.

“For most long steel products, the existing local production is enough to cater for local demand. With imports, however, it will result in an oversupply,” Malaysian Iron and Steel Industrial Federation (Misif) president Datuk Soh Thian Lai told The Edge Financial Daily.

“As such, the entry of Alliance Steel will be challenging for upstream steel players. Downstream players, however, will benefit from the oversupply and so will end-users [because of cheaper steel products],” he said.

Upstream players that may be affected by the entry of Alliance Steel include Ann Joo Resources Bhd, Southern Steel Bhd, and Tan Sri William Cheng’s Lion Group.

Nevertheless, the oversupply of steel products isn’t a local problem. Slowing global demand and huge overcapacity in China have driven down global steel prices.

The flood of cheap Chinese steel has already claimed one victim — Perwaja Holdings Bhd — which was forced to shut down its mill in Kemaman, Terengganu in late 2013.

However, Soh pointed out that if Alliance Steel focuses mainly on high-end steel products, it would not hurt the local market as much.

“The investor (Guanxi Beibu) plans to manufacture mainly high-end steel products, namely high-carbon steel and H-shape steel, principally for the export market,” said the East Coast Economic Region Development Council (ECERDC), which manages the Malaysia-China Kuantan Industrial Park where the plant is being built.

In anticipation of the plant, Guangxi Beibu, through its sister company Guangxi Beibu International Port Group Co Ltd, had acquired a 40% stake in IJM Corp Bhd’s Kuantan Port Consortium Sdn Bhd.

“The location of the plant next to the port, and the location of the port as well, are very strategic. They (Alliance Steel) will be able to ship their steel products to other Asean countries with ease,” noted an industry player. 

“There is no way they can rely on the local market anyway. It is too small. Asean, however, consumes about 40 million to 50 million tonnes of steel each year,” the industry player added.

With high enough local content, the steel produced by Alliance Steel could also qualify for the Asean Free Trade Area agreement and avoid import duties. Nonetheless, not all local players are convinced.

“The whole point of this investment is for the Chinese investor to invest in the latest technology in Kuantan. However, there are a lot of plants being shut down in China at the moment because they cannot make money,” another industry player pointed out.

“We are concerned that they might bring over refurbished machinery and equipment from these plants and set them up here. If that is the case, we would be allowing them to export their pollution here.

“The government has to make sure that new and cleaner technology is used,” he said.

On a positive note, the new steel mill will bring in much needed investment to Malaysia at a time when the ringgit is slipping and Bank Negara Malaysia’s foreign reserves are dwindling.

The construction of the plant over two years will also create 2,000 jobs and another 3,500 jobs once it is operational, said the ECERDC.

At the same time, Alliance Steel would also compete with Chinese steel imports and might be able to displace some of the two million tonnes of Chinese steel being imported each year.

“There is nothing wrong with the Chinese investing in Malaysia. The [local steel] sector has already been liberalised.

“But of course, it (Gebeng steel mill) needs to be done carefully. It may create jobs, but if it causes another player to lose money, jobs may be lost at another plant as people are laid off,” said the industry player.

He is also worried about the incentives that Alliance Steel would get, noting that it should not get any unfair advantage over the other local players. It is understood that Alliance Steel had acquired the 750-acre (303.514ha) plot of land for its mill at an attractive price of RM6 per sq ft.

“Investors in ECER will enjoy incentives that we normally give to investors, both domestic and foreign, in the region,” said the ECERDC.

“However, for this project, we are still working out the details on the incentives for the investor in collaboration with the Malaysian Investment Development Authority and the Ministry of International Trade and Industry,” it added.

It remains to be seen what kinds of incentives are given, since local players have been operating with minimal government support for some time now, and have continued to survive despite the tough operating environment.

This article first appeared in The Edge Financial Daily, on January 26, 2015.