Posted on 16 Dec 2020
A Global Issue with Global Forum on Steel Excess Capacity (GFSEC)
Overinvestment or overcapacity in the steel industry is a global issue, and is just an ASEAN problem. Global excess capacity is expected to be at least 606 million tonnes in 2020, according to Mr. Leopoldo Rubinacci, Co-Chairman of the Global Forum on Steel Excess Capacity (GFSEC) and Director for Trade Defence in the Directorate-General for Trade of the European Commission, based in Paris, France.
Backed by 33 member economies representing more than 90% of global steel production and capacity, the GFSEC was established on 16 December 2016 in Berlin. Member economies through GFSEC recognize that, excess capacity is detrimental to the health and viability of the global steel industry in many ways, that it:
- Depresses the profitability of the whole steel industry
- Displaces efficient steel production and leads to localized job losses
- Trade disruptions
- Wasteful energy use
- Hampers research, development and innovation activity
GFSEC developed six guiding principles for governments and policy recommendations at its meeting in 2017. These emphasize the importance of having the right policy framework conditions; call for the removal of subsidies and other measures that distort steel markets. The recommendations also stress the need for a level playing field among steel enterprises of all types of ownership and the need to promote industry restructuring by assisting displaced steel workers.
During 2020, GFSEC continues to work on a unique set of tools to address excess capacity, including in depth information sharing about government support measures, review of policy developments and drawing conclusions on whether government measures distort markets and contribute to excess capacity. The GFSEC has also undertaken discussion and analysis of the impact of the Covid-19 pandemic and associated economic disruption on the steel sector. In addition, the GFSEC has further enhanced its engagement with steel industry stakeholders.
On 27 October 2020, based on the outcomes of the 2020 GFSEC Ministerial Meeting, member economies called for more action in the GFSEC to accelerate the work of GFSEC in 2021, to be led by Italy, as the next G20 President and the GFSEC Chair. The joint call to the G20 leaders was to maintain the issue of excess capacity on the G20 agenda, to promote GFSEC principles in tackling the problem and to support the GFSEC as a multilateral way forward.
Moving forward towards the sustainable development of the steel industry, the GFSEC will further the exchange of information for transparent review, analysis and discussion and to closely monitor this issue globally. Member economies reaffirmed their call for the acceleration in the reduction of excess capacity and to carry out the various Berlin Ministerial recommendations. The GFSEC will continue to host collaborative events in 2021 with a broad range of stakeholders and to reflect the outcomes of GFSEC work in the G20 and other relevant forums. Members reiterate their standing invitation to all G20 and interested OECD members to participate in the work of the Forum
Overcapacity in the ASEAN Context
In the context of ASEAN, ASEAN-7 countries (ASEAN member countries of SEAISI), are facing overwhelming new steel investments into the region, which will add up a total of 151 million tonnes of production capacity estimated. Total overcapacity overhang will be more than 60 million tonnes. With the steel demand growth of an average 4-5% per year, it will take about 20 years for demand to catch up with this capacity level (see more details on overinvestment and the impact on steel industry in Newsletter August 2020 and September 2020).
A Case Study on Malaysia
A clear example of the impact of a new entrant in an overcapacity market is currently unfolding in Malaysia. A new project was set up in Malaysia to produce long products and it came onstream in October 2018. The long products sector was already in an overcapacity of more than 5.2 million tonnes (based on a capacity of 10.6 million tonnes and a steel consumption of 5.4 million tonnes) in 2018.
The newly implemented 3.5 million tonne added to overcapacity, resulted in a price war and the rise in exports of some rebars and mainly wire rods to the region and beyond. This is shown in the statistics, where Malaysia’s long steel export jumped significantly from 300,000 tonnes in 2018 to 1.9 million tonnes in 2019.
While it appears that the export effort benefits the country in terms of tax revenues and added employment, the actual fact is the top 6 listed players lost about RM 962 million (USD 22.4 million) over the period of 18 months as compared to the total industry (flats and longs). These total losses do not yet include the potential impact of job losses and losses from business sustainability issues and business closures.
The case study concludes that while Foreign Direct Investments (FDI’s) are viewed positively, there is a need to understand the impact on the local market so to ascertain whether this FDI is truly value adding or not. This is particularly important considering that many such investments are being proposed around this region which may impact the other regional countries adversely if they are not scrutinized and selected carefully.
What did Steel Stakeholders say @SEAISI e-Dialogue?
Of the participants (mainly government officers, steel producers, associations and traders) in the e-Dialogue on over-investment between GFSEC and ASEAN Iron and Steel Council (AISC), more than 80% view that overinvestment in steel industry causes a serious impact in their countries.
In the discussion among AISC members and Q&A session with participants, everyone is well aware of the overinvestment and the serious impact in their countries. Malaysia, Thailand and Indonesia’s local steel players experienced a serious impact from the overinvestment. Philippines and Myanmar are the only countries in the region that have less impact from the influx steel investment since the country is growing and having not enough steel capacity in the countries. However, the countries are concerned on quality of the investment. They suggested that there should be value added investment to substitute imports even if their countries still have room for more capacity.
The GFSEC Co-Chairman, Mr Rubinacci, suggested that the government of each country should take action in order to control overinvestment in individual country. If there is no control there will be a negative impact not only in the local market but in the world market. He remarked that steel demand is normally based on optimistic perspectives. As such, steel industry in each country typically boost up steel capacity to serve expected future demand. However, there is a high cost of shutdown of steel capacity when the industry realizes that there is a negative impact on overcapacity. By then, the spillover negative effects will be felt in the industry in terms of potential financial losses as well as job losses, and this could also affect the entire region.
Source:SEAISI
