Players bracing for tough times due to the dumping of products from China
THE aggressive dumping of China steel products at below-cost price in the global market is affecting the survival of steel millers in the Asean, region and Malaysia is not spared. Steel millers are now uncompetitive and suffering from widening losses as their operations are almost at a standstill.
Going into 2016, China will continue to churn out more steel despite its economic slowdown, exacerbating the current dire situation faced by regional steel millers. This will result in the closure of more steel mills, industry players tell StarBizWeek.
It is worth noting that the export price of Chinese steel products has been below the domestic steel price in China since 2014. The export prices are below the full cost by US$39 to US$89 per tonne.
The China Iron and Steel Association recently announced that its members – who are mostly state-owned large and medium-sized steel companies producing at least 80% of China’s total steel production – have incurred losses amounting to US$4.42bil in the first nine months of 2015.
Given such a situation, many industry players say that China steel millers are expected to compete among themselves and will be more aggressive in their export drive.
In the first nine months of this year, China steel exports surpassed the 100-million-tonne mark as opposed to a lower production of 850 million tonnes.
Cheap imports
On the local front, steel industry players are bracing for tough times, as they struggle with the increased dumping of cheaper imported steel from China.
The cheap steel imports are also squeezing domestic steel prices, resulting in many steel mills cutting down crude steel and flat-finished steel production. This is compounded by low plant utilisation for producing goods such as steel bars and wire rods, sections, steel plates and flat rolled products.
At the same time, the recent hike in the electricity tariff and gas prices, the goods and services tax as well as the imposition of the minimum wage policy will undermine growth in the bearish local steel sector.
While the main raw materials such as iron ore and scrap may have fallen significantly this year, the current volatile foreign exchange rate and the weak ringgit have made it more costly to import.
A Lion Group spokesperson tells StarBizWeek that the margin for local steel millers has worsened this year compared with 2014 due to the erosion in the domestic steel prices and increase in the quantity of imported steel.
He points out that the import of wire rods and steel bars continues to dominate the local market.
The spokesperson also blames the dumping of steel products by China, saying that some of the Chinese steel mills are likely to be selling at below cost price.
“The drop in raw material prices has not helped the domestic steel mills and actually provide the impetus to drive down prices further, what with the increased exports by state-owned Chinese mills which are assisted by state subsidies to export,” says the spokesperson.
In the past few years, he points out that local steel mills have been cutting down production and “on average, now operating at about a 30% capacity”.
“Some mills have already started to retrench workers, made redundant as a result of production cut-backs, plant shutdowns and losses.
“Perwaja Holdings Bhd and some midstream and downstream manufacturers such as steel pipe mills and service centres have also closed down,” says the Lion Group spokesperson.
Distorted global pricing
Meanwhile, Southern Steel Bhd group managing director Chow Chong Long says the dumping of below-cost steel products by China into the global market has destroyed the natural price premium between the world’s steel bar, rod and hot-rolled coil (HRC).
The HRC price per tonne used to be US$30 to US$50 higher than steel bar, while rod used to be US$10 to US$20 higher than steel bar. Now, the situation has changed, whereby HRC is US$23 lower than steel bar, while rod is US$12 lower than steel bar.
He also says that in the past two years, many steel mills have started to incur losses.
“The last two years have been a challenging period when global steel consumption fell behind capacity by 500 million tonnes per annum, of which 300 million tonnes per annum were from China.”
He concurs that huge exports by China steel producers at low prices have resulted in a significant margin squeeze for all steel producers around the world for low-value construction steel products.
“This is more significant for the Asean region which is mostly aided by exported low-end ‘boron-added’ steel which gets to enjoy an export rebate and evade export tax.”
Chow says the United States and the European Union, which impose aggressive trade measures and trade remedies, manage to survive, but regional emerging market countries including Malaysia, which are more open and advocate free trade, are suffering.
The Lion Group spokesperson adds that the existing trade remedies imposed by the International Trade and Industry Ministry such as anti-dumping and safeguard measures are not effective in curbing imports, which are still increasing, as it is difficult to eliminate abuses and loopholes.
In the case of bars and wire rods, he says imports have greatly exceeded domestic production.
“The increase in imports, despite the trade measures, shows that enforcement is not effective, particularly in checking the circumvention of HS codes for alloy steel imports from China,” adds the spokesperson.
While local players want the Government to implement more effective safeguard measures to protect them from stiff competition caused by cheap imports, analysts question the impact of such safeguard measures.
Complex steel issues
RHB Research Institute Sdn Bhd analyst Ng Sem Guan says the problems in the steel industry are structural and unlikely to be resolved in the near future.
The research house recently ceased coverage on Hiap Teck Venture Bhd, Lion Industries Corp Bhd, Ann Joo Resources Bhd and Malaysia Steel Works (KL) Bhd.
Ng says all integrated local players are badly hit, partly due to commodity prices plunging over the past months, resulting in prices falling more than the cost of raw materials.
“During a downturn, the steel players tend to suffer a loss in inventory value, as these stocks were purchased earlier at higher prices. They normally keep between four and six months of inventory at a time,” he says.
The other major problem in the industry, he says, is the huge excess capacity globally, particularly in China, which represents more than half the world’s production.
“These players have been exporting the excess production to this part of the world, and this has put pressure on the selling prices in Malaysia.
“This has been going on for many years and is unlikely to stop any time soon,” he says.
Ng adds that while the local players have been appealing to the Government to implement measures against this stiff competition, it is a structural problem which is not easily resolved.
“You can ask the Government for protection, but I question the effectiveness of these protection methods.
“Various measures have been implemented to discourage cheap imports, but there are still loopholes.
“People still find ways to bring cheaper steel into the country.
“The effectiveness of how these measures are being implemented is questionable,” he says.
The future, he says, will continue to be very tough, as weak sentiment pulls down demand for property.
“On the other hand, spending on infrastructure has been encouraging in developing countries, but we cannot deny that the property market is slowing down.”
He does not have any picks among steel players, saying that all of them are in the same boat and that each has its own issues.
MIDF Amanah Investment Bank analyst Kelvin Ong says Malaysian steel players are still facing pressure from the influx of China’s cheap steel products and sluggish demand.
“We understand that steel production in China is still high despite the slowing demand.
“Steel plants in China create employment opportunities and an aggressive shutdown of the production capacities and plants in China will have a socio-economic impact.
“Hence, plants in China continue to produce more steel. Based on our feedback from local steel players, some plants in China have been selling steel at prices below production cost,” he says.
Other countries in the region are also facing the same problems, says Ong.
“The Government is looking at measures to assist local players, and duties have already been imposed on some steel products.
“Although it may serve as a deterrent, I believe there are loopholes in China’s tariff structure, which steel plants in China can still exploit to sell their products at a cheap price,” he notes.
He adds that with the Asian Economic Community and the Trans-Pacific Partnership Agreement being signed, the country will have to be more open, giving less room for protection measures in the long-term.
Local players, he says, will have to prepare for this.
“At the moment, we remain negative on the steel sector and on the earnings of local steel companies. “This is despite some companies trying to be more cost-efficient to compete with the cheap steel products from China,” he says.
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