Industry Overview

8. INDUSTRY OVERVIEW AND OUTLOOK 8. INDUSTRY OVERVIEW AND OUTLOOK 8.1 OVERVIEW AND OUTLOOK OF THE MALAYSIAN ECONOMY Grow1h mo:rnentum in the Malaysian economy strengthened to 6,4% in the fourth quarter of 2003 from 5.2% in the third quarter. Growth was broad based. with positive OO11tributions across aU industries and demand components. A stronger upturn in exports gave added support to private sector activities and consumer spending. Rising consumer and business oonfidence, the strong underlying economic fundamentals and low interest rates contributed to the stronger growth momentum, An important development was the stronger expansion in investments. The combination of stronger domestic demand and rising exports resulted in a stronger-than­expected GDP growth of 5,2% for the whole of 2003. The main driver to the stronger growth performance was the manufacturing sector while most other sectors aJso rocorded higher growth. Growth in the manufacturing sector accelerated to record a strong eJi.paJlsion of 12%, contributing 3.5 percentage points to GDP growth. Expansion was driven by strengthening domestic demand and reinforced by more robust e\ports. The stronger cJi.pansion was thu!t seen in both the export and domestic-oriented industries (17,2% and 8.3% respectively; 3Q 2003: 11.5% and 6% respectively). Capacity utilization remained high i1,cr0SS both sectors. On the demand side, growth in domestic demand was driven mainly by the private sector, with a stronger growth in household consumption. Supporting factors include low interest rates. increased access to financing. higher commodity prices, the positive wealth effect of higher equity prices a.nd measures under the Economic Package which resulted in higher disposable incomes. Stronger extcrnal performance further raised consumer and business confidence during the quarter. Consequenrly, private consumption reoorded a stronger grOWlh of 6.9% during the quarter. Public consumption was also higher, increasing by 11.1% due mainiy to higfier expenditure on supplies and services. An important development was the stronger growth in investment during the quarter with gruss fixed capital fonnation rising: by 3.6%, Private investment in machinery and equipment strengthened a=; business sentiment improved and capacity utilization remained high. especially for the expoft”orienled industries in the manufacturing sector. Meanwhile. development expenditure of the Malaysian Federai Government. though lower than in the corresponding quarter of 2002, remained high in the fourth quarter due mainly to expenditure on transportation and health facilities. Stronget’ economic growth in the fourth quarter was achieved with low inflation. COlisumer prices registered a benign increase of 1.2%. A combination of rising capacity, higher productivity and more competitive pricing of goods and services continued to contain pricing power despite strengthening demand. The increase in propeny prices had also been marginal and mainly for properties in choicc locations. In the external sector. revised data indicated that the trade surplus in the fourth quarter was larger at RM19.8 billion (3Q 2003: RM19.4 billion), Gross exports expanded strongly by 14,9% while imports increased at a faster rate of 16% (3Q 2003: 7.9% and 1.9% respectively), Tbe expansion in gross exports was due to the significant increases in exports of manufactured goods and continued strong growth in exports of primary commodities. In the manufacturing sector, higher exports were due mainly to the upswing in the electronics cycle. Exports of agriculture and minerals remained strong, supported by high prices and export volume ofpalm oil. liquefied namral gas :and crude oil. (Source: BNM’s Quanerly Bulletin, Founh Quarter 20(3)
Company No. 622819-D a. INDUSTRY QVERVIEW AND OUTLOOK

8.2 OVERVIEW OF THE MALAYSIAN STEEL INDUSTRY In the decade years preceding the 1997 -98 financial crisis,. steel consumption grew steadily from 1.5 million mt in 1986 to 33 million rot in 1990. and &.1 million mt in 1996. Consumption peaked in 1997 at K3 million mt despite signs of an economic siowdo~Tt In 1998, !’teel consumption declined sharply as the crisis rooted itself in the real sector of the economy. Consumption nose­dived an unprecedented 45% to 4.6 million mt in 1998, before picking up a strong 33% in 1999 to 6.1 million mt. In 2000, aggregate steel consumption recorded 6.9 million mt, wilh long products (bars, wire 100S and seL’tiOOS) ac.:ounting for 44% oftotal consumption and flat products (hot-rolled sheets, plates and sheets. and CRe) making up the remaining 56%. In200I, stecl consumptiongrew 5% to 7.2 million mt before moderating to 7.0 million mt in 2002,. a slight detline of 2%. Long products accounted for 51% of total aggregate steel consumption in 2002, up from 43% in 2001. The consumption of long products stood at 3.6 million mtin 2002, up 15% (rom the previous year (‘2001: 3.1 million rnt). Bars and \\<1re rods made up the bUlk of the col’lSl,lmption for kmg products in 2002, at 51 % and 33% respectively. Sections accounted for 13% of alllQng products consumed. The consumption of flat products. on the other hand. stood at 3.4 miIliOll mt in 2002, down 15% from the previous year (200J: 4.1 millkm mt). Among the lll<ljnr categories of fiat consumed during lhe year were hot~rolled sheets and strips (49%), rold·rolled sheets (20%) and plates (7%). Malaysia’s aggregate steel consumption trend is sho~n below: Malaysian Steel Consumption Pattern 5000 T 4500 + 1: 4000 T +20
