Steel & Iron Workshop

Briefing Deck & Daily Program

6 – 8 Oct 2015
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission is strictly prohibited
Executive Summary:
The Iron & Steel workshop was held from 6-8 Oct 2015 at MITI’s office
on level 16. The workshop objectives were to:

1) Improve market share for domestic steel producers

2) Developing an action plan for the entire value chain (upstream to
downstream) to benefit from the catalytic sectors highlighted in the
11th Malaysia Plan

The workshop expected outcomes were to

• Identify subsectors that have prospects/ potential in both domestic &
export markets, and develop
• High-level action plans for the domestic iron & steel industry

2
Summary of issues
Upstream Midstream Downstream Traders
Issues 1. Market 1. Steel 1. Non-alignment 1. Lack of
Penetration Processing of standards collaboration
Asymmetry Centers imposed on raw between Supply
Materials and Demand
2. Shrinking Local 2. Circumvention
Market Share 2. Unfavorable 2. Low local
3. Unequal steel market Technical
3. Spike in Cost policy for Sabah Conditions Capabilities
Inputs & Sarawak
3. Increasing cost 3. Price Not
4. Enforcement & of doing Competitive
Standards business
4. Restrictions to
5. Policy & 4. Poor working import
Governance relationships
between 5. Inefficient
6. R&D allocation upstream and Application
downstream Processes
players
6. Low
Productivity

3
Summary of initiatives
Upstream
Short Term 1. Prevent Import
Circumvention
2. Enforce the GoM
Purchasing policy for
Malaysia-made
3. Reinstate off-peak energy
tariff recommendation
4. Defer removal of energy
subsidies
5. Enforcement on sub-
Standard products
Medium 1. Vertical & horizontal
Term integration of Domestic
Steel Industry to unify
industry interests & build
resilience against external
shocks & cyclic
conditions
1. Human Resources
2. Refreshed Structure for
Collaborative Capacity
Planning
Long Term 1. Innovation and R&D,
alignment with RMK11
catalytic sectors
2. Paying of Additional Profit
Tax to create CESS fund
1. Create buffer fund
against need in cyclic
adjustments
2. To structure & plan
strategic R&D in
industry
Midstream Downstream Traders
1. Encouraging local 1. Recognise international 1. Quarterly engagement
capacity & capability standards as alternative to between end users and
2. Compliance to product MS standards for raw suppliers
standards materials 2. Enforce relevant and
3. Increase technical 2. Quarterly industry working focused testing instead of full
knowledge of govt officers group testing for application of
4. Strict vetting on AP and 3. Green Lane COA exemption COA
CoA process
1. Free importation (no 1. Same testing standard for 1. Incentivise move to higher
restrictions) both local and imported raw grade steel that substitute
2. Promote JV with higher- materials imports
tech companies 2. Common testing
3. Stricter enforcement / methodology by 3rd party
penalty accredited labs/ witnessed
by accredited inspection
body
1. 1-policy for 1. Enhance R&D through
Sabah/Sarawak and collaborations between
Peninsula Malaysia industry, academia and
2. Reduce manufacturing government
costs
4
Issues & Recommendations

o Upstream
o Midstream
o Downstream
o Traders

5
 Upstream Midstream
Current key issues faced Downstream Traders

Issue areas Details & Data validation

• Past 24 months, 60% home market share lost to China price dumping / flooding practices (China
Market
Market Govt practices 9% - 13% export rebate for Alloy Steel exports. In perspective, upstream steel
Penetration industry typical profit margins in range of 1% - 2%)
Penetration
Asymmetry
Asymmetry • Industry’s attempts at expanding export market share blocked:
• Crowded-out by China price dumping
• Foreign markets have tougher protection than Malaysia
• ASEAN free trade not in action; other ASEAN Non-Tariff protection mechanisms higher than Sectoral issues
Malaysia with Traditional
business viability
Shrinking
Shrinking Local
Local • Loss of SMEs product offtakers (loss of resilient local market network, indicator of Economic Health ) factors (Costs &
Market Share
Market Share • Closed down by finished-product competition from China Margins) not
• Remaining ones face cost pressures to buy China instead of Malaysian to survive confined to single
non-performing
Spike
Spike in
in Cost
Cost entiity.
Inputs
Inputs • Timing of Energy tariffs rise simultaneous with GST; substantial cost, no adjustment buffer time

