Southeast Asia’s steel surge: how will the region manage overcapacity?

By Mihir Vora, Senior Commodity Analyst and Malan Wu, Head of Steel Research

Southeast Asia continues to see ambitious expansion in steel capacity. But with lacklustre utilisation levels, will protectionist government policies be enough to address overcapacity? We explore what’s behind the capacity boom, and some of the measures being deployed to address it.

What’s behind the steel surge?

Even in a global pandemic, steel capacity additions throughout Southeast Asia have continued to rise. In 2020, 5 Mt was added; 60 Mt more is planned by 2030.

This extra capacity is led by Chinese investment, largely through the blast furnace route. We predict blast furnace production in the region will surge and elevate demand for iron ore and metallurgical coal.

But these ambitious plans will also exacerbate overcapacity. With competition from imports, we believe steel production will be slow to catch up.

Countering the threat of overcapacity

Can utilisation levels rise enough to meet these increases? Our base-case scenario does show steel output growing 5% annually between now and 2030. However, capacity surplus is also expanding.

With profitability under pressure, companies and regulators in the region have already taken action. For example:

• Opposing expansion plans: steel manufacturers and associations have called for the 10Mt Wenan Steel project in Malaysia to have its manufacturing license suspended.
• Pushing back on substandard technology: regulatory authorities have raised environmental and product-quality concerns over Chinese players dumping obsolete induction furnaces in the Philippines, Indonesia and Thailand.
• Shelving projects: Vietnam steelmaker Hao Sen has scrapped a 4.5 Mt mill, citing competition from cheap steel imports from China.
• Tightening regulatory frameworks: regions plan on limiting the numbers of licences being issued and are imposing trade barriers.

However, despite these checks on expansion, we still expect around 60-70% of the 60 Mt planned expansion to materialise.

The region turns to protectionism

Southeast Asia is already lowering its finished steel imports, but, at 60%, the ratio to consumption is still very high.

Local steel manufacturers have long urged for government support to curb imports. Now governments in the region have sprung into action with a slew of protectionist measures. Key economies have introduced duties on steel products from their export partners, including Vietnam, Malaysia, Thailand and Indonesia. Vietnam, for example, has placed duties of up to 25% on cold-rolled sheets and coil from China, while Indonesia has imposed duties on several flat product imports from China, Russia and India.

These measures will further restrict finished steel imports, which we expect to decline to 40-50% of consumption by 2030. However, the total value is still high when compared with the current global average of 20%.

Opportunities for self-reliance

So, what next for steel production in the region? It’s imperative that Southeast Asia strikes the right balance between imports and domestic production. We believe economies should focus on developing a resilient in-house supply chain, by incentivising domestic steelmakers. This will mean procuring domestically produced steel for government-funded projects.

The region should also continue to reduce dependence on imports by levying safeguard duties, quotas and limiting permits. In addition, clearly articulating government policies for investment, grant of licences, and technology usage can limit overcapacity and deter the transfer of outdated technology.

Focusing on domestic steel supply bodes well for the rising demand from infrastructure, automotive and industrial investments.

Find out more about the outlook for steel

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