Posted on 09 Aug 2024
Overcapacity
Since 2019, I have been highlighting the issue of upcoming overcapacity in the ASEAN steel industry. Today, it is no longer upcoming, but an imminent threat to the steel industry in ASEAN. As time goes on, it appears that the situation will continue to worsen, more projects start to emerge in the region.
What is Overcapacity?
Overcapacity in the steel industry is characterised by low utilisation. It means the industry’s production is very low, typically below 50 - 80% of its installed capacity.
Where is the Overcapacity?
One major place of overcapacity in the steel sector is China.
S&P Global Commodity Insights[1] highlighted those Chinese steelmakers commissioned ~22 million metric tonnes (m MT) of pig iron and 28.5 m MT of crude steel capacity and closed ~23.8 m MT existing pig iron and 29.8 m MT existing crude steel capacity in 2023. They highlighted out that newly commissioned facilities are more productive than older ones, which reflected the continuing growing pig iron and crude steel capacity in 2023.
Furthermore, they reported these steelmakers also plan to bring 82.2 m MT of pig iron capacity and 114 m MT of crude steel capacity on stream in 2024.
Fastmarkets[2] reported that the “Golden March and Silver April” period, which traditionally is a peak steel consumption period is unlikely to happen due to weak steel demand, stemming from extreme weather and lack of stimulus measures and weak real estate sector. This phenomenon has led to the increase in inventory as well as maintenance being planned during the second quarter of 2024.
The other region in overcapacity is ASEAN. From a crude steel capacity of 78.1 m MT in 2022, it is set to increase to 182.5 m MT by 2030. Of this 104.4 m MT, 83.6 m MT will be blast furnace capacity, while the remaining 20.8 m MT are DRI and/or EAF capacity.
However, ASEAN’s demand for steel in 2022 was 75.1 m MT. Assuming ASEAN maintains a demand growth of 7.3% (equivalent to the highest steel demand growth from 1998 to 2018), it will take about 12.6 years for demand to reach 182.5 m MT from 2022. However, if we were to ignore the crisis and take 1997 to 2023 demand figures, CAGR is only 3.3%, which means it will take 27.5 years for demand to reach 182.5 m MT of capacity.
Impact of Overcapacity
Industry overcapacity often results in increasing competition, suppression of prices and eventually industry financial losses. SEAISI’s presentation[3] highlighted a case study demonstrating 6 listed companies in Malaysia losing USD 224 million in 6 quarters starting from Q4 2018 to Q1 2020 due to a new entrant in an overcapacity market.
If the situation is not controlled, further losses may cause business closure and declining investment interests in the steel sector.
Furthermore, if an industry is in overcapacity, there will be a substantial rise in exports from that country. This is clearly evident in both cases of China and ASEAN steel overcapacity. China has been exporting huge volumes of steel in the last one year or so, and the same goes for ASEAN countries such as Indonesia, Malaysia and Vietnam.
Increasing exports will put pressure on the destination country’s market prices and affect their steel industry. Uncontrolled exports will attract trade actions from the destination countries as the local industry is injured. It will not be surprising to see further increase in trade actions against China or against ASEAN countries in the near future.
What Can Be Done?
Measures must be taken to resolve issues of overcapacity that manifest in 2 forms (1) domestic overcapacity affecting industry profitability and (2) increased competition from surge of imports due to external overcapacity situation.
Domestic Overcapacity
A domestic overcapacity happens when
Both are long term issues that requires hard decisions to balance the demand supply distortion, which may include:
Governments should play their part to also stop issuing manufacturing licences and review the state of the industry with respect to longer term sustainability goals. They should also assist in the consolidation / restructuring of the affected players, so to allow them time to get organised and be stronger in the regional and/or global market.
Surge in Imports
Surge in imports into the affected country requires prompt action to protect the industry from being affected by these imports. Major action calls for the following (but not limited to):
Again, this is another area that needs the assistance from governments to put such controls in place.
There could be other measures that can be taken to prevent the impact of overcapacity, whether it is due to the domestic market or due to an external overcapacity source.
To apprehend the issues that materialise with overcapacity, governments must take prompt steps to intervene on these matters that affect the industry. If this does not happen, then the industry may be irreversibly injured. And if such a situation happens, investors should reconsider investing in the country.
Local associations should work with the governments to on this issue as a example of close private public collaboration, tackling serious industry issues affected by overcapacity in the region.
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[1] S&P Global Commodity Insights (16 Jan 2024), “Tepid domestic demand, robust exports to tint China's steel sector in 2024”, ”, <https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/metals/010324-tepid-domestic-demand-robust-exports-to-tint-chinas-steel-sector-in-2024>.
[2] Fastmarkets (4 Mar 2024), “Mills plan for maintenance in March amid accumulated steel stocks””, <https://www.fastmarkets.com/insights/chinas-ferrous-market-abandons-expectations-amid-poor-outlook-and-limited-demand/>
[3] SEAISI (7 July 2020), “The ASEAN steel industry in 2019 and overcapacity issues”, <https://www.steelforum.org/stakeholders/gfsec-july-2020-seaisi.pdf>
Source:SEAISI