Steel Sector - New licensing rules for 8 alloy steel tariff lines OVERWEIGHT

- Bernama reported that the Malaysian government is set to impose licensing requirements on the importation of eight tariff lines for alloy steel products (HS 7225) effective from June 15 onwards. The licenses would be gazetted under the Customs (Prohibition of imports) (Amendment) (No 2) Order 2012 yesterday, the national news agency quoted the International Trade and Industry Ministry (MITI) in a statement yesterday.

- In addition, MITI would also monitor the trade of these products following a meeting with manufacturers/importers and steel associations held yesterday to brief them on the new licensing requirements and procedures involved in its implementation.

- While we are unsure about the exact type of steel that is affected by this ruling, our checks indicate that HS7225 is a general code for alloy steel-based flat-rolled products of 600mm or more:  (i) silicon-electrical steel for both Hot-Rolled Coil (HRC) and Cold-Rolled Coil (CRC); and (ii) electrolytically plated/coated zinc.

- These latest measures are part of the Federal government’s plans to strengthen Malaysia’s steel industry in light of rising competition, we believe. Among the main concerns are the increasing in-flux of cheap boron-added steel imports from China, brought in by traders/stockists under alloy tariff codes that are duty-exempted. Flipside, Malaysia – unlike its neighbours such as Thailand (19.5%) - has not resorted to anti-dumping measures to circumvent this issue. As such, local players believe it has resulted in demand destruction across the entire local steel value chain – i.e. from HRC to CRC to coated steel and pipes.

- To be sure, international steel publications had also recently reported that both Thailand and Malaysian mills have sought their respective governments’ intervention to suspend the import of boron-added wire rods from China. Coupled with an export tax rebate of 15% no duties when the products reach both Thailand and Malaysia. 

- We however note that the negative impact is more pronounced on local flat-steel players – which are already facing a rising trend of Chinese steel that could flood the local markets amid a moderation in the Chinese economy and the ASEAN-China FTA pact.   

- We had previously written that the Boston Consulting Group (BCG) is to submit a report to MITI by month-end to provide an in-depth review of Malaysia’s entire steel supply chain and its associated export/import duties - in light of the rising influx of cheap foreign steel.

- While it is too early to pre-empt its beneficiaries, we believe the new licensing measures represent the first step towards curbing the threat of cheap imports from. But, we reckon a more significant impact would be if the government were to grant a request by the local steel industry to impose either an outright ban on  the export of local iron ore from or imposition of a 30% duty or tax of RM180/tonne, whichever is higher.

- In any case, we prefer long steel to flat steel players – where the former is set to benefit from a multi-year kick in domestic infrastructure spending from 2H12 onwards. Our top picks are Ann Joo Resources and Lion Industries.

Source: AmeSecurities