• Human Resources: rising costs, low retention

Other
Other Issues
Issues • Financing / liquidity / loans / capital investment

Enforcement • Lax standards enforcement (exacerbates cost-cutting pressures in addition to safety & conformity issues)
Enforcement &
&
Standards • Cost-cutting behaviour (low-grade scrap recycling, material skimping; both unsafe & non-Standard)
Standards
• Exploitation of loopholes – closure responsiveness (Alloy definition standards, East Malaysia exemptions)

Policy • Over- Capacity without coordination planning (China mega entrant from 2017, 1.2bn tonnes pa capacity; current
Policy &
&
Malaysian combined capacity 10mil pa). Need expanded role of concerted industry council (ie: MSI) & unified industry
Governance
Governance voice.

• Insufficient R&D allocation in good times prior. In crisis-mode = industry survival priority. Seeking Blue
Industry understands post-crisis need to build resilience. Ocean business
Long
Long Term
Term • Mitigate risk of market appetite/uptake for new innovations, control exploratory exposure with
viability factors
(Value Ecosystem
integrated value chain development,
vs Product)
6
 Upstream Midstream
Short Term Initiatives Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

• Prevent import circumvention
1 Q4 2015 – Customs / SIRIM / Standards Malaysia, MITI
• Falsely declared Alloys cannibalising market share to obtain ongoing CIDB
9% - 13% GoC rebate, but not being consumed / utilised as
Alloy (refer Appendix p 21 - 28)

• Enforce GoM purchasing policy for Malaysia-

2 Q4 2015 – MOF / JKR MBAM / REHDA / MITI /
made ongoing SIRIM / CIDB
• Boost market share; enable sector-wide recovery; retain
access to a diversified basket of steel feedstock sources for
Malaysia (ie: sustainable mix of domestic & international, vs
current imbalanced domination refer Appendix p29 - 30)

• Implement the Off-Peak energy tariff

3 Q4 2015 - Energy MITI / KETTHA
Commission /
recommendation TNB / Gas
• Recommendation & margin calculations as per industry study Malaysia
currently implemented in modified format; represent nett cost
increase to industry rather than cost assistance.

• Defer removal of Energy subsidies

4 Q4 2015 - KETTHA Energy Commission /
• In view of current market & economic conditions, subsidy 2017 TNB / Gas Malaysia
removal for the 7 high-energy consumption industries (Iron &
Steel, Petchem, Chemicals, Plastics, Ceramics, Glass,
Furniture) (Refer Appendix p31)

•5 Enforcement against sub-standard products Q4 2015 - CIDB MITI

• Cost pressures within local market worsened by ongoing (Construction)
cheap/unsafe material-skimping & sub-standard steels (Non-Construction
no enforcer
identified)

Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years 7
 Upstream Midstream
Mid Term Initiatives Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

• Vertical & horizontal integration of Domestic
1 Q2 2016 - Private Sector MSI / MITI
Steel Industry to unify industry interests & build ongoing
resilience against external shocks & cyclic
conditions.

