Veins of steel: Despite a host of challenges, the Thai metals industry looks set to remain a strong player

Thailand is no small player in the steel industry. It is the number 33 manufacturer in the world for crude steel, behind only Malaysia and Vietnam in the ASEAN region, according to World Steel Association figures for 2012. In the first half of 2013, reports the South East Asia Iron & Steel Institute, it was the region’s largest producer of flat steel, and took second place for long steel after Vietnam, with production in the latter up 16.2% year-on-year.

Even with such production muscle, the country is a big importer of steel and has run a steel deficit for years. In 2012, it was the world’s fifth largest importer of steel and the number two net importer after the US. Demand for steel in Thailand is high because of its substantial manufacturing base and status as an exporter of finished electronics and motor vehicle products. It also uses a good deal of the metal in construction, both of buildings and of infrastructure.

Slow Growth

Production has been weak of late, in part because of a weak economy. In the fourth quarter of 2013, demand for steel in the country began to decline, though full-year production was up 4.6%, according to The Nation. Thailand’s GDP growth slowed to 0.6% in the fourth quarter of 2013 and to 3.2% for the year, estimates the World Bank. Prolonged protests began to eat into consumer confidence (which sunk to a 12-year low), jostled manufacturing activity and have made it difficult for the government to conduct business.

Imports also began to affect the sector’s performance. In 2013, steel imports were up 8.5%. The situation was particularly bad in long steel products, where consumption grew 5% while imports rose 18%.

Dumping Charges

This has led to claims of unfair trading, especially on the part of China, which has industrial over-capacity and has been pushing much of its excess into the markets of South-east Asia. Tata Steel Thailand, which is listed in Thailand and 70% owned by India’s Tata Steel, claims China is dumping into Thailand and that this is largely to blame for problems in the sector. The company says Chinese companies receive the equivalent of a 9% subsidy from the Chinese government. Anti-dumping measures had been in effect against China on high-carbon wire rods, but expired on December 7, 2013.

Tata’s management is calling for the Thai government to do more to protect domestic manufacturers, but the ongoing protests have prevented the government from considering the request.

Thailand has also placed anti-dumping duties on hot rolled steel. In February 2013, the country’s Department of Foreign Trade initiated a 33.11% tariff on the product for 200 days. Tellingly, it exempted Taiwan, South Africa, Russia, Ukraine, Romania, Kazakhstan, Iran, Egypt and Turkey. The major exporters of the product to Thailand were China, whose market share was 42.39%, followed by Japan (25.26%) and Korea (20.13%).

Plans For Infrastructure

The sector has, despite dumping concerns, remained optimistic about the future, for several reasons. One is infrastructure. Until early 2014, the Thai government had been intending to go through with a BT2.27trn ($74.23bn) transportation development programme.

Under this plan, the country was to build high-speed trains, extend urban rail lines, upgrade railways and roads, and develop its ports. For all of these projects, steel would have been an essential component, and the truckloads of steel needed for them were meant to drive demand for a good seven years.

In March 2014, though, the Constitutional Court of Thailand ruled that the infrastructure plan was unconstitutional, on the grounds that it was pushed through as legislation outside the budget and did not receive full political scrutiny. The project thus has stalled.

Nevertheless, industry executives say that, given the long-term regional trend, the case is still strong for steel both in Thailand and among its neighbours.

According to public comments by Win Viriyaprapaikit, president of Sahaviriya Steel Industries (SSI), the demographics, status of industry and market dynamics all suggest that the sector has a bright future in South-east Asia. At present, annual per capita consumption of steel within ASEAN is about 90 kg, while in industrialised countries the figure tends to run in the range of 200-500 kg. Consumption, says Viriyaprapaikit, rises with income levels, and hence he sees per capita consumption in the region rising to more than 250 kg by 2030.

On account of these trends, the sector has seen significant investments in recent years. In 2010, Millicon Steel invested BT2.9bn ($87.9m) in a metal melting shop. In 2011, JFE Steel formed a company to manufacture hot-dip galvanised steel sheet in Thailand. The following year, Nippon Steel invested in a steel galvanising line and Tycoons Worldwide, a Taiwanese company, announced that it would build an electric furnace at its Thai mill.

Challenges Abroad

As with most manufacturing in Thailand, expanding abroad is vital for the sector’s growth. It needs the technology, economies of scale and business experience that are only available in the global markets. So far, however, the country has not been very successful in looking beyond its borders for business opportunities.

SSI’s efforts to diversify internationally, for example, have not gone well. In March 2011 the company, which is Thailand’s largest steel maker, acquired Teesside Steelworks, an operation in north-east England that was founded in 1917 and had been struggling for a number of years. The steel plant was reopened by its new owners in 2012.

It has been a drain on the company ever since. In late 2013 the Thai company sold BT9.4bn ($285m) worth of shares, primarily in order to fund its money-losing operations in the UK. The offering was under-subscribed. In the same set of transactions, the SSI also sold BT1.6bn ($48.5m) worth of the shares it held in Thai Cold Rolled Steel Sheet, the first company to manufacture that product in Thailand.

The operation at Teesside has since started to turn around. The company has scaled up its UK-based production and reduced its loss. Still, despite all its efforts and investment, SSI has been unable to turn a profit, and the company’s UK chief said in March 2014 that the operation was under threat of being closed down once more. The transaction has increased the company’s capacity and brought some international exposure, but has also left it selling steel at a loss and put a strain on finances at home.

Regional Integration

The future of the Thai steel industry greatly depends on the development of the ASEAN Economic Community. In some respects, the country is well placed to be a leader in the new entity. It has critical mass, produces a wide range of products and has significant foreign investment in the sector. Because of its strong industrial base, it can be both a heavy user and a big exporter of steel. Other members have their strong points, but none has the combination of qualities Thailand offers.

Thailand does lack some capabilities at the higher end. Many of such product types must be imported from Japan, Korea or the EU. This, however, is an issue it shares with all ASEAN members. While many countries succeed well at the low end and others, like Thailand, have worked their way up the value chain, they all lack the capacity to produce very high-end products. The question is whether they will be able to agree enough to cooperate in steel manufacturing so that at least one of them can invest in making products that now have to be imported.

If the economy recovers, many of the concerns will dissipate. Demand will rise again as industry gets back on track and the steel sector will certainly benefit. In the longer term, however, the sector is going to have to deal with structural issues and industry trends that are challenging all types of manufacturing in Thailand. Industrial capacity will shift to lower-cost locations within ASEAN while costs at home will rise. The sector’s recent hiccup will be followed by issues more long term and fundamental in nature.