3500~ , +10
::=tto # <:) i T, -10 9 2QOO-+ t +-20 +-.3(} ~40 o -50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
~Longs _ Flats-‘Ity-o-yChange [n Tolal cOO$l.lmPtiQ~J (SOUTCe.: ‘T1le 6′” Repon of Status and OUIloak of the Malaysian Iron and Steel Industry 2(XH (“M1S1F RepOJ1 200J”iJ 8. INDUSTRY OVERVIEW AND OUTLOOK 8.:2.1 Flat Products -Cold Rolled Steel Coils The steel indtNry in Malaysia has been grouped into three (3) distin<:t product groups as shown below;­Typeofl’r_Cal<gory L Primary Products (n) Scrap Substitutes:
• Hot Briquetted Iron (HBl) .. Direct Reduced Iron (DRl)
(h) Crude Sleel (semi-finished):
• Billets
• Blooms
• Slabs

 

2, Rolling! Finished Products (a) Long ProdllCtS: .. Bars . • WireRcxls • Sections fb) Flat Proourts: .. Hot Rolled Plates and Sheets .. eRe 3. Secondary Products (al Downstream Wire and Wire Products:: • Nails .. “,rrre .. WrreMesh .. Bolts and Nuts .. BJlI’b Wire., etc, (b) Flat-Secondary: • Coated/Painted Steel
• Tubes and Pipes (searned-) .. Boilcrs& Pressure Vessels .. Other fabricated products

 

A1SCRe and Ornasteel are the only two producers of eRe in Malaysia. The country’s current installed capacity for the production of cold rolled sheets stands at 730,0Cl0 mt MSCRC, which started operations in 1990 has an installed capacity of 250,0CX) rot “,nile Ornasleel, which began operations. in 1994, ha.;; an installed capacity of 480,000 mt The raw materials used by both MSCRC and Ornasteel are hot rolled “mother coiIs”. The production ofCRC stood at 551,0CX) rot in 2002, up 25% from 440,000 rot in 2001, Based 011 an installed capacity of 730,000 tnt, the utilisation rate v.ag II high 75% in 2002 (20011 66%). The production of eRe increased steadily between 1991 ~ 1997. Prior to 1991, there was no local production of CRe In the country and aU of Malaysia’s requirements of cold rolled flats had to be imported. Between 1991 and 1997, production increased by more than 1().·fold from an Initial level of 47,000 rot in 1991 to the peak figure of 485,000 mt in 1997. In 1998-, producti<}n full 32% to 330.000 mt. rt picked up again in subsequent years, growing 24% and 19% on an annual basis to 410,tXX) mtin 1999 and 488.000 mtin 2(((Irespectlvely. Company No. 622819-D -~-‘——…………–:=————-=-=———­8. INDUSTRY OVERV1EW AND OUTLOOK Imports of CRe peaked in 1999 at 945,00) ml: (after the economic downturn) and have since then declined gradually, The decre<lse in imports is partly due to the softer demand from the local automotive industry, Like many other domestic-oricnted industries, the automotive industry was seY’Crely affet:tro by the 1997·98 economic downturn. But even though the market for automobiles picked up in the recent years. imports have continued to decline, In 2002. imports of CRC stood at 709,000 mt (2001: 849,0Cl0 mt), Like most other steel products, eRC 1S meant primarily for domestic consumption. Hence,. only small quantities of the same are: exporl.ed, But in 1998 and 1999, exports were strong because of the weak domestic rondltions. Exports of CRe rose 55% from 71!OJ rot in 1997 to ) 10,00) mt in 199&. before mtting an all-time high of 231,(00 ll1t m 1999. Exports dropped sharply in subsequent years as domestic demand picked up. In 2002, exports accounted fur a meager 16,000 mt (2001: 15,000 mt), The table below illustrates the consumption, production.. import and export trends of CRc’ Cold Rolled Coils:: Consumption, Production, Exports .and Imports
91} ‘N~ ~ t,J” ~’O 9:’\ …OJ …Qi ….OJ ….q; ….OJ” 1-ProductiOn !mPQl1$’–~E~l1$ ~Consum pu’on-l
~~~~~~ ~~~~~~~ The majorapplications ofCReareli.stcdas fOJ1Qv,,”S;­” Coored sheets (Galvanized Steel Sheets. Tinplate, Other Metallic Coated Sheets) ” Ekx:trica1 Steel Sheets ” Aircraft Building and Repairing • Steel Furniture
• Kitchenware and Tableware ” Automotive Com~ and Parts ” Steel Pipes and Tubes ” Steel Drums ” Steel Stropping ” Other Fabricated Products

 

8. INDUSTRY OVERVIEW AND OUTLOOK
