Posted on 24 May 2024
Introduction
The ASEAN Steel Industry’s beginnings goes back to the 1960s, when Governments built national steel mills necessary for the countries’ development. They needed homes for the population and infrastructure to encourage businesses.
Since then, the industry has been growing from strength to strength with peak demand reaching 80 million tonnes in 2018 and 2019.
Capacity Buildup
In 2011, an unprecedented, perhaps not so noticeable, event happened - a large steel mill was being built in Indonesia. Krakatau POSCO, a joint venture between PT Krakatau Steel of Indonesia and POSCO of South Korea, completed this first large scale blast furnace (BF) and the largest steel mill in ASEAN in 2014.
3 million tonnes of crude steel capacity was unheard of in ASEAN at that time, with most mills operating at 300,000 to up to 1 million tonnes (MT) then. This is the first Mega Mill.
Since then, many other large-scale mills have appeared from 2018 to 2023 across ASEAN-6 (Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) totalling 26.5MT.
Today, many more large-scale steel projects are under construction or being proposed in the ASEAN region.
Industry Overcapacity
Based on the latest figures, SEAISI estimates that by 2029-2030, total capacity will reach 184.5 MT, if all the capacities are installed. This is more than 2.3x today’s capacity at 78.1 MT.
In 2022, ASEAN-6 steel demand was 75.1 MT, with a crude steel capacity of 78.1 MT. Production was 50.5 MT
and capacity utilisation was 64.6% (below the healthy level of 80%). Imports was 43.8 MT or 58% of ASEAN steel demand.
Today, many more large-scale steel projects are under construction or being proposed in the ASEAN region.
SEAISI forecasts that the ASEAN-6 steel demand will reach about 78 MT in 2024 and 80 MT in 2025.
Assuming demand will grow at the rate of 4.29% per year (based on 1998 to 2018 demand, which is the fastest), it will take about 21 years for demand to reach 185 MT to match the capacity buildup.
Industry Overcapacity in Malaysia
What about steel industry in Malaysia? Malaysia’s crude steel capacity today is about 16.1 MT.
By 2029/2030, based on the latest announced projects and industry information, total crude steel capacity will rise to 54.7 MT, if all the projects materialise.
Will the additional capacity of 38.6 MT, while good in terms of confidence in the country, be able to support Malaysia’s steel demand of 7.5 MT in 2022 or the region, which is also expanding in capacity?
Impact of Overcapacity
In 2020, SEAISI completed a case study on the impact of a new large-scale steel mill entering the Malaysian long steel products sector.
The Malaysia long steel products (bars, wire rod) sectors were already in an overcapacity in 2018. Demand was 5.4 MT. Capacity was about 10.6 MT while production was 3.6 MT. Utilisation rate was 33.6%.
A new entrant with a capacity of 3.5 MT emerged. What happened was a massive price competition, followed by a surge of exports of steel from Malaysia to neighbouring countries.
Worse, the top 4 listed long products (upstream) sector players lost MYR 853 million (~USD 199 million based on FX rate at that time) over 6 quarters. The entire long products sector obviously lost a lot more during this period.
The risks associated with such losses lead to financial difficulties for the producers, inability to raise funds, potential job losses and social issues in the country.
It is also important to note that as part of the 3.5 MT capacity by the new entrant, about 2.0 MT is supposed to be for medium and large sections. However, due to unknown reasons, very little or no sections are currently being produced and demands are now met through imports.
This is why an industry’s performance must be monitored and policies on investments must be carefully crafted in consultation with industry associations to prevent such risks.
While this case study is on the Malaysian long steel products sector, the basic principles of nurturing an industry and its learnings equally apply to all industries and sectors in any country.
The “De-greening” Issue in ASEAN
Along with the capacity buildup, more investments are coming into ASEAN in the form of blast furnaces. These are the older technology and the most pollutive technology that emits a lot of carbon.
Based on SEAISI’s estimates, out of total installed capacity, there is a structural shift in technology towards the more pollutive Blast Furnace / Basic Oxygen Furnace (BF/BOF) systems against Electric Arc Furnace Systems (EAF):
That means the ASEAN steel industry is going to become more carbon intensive (“de-greening” in the future, if ASEAN governments continue to encourage such investments without carbon capture, utilisation and storage systems (CCUS).
BF/BOF systems are 3.4x more pollutive compared to EAF systems! Based on our computations, the ASEAN steel industry’s emission will accelerate in the future with emissions from BF/BOF hitting 84% of total emissions compared to EAF emissions of 16% by 2028.
How does this “de-greening” trend fit with the ASEAN countries Net Zero commitments? I believe ASEAN governments are looking at these seriously and potential investors should also review their various proposals to bring in green technology to ASEAN.
Moratorium
The Ministry of Investment, Trade and Industry (Miti) has implemented a two-year moratorium, starting 15 August 2023, to allow for reassessments to address the challenges faced by the local iron and steel industry and update the industry’s direction in line with the New Industrial Master Plan (NIMP) 2030.
Deputy Minister Liew Chin Tong said the temporary suspension covered all inquiries, assessments of current applications, new applications, licence transfers, expansions, regularisation and diversification for manufacturing licence as well as the issuance of certificates for exemption from manufacturing licence (ICA10) under the Industrial Co-ordination Act 1975 (Act 156) for manufacturing activities in the iron and steel industry, including non-ferrous recycling activities. Exemptions are available on a case-by-case basis as long as these are in line with the New Industrial Master Plan 2030 (NIMP 2030).
An Independent / Special Committee on the Industry
MITI will also form an Independent / Special Committee (“Committee”) on the Iron and Steel Industry in Malaysia to look at the sustainable development of the future of the industry.
MITI Minister Datuk Seri Tengku Zafrul Abdul Aziz has decided to form the Committee, which HSBC Bank Malaysia chief executive officer Datuk Omar Siddiq Amin Noer Rashid will lead.
Kudos to Malaysia and MITI for taking the lead in ASEAN on recognising and acting on Industry and Climate Change challenges impacting the steel industry.
The SEAISI Secretary General has also been appointed as a Special Committee Member. He looks forward to contributing to the Committee in charting the future for the Iron and Steel Industry in Malaysia.
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Source:SEAISI