• Skills and training in line with industry needs

2 MSI / CIDB MITI
• Identification of skillsets Q4 2015
• Development of NOSS Q2 2016
• Launch of programme Q1 2017

• Refreshed structure for collaborative capacity

3 2016 MIDA / MITI
planning REGIONAL
CORRIDORS /
• Regular & wider engagement between industry and
government STATE
INVESTMENT
CORP

Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years 8
 Upstream Midstream
Long Term Initiatives Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

• Innovation & R&D for alignment with high value
1 Q1 2017 – MSI / MOSTI CIDB / MITI / MOSTI,
niches, new markets & RMK-11 sectors ongoing UNIVERSITIES / MAI
• Seek new material ranges & high-revenue applications in new
/ Mid & Downstream
markets
• Alignment with RMK11 catalytic sectors (E&E, M&E,
Aerospace, Transport, Metal, Medical Devices)

•2 Set aside from industry profit tax into a CESS for Q1 2017 - MSI / EPU MOF / MITI / MIDA
industry resilience ongoing
• Structure a strategic, holistic & concerted industry resilience
development plan, not just individual players capital
reinvestment into production infra

Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years 9
 Upstream Midstream

Current key issues faced Downstream Traders

Issue areas Details & Data validation

• Availability of good feedstock (quality)

Steel
Steel Processing
Processing • Local steel can’t always meet industry requirements
Centers
Centers • E.g. selected industry need propriety-grade steel (JFS for
automotive)
• Products standards

• Limited local options (to source for steel)

• Price being dictated, rather than market-driven

• Local producers not interested to produce certain steel types

• Not viable business-wise (no economy of scale)

• Undeclared duties
Circumvention
Circumvention • HS code manipulation
• Certificate of Approval (CoA)

Unequal
Unequal steel
steel policy
policy • Steel policy for Sabah & Sarawak is different from the rest of Malaysia
for
for Sabah
Sabah &
&
Sarawak
Sarawak
10
 Upstream Midstream

Short Term Recommendations Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

• Compliance to product standards Q4 2015 – DSM SIRIM, CIDB,
1
on-going Customs, MITI, MIDA
• Every steel product need to comply to a MS, if
its not available, to refer to a international
standard
• Increase technical knowledge of govt officers
2 Q1 2016 – Steel Customs, MITI,
on-going Associations MIDA, MOF, MSI,
(e.g. MSI) CIDB, SIRIM

3
• Stricter enforcement / penalty Q4 2015 – Customs MIDA, MITI, CIDB,
on-going SIRIM

•
4 Strict vetting on AP and COA Q4 2015 – Customs MIDA, MITI, CIDB,
on-going SIRIM

• Minimum 1-policy MFN tax for Sabah and Q1 2016 – MITI Customs, MIDA,
5 Sarawak on-going MOF, IRB

• Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years
11
 Upstream Midstream

Mid Term Recommendations Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

•
1 Free importation for products not available Q1 2017 – MITI MIDA, MOF, Customs
locally (no restrictions ) on-going

• Reduce manufacturing cost

2 TBA TBA TBA

Long Term Recommendations

Initiatives Timeline Implementer Other Stakeholders
• Encouraging local capacity & capability
1 TBA TBA TBA
> look beyond Malaysia, increase quality &
technical capability
• Merger and Acquisition (M&A), promote JV with
2 On-going TBA TBA
higher-tech companies

• Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years
12
 Upstream Midstream

Current key issues faced Downstream Traders

Issue areas Details & Data validation

1• Standards imposed on raw materials are not aligned with the

Raw
Raw Materials
Materials requirements of downstream players (eg standards for wire rods apply
the specifications of higher grades to the entire range, which is
irrelevant), and should instead be imposed on finished products
2• Local steel producers are unable to supply the suitable grade/specs of
steel to downstream players (eg auto industry requires auto-grade steel
which upstream players do not have, hence raw materials must be
imported, eg Perodua imports from Japan, Proton imports from Korea)

3• Local market does not have capacity to compete in the economies of

Market
Market Conditions
Conditions scale in downstream sector, and should promote the use of more
customised products in order to be more efficient
4• There are insufficient incentives for exports
5• Demand is slowing down due to economic conditions

6• Human capital costs are high due to high levies on foreign workers,
Cost
Cost of
of doing
doing
business while locals are unwilling to work in the industry due to working
business
conditions
7• Power costs are increasing

8• Poor working relationships between upstream, midstream and

Working
Working
relationships downstream players, and between downstream players and
relationships
government agencies
13
 Upstream Midstream