8.3 OUTLOOK FOR mE MALAYSIAN STEEL INDUSTRY To a large extent. the steel industry in Malaysia is centered on two main sectors -the construction ani manufacturing sectorn. Steel production is no longer dominated by long products such as bars and wire-rods as the importance of flats and sted sections has increased in recent years with rapid development and economic prosperity of the country’s population. With capacity now available for mcdimn am heavy Sled sections as wdl as for Oat products. impons of such products have been significanlly reduced in the recent ~.l:Iowever, in the case of mediwn am heavy steel sections. imports have ~n on lhe rise again follo’Wing the closure ofPerwaja Steel Berhad’s section mill in Gurun in February 2002. Likewise. with continued emphasis on the manufacturing seckI as Ihe engine for growth, it is anticipaled that Malaysia’s rooswnption pattern would wilDeSS a shift from longs to Oats in the mcdiwn to long term, as !he per capita income: of its poplliation rises. (Source: M/SIF Repon 2(03) CRC plays an important role in supporting the manufacturing sector. Any future growth in lhis . sector of the steel industry as a whole will be closely associaled to the growth ofthe manufacturing SOC\(l<. In view of the above, the following discussion on the prospects of the manufacturing sector is not intended to be exhaustive but reflects some of the factors which are rek:vant to understand the prospects of the Sleellndustry based on prevailing local economic developmenls. 8.4 OVERVIEW AND OUTLOOK OF mE MALAYSIAN MANUFACTURING INDUSTRY The stronger growth in the Malaysian econom)’ was supported b)’ expansion across all the major sectors of the economy, wilh Ihe main Unpelus emanating from the manufacluring sector which conlributed 3.5 percentage points 10 GDp. The more robust manufacturing seclor further reinforced the recovery in the services sector. Growth in the manufacturing sector acceleraled 10 record a double-digit expansion of 12% during the 411l quarter of 2003. driven b)’ stronger exports and strengthening domestic demand. The higher growth entAnaled from suonger expansion in the export .nd domestic-orienled industries (17.2% and 8.3% respectively; 3Q 2003: 11,5% and 6% respectivel),). The capacity utilisation rate for the export-orienled sectors remained high at 88% (3Q 2003: 88%), while that of the domestic-orienled sectors declined to 74% (3Q 2003: 82%), due mainly to the lower production in the transport equipment industries. The overall manufacturing capacity utilisation rate remains high at 82% in the fourth quarter (3Q 2003: 85%). The strong performance of the export-oriented lndustries reflected expansion in the eJectronKs, chemicals and rubber products industries. or significance, production of electronics increased markedly following rising global demand across all markets and product segments, The spillover effects from the strong electronics performance as well as the improved external demand for resins and plastic products underpinned the growth in Ihe chemical producls industry. In the domeslic-orienled industries. the higher growth was supported by expansion in the construction related industries and food and beverages. while the performance of the transport equipment industry was affected by the slower demand for new cars. (Sourc~: BNM’s Quan~rly Bull~lin. Fourth Quonu2(0) Company No. 622819-D 8. INDUSTRY OVERVIEW AND OUTLOOK
Malaysia’s manufacturing sector is all geared up for better times ahead. as output strengthened further starting February 2003, on the back of higher growth of domestic-oriented industl’1es and better performance of export·orienled industries. Domestic-oriented industries recorded double digit growth, spurred by higher consumption in food and beverages, and continuing demand for prOOUCls of constnJeoon.related industries, particularly non-metallic minemls such as cement and concrete as well as higher growth of fabricated metal products in the second quarter of 2003. With the increased aclivities of the manufacturing ;;ector, demand for natural ga~ surged up’ward, and contributed to higher growth of the domestic-Of’ienred industries, in particular the industrial gases sub-sector. The export~oriented industries also performed betler in 2003 and recorded a moderate growth during the first six. months, due to a rebound in rubber products and textile industries, particularly the apparel. External developments and strengthening domestic economy point to stronger growth in the manufacturing SeL’tor. Growth in export-oriented industries, in particular the eleclronks industry, is envisaged to gmn strength following higher inter-regional trade. particularly between ABEAN and East Asia. Efforts to prom;.’I1c domestic consumption as well as advancemcuts into higher value·added products will further boost growth of domestic·oriented industries_ Taking cognisance of the on·going development processes, the overall value added of the manufacturing sector is expected to register a stronger growth of 1.2%.

