Sudden shortage of steel


  • Business
  • Saturday, 23 Apr 2016

Shortage: A worker holds steel bars as he walks at the construction site of a new apartment in Jakarta, Indonesia. Steel prices in Malaysia have shot up. — Reuters

FROM a chronic oversupply situation just months ago, there is now a sudden shortage of steel in Malaysia, causing a rapid rise in prices.

The shortage stems from drastically lower imports of the commodity from China, due to the increasing demand for steel there, according to industry experts.

“The shortage we are seeing now is because Chinese exporters are cancelling their earlier contracts as they can fetch higher prices domestically.

“Steel prices are going up very quickly, and because we are importing much less, there appears to be a shortage,” says an industry source.

He says it is due to this situation that steel prices in Malaysia have shot up.

Last year, Malaysian steel millers were badly hit due to the aggressive dumping of China steel products at below-cost price in the global market.

Export prices were below cost by US$39 (RM1541) to US$89 (RM346) per tonne.

The companies suffered huge losses, with many cutting down capacity, retrenching workers and even shutting down mills.

In November, it was reported that the local mills were on average, operating at about a 30% capacity due to the chronic oversupply situation.

An industry source tells StarBizWeek that steel consumers in Malaysia, such as the construction industry, are now feeling the pinch as their costs are being pushed up.

“The local steel manufacturers were neglected when China was dumping steel below the market price – but now consumers are complaining because prices have shot up.

“Many millers had to shut down or cut capacity.

“Now that there is a shortage, they cannot instantly ramp up production - it takes some time.

“They would not have stocked up on raw material, and may have retrenched their skilled workers,” he says.

While Malaysia’s total production capacity is enough to cater to local demand, he says the producers needed time to catch up with the current demand.

However, he says the shortage situation was not expected to last for long.

“This will probably go on until July, after which it is expected to return to the oversupply situation,” he says.

Meanwhile, a peer comparison of 16 steel companies listed on Bursa Malaysia, conducted by RAM Ratings found that a “toxic mix” of rising competition, pricing pressures and domestic cost-push factors will result in another difficult year ahead for Malaysian steel players.

The rating house says the aggregate revenue for the peer group fell to RM15.08bil in financial year 2014 from RM16.32bil in 2011.

“More than half of the peer group recorded at least a year’s worth of operating losses over a 4-year period.

“Even the profitable ones have to be very vigilant as the majority of these recorded margins on operating profit before interest and tax of only 2% to 5%, leaving them vulnerable to any shift in revenue or cost,” says head of Consumer and Industrial Ratings Kevin Lim.

Steel companies have had to deal with rising domestic costs, which have slashed their margins, according to Lim.

“As expected, these companies also exhibited very volatile pre-tax profits and cashflows,” he adds.

The study also found that half of the companies studied had gearing ratios of at least 0.90 times, with many of the highly geared companies reporting “unimpressive” cashflow protection.

It says the average borrowings rates had risen for almost all the companies.

“Several of the larger entities have also issued private debt securities after the global financial crisis, proving that qualified borrowers should still be able to tap the debt market.

“On the other hand, fund-raising activity on the equity front has been rather muted,” it says, adding that the 16 companies had only raised some RM293mil in equity between 2011 and 2014, mostly driven by a single company, to partially fund its capital expenditure.

“With competition likely to get more intense, industry consolidation certainly makes sense, although this undertaking is certainly not a simple case of 1 plus 1 equals 2”.

“Financial risks aside, mergers and acquisitions would also involve various integration challenges. However, weak balance sheets and/or volatile cashflows are likely to constrain the ability of domestic players to undertake large scale mergers and acquisitions that could restructure the local playing field,” it says.


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