SEAISI questions additional ASEAN steel capacity

The Selangor, Malaysia-based South East Asia Iron and Steel Institute (SEAISI) has published on online article questioning whether steel producers in the region are investing too heavily in new projects, creating a potential overcapacity situation.

Of interest to the ferrous scrap recycling sector in the United States and Europe, the association singles out iron-ore-fed basic oxygen furnace (BOF) integrated mill investments, many funded by steelmakers and banks in China, as particularly problematic. Competing electric arc furnace (EAF) mills in the region are high-volume buyers of ferrous scrap exported from the U.S. and Europe.

The association says the steel industry in the Association of Southeast Asian Nations (ASEAN) region “is facing new production capacities [that] may worsen the current overcapacity problem in the region.” SEAISI adds, “The influx of proposed investment from China of up to 50 million metric tons of production capacity in several ASEAN countries, as well as investment from other countries in the form of joint ventures with local companies, will add up a total of 151 million metric tons of production capacity estimated. Total overcapacity overhang will be more than 60 million metric tons.”

The association calculates “it will take about 20 years for demand to catch up with this [planned] capacity level.”

The SEAISI expresses particular concern about integrated BOF projects, writing, “Note that the highlighted overcapacity in excess of 60 million metric tons only comes from integrated mill projects. As those in the steel industry are aware, once a blast furnace is installed, there is no such thing as operating at low capacity. For economies of scale, blast furnaces usually must be run at full capacity. And that’s where the problem will start.”

Nations in the region chasing foreign direct investment (FDI), much of it tied to the Chinese government’s Belt and Road initiative, receive scrutiny from SEAISI. “When the market is under capacity, FDI will add value to the industry [and] will be able to serve existing demand,” writes SEAISI.

However, the association continues, “When in an overcapacity situation, the new investment will lead to severe competition in the industry. Local steel producers (together with the new investment) could face severe financial losses within the domestic market, and this will threaten the sustainability of the steel industry in the country. A clear example is already unfolding in Malaysia.”

In that nation, “With a new player entering Malaysia’s overcapacity long products market, Malaysia’s export of wire rod has risen significantly since 2019. The [export] volume in the first five months of 2020 was 1.6 million metric tons, which was an increase from 185,000 metric tons in the same period of 2019. Around half of the volume was exported to ASEAN member countries. When regional steel mills start to face financial losses through such severe regional competition, it may lead to job losses, business closure and lower government tax revenues. In such a case, is the FDI still adding value as earlier thought?”

Answering its own question, SEAISI writes, “Because of the serious implication of such FDI in an overcapacity market, as well as an oversupplied regional market, the actual hope that the FDI adds value may not be real after all. It could end up being a loss of value to the industry, the country and its people. As such, authorities should examine the long-term impact of regional investments before making the decision to accept new FDI when the local and regional markets are in an overcapacity situation.”

In its October 2019 newsletter, SEAISI reported that Datuk Lim Hong Thye, president of the Malaysian Iron and Steel Industry Federation (MISIF) had “blamed Chinese steelmaker Alliance Steel Sdn Bhd for the losses incurred by the local steel industry in the last three quarters.”

At that time, MISIF “claimed that Alliance Steel had been crowding out the local steel bar manufacturing segment since October [2018] and producing only a small amount of beam and medium section products that were supposed to be Alliance Steel’s mainstay, as these are not commonly produced in Malaysia,” SEAISI reported.

Steel bar products such as reinforcing bar (rebar) are commonly produced at recycling-friendly scrap-fed EAF mills. On its website, SEAISI uses the word “sustainable” in both its mission and vision statements, and lists as a “strategic theme” to “advocate environmental sustainability in [the] steel industry.”