Recommendations summary Downstream Traders

Initiatives Timeline Implementer Other Stakeholders

SHORT TERM RECOMMENDATIONS
• Adopt or recognise international standards as
1 Oct 2015 – Standards MITI, SIRIM (SDA),
alternative to MS standards for raw materials Sept 2016 Malaysia industry associations,
(for industrial sectors) Customs, MOF
• Quarterly industry working group divided by
2 Jan 2016 – Malaysia Steel MITI, SIRIM, industry
cluster ongoing Institute associations, CIDB,
MIDA, MATRADE,
MAI, SME Corp,
Financial Institutions

• Create “green lane” COA exemption process

3 Jan – June MITI Customs, MOF,
based on end-user acceptance and approval for 2016 SIRIM, DSM, industry
industrial sector players

MID-TERM RECOMMENDATIONS
• Have the same standard of testing and common
4 Jan – Dec MITI Standards Malaysia,
testing methodology for local and imported steel 2016 CIDB, SIRIM, MAI,
products (upstream and downstream) industry players
LONG TERM RECOMMENDATIONS
• Enhance R&D through collaborations between
5 Jan 2016 – Malaysia Steel MOE, FMM, Master
industry, academia and government ongoing Institute Builders Association,
CIDB, CREAM, SME
Corp, MAI, MOSTI
• Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years
14
 Upstream Midstream

Current key issues faced Downstream Traders

Issue areas Explanation

Lack
Lack of
of • Steel users are fragmented. No close working collaboration between
Collaboration upstream and actual steel end user.
1 Collaboration
between
between Supply
Supply and
and • The true demand for specific steel products is not known by local
Demand
Demand manufacturers.

• Local steel manufacturers are only producing common mild steel.

Low local Technical
2 Low local Technical
Capabilities • High tensile steel which is required for shipbuilding, offshore
Capabilities
constructions and other industries are not available locally.

• Raw material cost to the industry end user is not competitive. Steel
products are cheaper to be imported from overseas.
Price
Price Not
Not
3 • Labour cost for skilled foreign workers are continuously increasing.
Competitive
Competitive
• No tax for imported fabricated steel products. Imported fabricated
products will substitute locally manufactured steel products.

15
 Upstream Midstream

Current key issues faced Downstream Traders

Issue areas Explanation

• Irrelevant mandatory standards imposed by Government on imported

4 Restrictions
Restrictions to
to steel products.
import
import
• CIDB requires testing on construction related steel products (including
raw materials) before allowing it to be imported.
• Additional Non-Tariff Barriers:
a. AP
b. CoA
• Trade Measures:
a. Anti-Dumping Regulations
b. MFN 15%
c. Safe Guard

Inefficient
Inefficient • Inefficient application procedures for COA. Servers down, officers not
5 Application
Application around.
Processes
Processes • Additional port charges, LAD charges, storage.
• Accelerated corrosion from prolonged exposure to aggressive
environment (sea).
• Cashflow adversely affected by GST related matters.

• Lack of re-investments for new technologies.

6 Low
Low Productivity
Productivity • Plants are currently running on low capacity. Re-investments will not be
economically viable.
16
 Upstream Midstream

Short Term Recommendations Downstream Traders

Recommendations Timeline Implementer Other Stakeholders

1 Quarterly MSI MBAM, BMDAM,

• Facilitating Collaboration between Players from MEMA, FOMFEIA,
Supply and Demand MOGSC, FMM,
TEEAM (E&E)
2 Review high levy charges on foreign workers TBA TBA TBA
 Cash Rebate

Mid Term Recommendations

Recommendations Timeline Implementer Other Stakeholders
1  Review COA TBA CIDB TBA
 Correct implementation of CIDB Act 520

Long Term Recommendations

Recommendations Timeline Implementer Other Stakeholders
1 • Focus on Niche Markets TBA MSI TBA

• Short term – <12 months; Medium term – 1-2 years; Long term - > 2 years
17