Malaysia's steel industry is likely to slow down but achieve sustainable growth this year due to a downturn in the domestic construction sector and moderate growth in the manufacturing industry. Starting from 2005, the industry is likely to book an average 10% growth annually for the next six years.

This is in stark contrast to the steel industry's heyday in the mid-1990s, when it chalked up 20-30% growth annually. The iron and steel products sector has seen significant developments during the last three decades, in step with the overall growth of the Malaysian economy. The iron and steel products subsector covers the manufacture of primary steel products such as direct reduced iron, hot briqueted iron, blooms/slabs and steel billets and a wide range of downstream flat and long products such as hot rolled coils, cold rolled coils, steel pipes and sections, steel billets, steel bars and wire rods.

Malaysian Iron and Steel Industries Federation (MISIF) deputy chairman Datuk Lew Chin Hoi said steel consumption is expected to be weak this year. He expects consumption to improve marginally next year before picking up again from 2007-2009 in line with the implementation of infrastructure development under the 9th Malaysia Plan and industrial activities under the 3rd Industrial Master Plan.

Steel consumption in 2004 jumped 16% to 7.7 million tons from 6.6 million tons a year earlier. Both long and flat products grew by 15% and 18% respectively in 2004, Lew said. "We do not expect 2005 to experience such a phenomenal growth as the market demand has slowed since the second quarter in view of the slowdown in the construction industry," he said.

Major players agreed, with one official saying, "I personally do not foresee such strong growth this year." Amid the gloomy scenario, domestic steelmakers are bracing for lower profit margins this year due to increasing cost pressure and slowing demand from China. Local steel manufacturers do not expect significant growth this year as market demand had slowed down since the second quarter due to the weak construction sector. Industry players are likely to report an average of 20-30% reduction in their profit margins.

The business climate seems bleak for the industry, which currently comprises about 290 companies employing about 29,400 workers. The combined annual output of these companies is valued at RM18.8 billion (US$4.95 billion). According to MISIF's Lew, the way forward for the industry players is to seriously venture into downstream activities. "We are of the view that the local steel industry has to build downstream capacity and strengthen the export value-added capability to better serve the domestic market and weather greater competition in the international arena," he said.

Downstream activities include lightweight steel for the residential construction sector. Lew said the construction sector, the largest market for steel, provides the greatest opportunities for growth, particularly as concerns about supplies of wood keep increasing. Lew also said steelmaking in Malaysia relies heavily on supplies of scrap from imports and domestic sources. With the turnaround in the steel industry, steelmakers - like other scrap users - have been subject to supply and pricing problems.

Major players

Among the major long product makers in Malaysia are Malayawata Steel Bhd, Lion Industries Corp Bhd, Kinsteel Bhd and Southern Steel Bhd. Flat steel product manufacturers include Hiap Teck Venture Bhd, Choo Bee Metal Industries Bhd, and Mycron Steel Bhd, a subsidiary of Melewar Industrial Group Bhd.

Malayawata expects to increase output by 40% to 900,000 tons within the next three years without having to invest heavily in new equipment. Its president Datuk Lim Hong Thye said this was possible with the research and development (R&D) agreement on electric ARC furnace operations with Germany's Badische Stahl-Engineering GmbH (BSE).

Kinsteel expects to be transformed into a fully integrated steel producer by the end of next year. Managing director Datuk Pheng Yin Huah said the group's expansion, particularly the setting up of an RM80 million wire rod plant and over RM100 million electric arc furnace facility in Gebeng, Pahang would enable Kinsteel to be placed among the top five steel producers in Malaysia.

Kinsteel, which has a total production capacity of 800,000 tons per annum, is located at the Gebeng Industrial Zone near Kuantan in Pahang. It operates seven steel mills. Melewar Industrial Group (MIG) expects to book higher profit after completing a RM120 million expansion program to bolster production of cold-rolled coil (CRC) to keep pace with rising demand. CRC is produced by its 54%-owned subsidiary, Mycron Steel Bhd, in Shah Alam. Mycron's annual capacity will increase by about 45% to 260,000 tons from the existing 180,000 tons. The expansion will upgrade product quality to meet rising demand for high-grade CRC, which gives better margins.

Government policy

To ensure adequate supply for the domestic construction industry, the government has introduced export controls and relaxation on imports of steel bars and billets. Restrictions on exports and relaxation on imports of steel bars and billets have stabilized the supply of this raw material for the construction industry.

Lew said one of the major issues confronting the local steel industry is the government policy on imports of flat steel products. While other countries have removed their safeguard measures in 2003 and both steel prices and supply have moved to higher levels, Malaysia's import restrictions remained in place. This has caused some dislocations between the upstream and downstream sectors of the steel industry, apart from curtailing downstream activities, he added.