Posted on 28 November 2005

 

Source: SEAISI

Despite the decent growth in the last few years, ASEAN steel industry remains still as a group of small individual producers, and therefore coupled with disadvantages of being small.  Only Lion Group of Malaysia -ranked 74^th – is on the list of top 80 steel producing companies in 2004 released by IISI. 

The first shortcoming is low steel consumption in their home countries.  With the exceptions of Malaysia and Thailand, most of the countries are in the lower level of steel consumption per capita: Vietnam 66 kg, Philippines 36, and Indonesia 26 kg. The low steel consumption is very much restrictive for the steel producers to grow up on captive domestic market. Although low steel consumption is a common symptom of the beginning of developing economies, a better marketing strategy should increase steel intensity in the countries.  Opportunities are widely open in many sectors like construction, automotive, household appliances, and shipbuilding. 

Secondly, the industry suffers from the weak supply chain structure of the industry.  Almost all raw materials are imported from outside the region.  Lack of domestic iron ore and scrap supplies increases production costs as the industry must pay dearly the shipping costs and on top of that, they –as much smaller buyers- must pay more than the steel industry giants have.    The intermediate chain is fragile as well, the region has an acute undercapacity in upstream steelmaking facilities, and also in rolled sheet products. 

The weak demand and unbalance supply chain lead to a high production costs and unsurprisingly  invite imported steel from low cost producing countries to utilize the price disparities.   Table below illustrates the region's dependence on imported steel.

            South East Asia Steel Balance* – 2004 (in Million MT)

Crude Steel Production	14
Finished Steel Production	30
Export	8.2
Import	34
Apparent Consumption	37

            * Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam 

There is a hope: regional trade arrangements have been shaping global businesses, and the South East Asia nations have ASEAN Free Trade Area (AFTA) arrangement.  AFTA is designed to effectively reduce trade barriers among ASEAN countries.  The new economic arrangement will obviously shape the steel industry in South East Asia.    

The regional integration is aimed to stimulate regional trade, attracting investment in steel industry, stimulate greater demand and ultimately boosting economic activities in ASEAN countries.  Eventually, there are opportunities and threats originated  from the regional economic integration will be discussed in this brief paper. 

AFTA may make new investments in upstream steelmaking viable. Operations based on limited local resources (iron ore, coal, natural gas) are expected to flourish.  AFTA will provide incentives for ASEAN steelmakers (or new investors) to have a cost advantage over the foreign products.    The free trade arrangement will  attract new investment in steelmaking to balance the capacities. 

However, questions have been raised by the ASEAN steel industrialists when AFTA is moving beyond its boundaries.  The China, Japan, India giants are in the next integration phase.   As most of the ASEAN steelmakers are in a transition stage in which production technologies, process and management structures are being converted from traditional to world standard, one may wonder about the future of  South East Asia steel industry in an extended FTA.

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