Pedal to the metal: Infrastructure projects are fuelling an increase in steel production

Fuelled by steady economic growth, and the consequent liberal capital expenditure policies of both the public and private sectors, steel manufacturing – along with the construction materials industry as a whole – is maintaining a steady upward trajectory. Since 2008 the annual growth of Malaysia’s construction sector has averaged 4.7%, while domestic production of iron and steel products has also been on the up, according to the central bank. Iron and steel bar and rod output reached 2.56m tonnes in 2011, up 16% on 2010’s 2.2m tonnes, while galvanised iron sheet production increased by 15.8 tonnes over the same period to 184.1m tonnes. Although Malaysia was exporting substantial quantities of steel – primarily in the form of billets – as recently as 2008, the industry now operates largely as a secondary market and has been primarily supplying domestic consumption in recent years, despite the uptick in the export sector. After metal manufacturers achieved a total export value of $9.4bn in 2008, overseas shipments dipped sharply in line with the global economic downturn to $7.3bn in 2009, before rebounding to $8.5bn in 2010.

ROLLED GOLD: Hot rolled steel production is dominated by Lion Group subsidiary Megasteel, while the cold rolled sub-sector is led by Megasteel, Mycron Steel and CSC Steel. The long product market, including construction materials such as rebar, has five primary operators: Lion Industries, Ann Joo Steel, Kinsteel, Southern Steel and Malaysian Steelworks. Domestic demand for steel has remained strong, largely due to the steady stream of large government infrastructure projects. Major schemes remaining under the 10th Malaysia Plan and the Economic Transformation Programme include the $16bn Klang Valley MRT, the Kuala Lumpur-Singapore high-speed rail link ($3.2bn), development of Sungai Buloh Island ($3.2bn), development of the South Johor Economic Region ($3.2bn), seven highway projects ($6.1bn) and the Gemas-JB double track and electrification rail scheme ($2.6bn). With these projects set to require large quantities of steel, Affin Investment Bank analyst Sharifah Farah expects demand to grow at an annual rate of 5-10% in the coming years. Given current capacity utilisation of some 60%, extant manufacturing facilities should be able to absorb this growth.

MATERIAL IMPORTS: Despite this growth, the sector has been hit by high raw material costs, which are dragging down the bottom line. With scant domestic iron resources of its own, Malaysia must import the vast majority of raw materials in the form of scrap metal and iron ore pellets, which are dependent on international prices. In addition, while electricity prices were relatively attractive in the past due to government subsidisation and price controls, recent liberalisation and a 2011 tariff increase may also squeeze margins. “Although higher electricity prices will be difficult for steel producers, the larger impact is the expense of raw materials, which account for 40-50% of production costs,” Farah told OBG.

CONTINUING APPEAL: So far, however, the steady stream of domestic projects has outweighed the potential drawbacks of the Malaysian steel industry, as evidenced by the continued interest investors have shown. Brazilian mining outfit Vale, for example, is building a $420m iron ore trans-shipment complex in Perak, which will include a pelletisation plant, a jetty and warehouses to serve as a base for its Asian clients on commencement of operations in 2014. China’s state-owned steelmaker Shougang is also constructing a $580m integrated steel mill in Kemaman with local partner Hiap Teck Venture. The mill is expected to commence operation by 2013.

Belgium-based steel wire producer Bekaert is also forming a joint venture with Malaysia’s Southern Steel, according to a May 2012 announcement. Southern Steel will hold a 45% stake with the remainder to be held by Euronext Brussels-listed Bekaert, while the assets will include subsidiaries Southern Speciality Wire, Southern Wire Industries and Cempaka Raya.