 

8.5 GOVERNMENT LEGISLATrON AND POLlCIES The steel industry in Malaysia is not governed by any legislation which is unique to the industry. Nonetheless, the fact that the industry is capital·intens.ive in nature, relies heavily on imported inputs and is largely driven by demand from the local market.. ensures that it receives a fair amount ofattention from government policy makers. A major issue confronting the local industry is the Government’s policy on imports of flat steel products. The polky, whicb is meant to protect the local industry, was put into place in response 10 safeguard measures imposed by [he US, EU and other countries (to protect their own steel industries) as well as the overcapacity problems experienced during the Asian financial crisis. Key elements of the policy include: a) Requirements for import permit for flat steel items; and b) Impmt duties ranging from 30%-50%.
The imposition of the above two (2) policies was to provide some measure of proteclion similar to other countries and to prevent the Malaysian steel industry from being a reCipient of products diverted from elsewhere. (Source: M/SIF Report 2003) Ho\\’ever, management believes that there is no material impact on the operations and perfonmmce of the Group (including production costs and profits) arising from an increase in import taoffs as the Group is able to pass on the higher costs to their customers in the form of higher prices fur their products. Furthermore, the tariffs were intended to be a measure to protect the local sleel industry from being the recipient of steel products diverted from elsewhere. II Company No. 622819-D 8. Il’lDUSTRY OVERVIEW Al’lD OUTLOOK
8.6 THE INDUSTRY’S RELIANCE ON IMPORTS Traditionally, steelmaking facilities in ASEAN countries consist of mini-mills with the production capacity for downstream products. (both long and flat) much higher than for steelmaking. This disparity in the industry has required ASEAN countries, including: Malaysia, to import large quantities of ore pellets. billets. HRC and eRe as feedstock for rolling activities. The use of scrap is particularly evident due tn the use of electric arc furnaces (“EAPs”) and cheaper cost compared to alternatives_ Presently. about 65% ofthe scrap needed for steelmaking in Malaysia is imported, Until the late~1990s, Malaysia had no capacity to produce hot-rolled flat products. such as sheets, strips and plates. Domestic demand for such products was completely met tluough imports. How”wer, all that changed with the coming on~Slream of Megasteel’s 2,0 million mt HRC plant in 1999. Since then. HRC imports have steadily declined from 832,000 rnt in year 2000 to 549.000 mt in year 200:2. Despite the reversing trend. domestic demand is stiIllargely imported from China, Japan, Thailand and Korea as Megasteel is currently producing lIRe at only 50% of its plant capacity per year, (Source: MIS-IF Report 2003)
8.7 FUfUREPLANS Al’lD STRATEGIES OF TIlEMSB GROUP The MSB Group plans to further expand the Group’s present market share through the implementation ofseveral strategies, The Group intends to increase the efficicocy of its present cold rolling mill plant in Shah Alam, Selangor Darul Ehsan. In doing so, the Group expects production coot to be reduced, The Group has also recently acquired two (2) adjoining pieces of vacant industrial land for future expansion purposes. With the expected liberalization of the Malaysian steel industry following the full jmplementation of the AFTA, domestic HRC prices are expected to match international HRC prices, This will in turn enable MSCRC to source raw materials at more competitive prices.. The Group is also adopting the strategy to produce high grade and high quality CRC;; in order to position the Group in a niche environment and to stay ahead of the competition. THE REST OF TIllS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

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