Posted on 25 Feb 2022
Construction is the largest steel consuming sector in ASEAN, with 78% share of total steel demand in the ASEAN-6 countries.
Evolution of the Steel Mills’ Products and Services
Over the last many years, steel producers across the region has evolved in face of the competition. Several business models can be identified. What are the advantages and disadvantages of each model? Which model is best for your steel business and with the trend of high competitive market environments?
According to Mr. Yeoh Wee Jin’s presentation during the Session on “What is the Future of Steel and Construction?” at the 2021 SEAISI Sustainability & Construction Fortnight e-Event, the usual model (Model 1) is the steel mills selling their products to distributors, who further distribute to contractors to do fabrication and installation at construction sites. This model typically applies in a monopolistic situation and imports are at a minimum or is not present.
Model 1 cannot last very long and it evolves rapidly to the next model (Model 2), where steel supply comes from both domestic production and imports. Steel mills start to sell directly to the contractors, especially the large projects. However, selling products to distributors is still very common, especially to customers in far flung and rural areas. Contractors still do fabrication and installation at construction sites. This concept is applicable in the country where labour costs are low and there are available space for fabrication works on site. In this model, steel mills are operating in a high volume, low customization and low engagement mode with customers. Most of the fabrication works are outsourced by the contractor to labour sub-contractors. All materials, equipment, utility costs are borne by the contractor.
Model 3 is the evolution from model 2. Model 3 is based on the concept that the fabricators and distributors are becoming stronger and larger since they work closely with contractors. In this model, fabricators/distributors understand the requirements from contractors, hence they can provide better products and services to customers. All in all, with model 3, there are steel supplies from domestic producers and imports and there is a group of fabricators and distributors between steel producers and contractors.
Steel producers in some countries will start to go downstream to get closer to customers to be more competitive as they shift into Model 4 whereby they have their own fabrication and distribution business. Business models 3 & 4 exists in parallel in Thailand, Malaysia and Philippines. Model 4 helps steel producers get closer to contractors by providing value add fabrication services, so that the contractors are able to cope with larger volume deliveries. This typically happens in locations that face site congestions, rising labour costs, labour shortage and high wastages.
With the above business model, Mr. Yeoh mentioned that the evolution of the steel business into providing value add services usually starts with wire mesh, followed by pc strand / wires and cut and bend. It happens this way because businesses are able to recognize the value add of using wire mesh as it is easy to calculate the productivity and cost savings using wire mesh. This is an interesting point for the evolution to the next model.
Singapore Model: High Service Levels in Open Market
The Singapore market is a highly competitive and open market. Here, the steel mill provide direct sales and fabrication services and distribution to contractors. At the same time, they can be flexible enough to also bring in imported steel. As part of the evolution from the previous model, this Model 5 sees the steel mills provide more customized services and higher value-added products and services to contractor.
The competition are importers of steel, matching the steel mill with the similar value added products to contractors. This is Model 6.
Models 5 and 6 occur in a market where labour costs are high, safety is paramount, productivity is high and with government push for higher productivity and efficiency. Business is no longer just about selling volume, it is now about higher value add products and services, requiring high customization, high engagement with customers with smaller batches of products.
Of late, a new segment has appeared. Pre-casters are now positioned between the higher value added steel mill (Model 5), higher value added importer (Model 6) and the Contractor. Pre-casters now capture the part of the value chain in integrating products and services (steel and cement and other construction accessories) and “controlling” access to the customer.
Steel mills are unable to step into this segment mainly because of the way their businesses is defined, being steel and that excludes cement and concrete, paving way for the pre-casters to occupy part of the value chain.
However, Model 5 is interesting because it shows how a steel mill continues to evolve and adapt to the competition by moving down the value chain and providing value add services beyond the commodity steel.
Hong Kong Model
Hong Kong is another very open and competitive market, however the outcome is very different compared to Singapore. Here, the only steel mill is no longer running the meltshop and most of the steel supply in the country comes from imports (whether billets or bars). Here, the construction industry remains largely conventional, relying on imports and on on-site fabrication, although there are efforts to shift towards off site fabrication.
So, the Hong Kong model, Model 7, is one extreme, where difficulty to adapt and evolve, it is no longer viable for steelmaking to happen. Of course, there are other factors that come into play, such as proximity to the China market and China suppliers who export huge amount of steel globally.
These are the trends of how steel businesses have evolved over the years and these businesses are at different stages of the evolution, identified as business models 1-7 above. Like it or not, steel mills are shifting downstream to be closer to customers. However, the ability of the steel mills to shift along the value chain does not only depend on the choice made by the steel mills, it also depends on several other factors such as:
Pichsini Tepa-Apirak
Source:SEAISI
