Steel Sector - BCG report ready

-  The Star reported that the much-awaited report prepared by Boston Consulting Group (BCG) for the local steel industry has been submitted to the Ministry of International Trade and Industry (MITI). MITI had in late February appointed BCG to come up with a comprehensive study to make recommendations to enhance the competitiveness of Malaysia’s RM40bil steel industry.   

-  While details remain sketchy at this juncture, newly-appointed Malaysian Iron and Steel Industry Federation (MISIF) president Datuk Soh Thian Lai had reportedly said, following the association’s discussions with BCG, it entails the following key areas: (i) competitiveness; (ii) the existing steel policy; (iii) import & export duties; and (iv) influx of cheaper imports.

-  One of the key issues that have been afflicting the local steel industry is the threat of unwarranted cheap imports in the flat steel segment. We had written previously that there has been an increasing influx of cheap boron-added steel imports from China, brought in by traders/stockists under alloy tariff codes that are duty-exempted.  

-  This had caused the Lion Group’s Megasteel, the country’s sole supplier of hot-rolled-coil (HRC), to continue requesting for assistance from the Malaysian government to curb these cheap imports after its request for safeguard measures were shot down by MITI.

-  Another grey area is the impact on mid-stream and downstream players with the advent of various regional and bilateral trade pacts, including the Asean Free Trade Area (AFTA). We gather that competition from regional products would intensify come 2013-2014, when the 40% Asean material content requirement comes into play where several international steel giants have established steel projects in Vietnam, Indonesia and Thailand.

-  On the other hand, we understand that the federal government’s policies appear to be more supportive of select local entities, especially those involved in upstream production. Furthermore, the confirmation of local availability (CLA), which allows the midstream/downstream producers to gain import duty exemption on certain flat steel products, is not strictly exercised for some segments.  

-  On a brighter note, we sense that the Malaysian government is gradually taking measures to safeguard the local steel industry. In the middle of last month, the government imposed licensing requirements on the importation of eight tariff lines for flat-based alloy steel products (HS 7225) effective from June 15 onwards. 

-  But, we gather that a more significant impact would materialise if the government were to grant a request by local steel players for either an outright ban on exports of domestic scrap/iron ore or imposition of duties.

-  Coupled with the normalisation of key input cost in recent months (e.g. iron ore, coal) and roll-out of select domestic infrastructure projects, this could trigger an inflexion point for local steel players moving into 2H12. To be sure, prices of domestic steel bars have risen ~20% to about RM2,500/tonne from late-2011 levels even before the expected ramp-up in steel demand from the Sg.Buloh-Kajang MRT project. 

Source: AmeSecurities