• Maintain OVERWEIGHT on sector; Top Picks: Press Metal (PMAH) andMalayan Cement (LMC). We recently participated in the trade forumorganised by the Malaysian Iron and Steel Industry Federation (MISIF) toacquire insights into the local, regional, and global outlook for the steelindustry. Industry headwinds are expected to persist into 2024, primarily dueto uninspiring demand – particularly from China – and the presence ofstructural overcapacities within the ASEAN region.

• Roadmap to sustainable and low-carbon iron and steel industry. As thesteel industry accounts for c.28% of the local manufacturing sector’s totalcarbon emissions, and c.4% of Malaysia’s total carbon emissions, a multifaceted approach is needed to achieve Malaysia’s net zero target by 2050.We learnt that the lowest hanging fruit would be renewables and pursuingenergy efficiency (EE) as the most accessible and cost-effective steps toreduce scope emissions. Subsequently, the transition can be made toelectrification using electric furnace (EAF), hydrogen-based direct reduction(H2-DRI), carbon capture and storage/utilisation (CCS/CCU), and bioenergyCCS (BECCS). The adoption of these advanced technologies is contingentupon Malaysia’s technological maturity and economic viability.

• Global steel trade & China market. In 2022, global and China crude steelproduction reached 1,885m tonnes and 1,018m tonnes respectively, withChina contributing c.54% of global production (Figure 5). While China’s steelconsumption has been declining since 2021, global steel consumption hasremained stable, buoyed by growth in India and Japan. Yet, the Chinesesteel industry is at a crossroads, as both production and consumption ofcrude steel have been steadily declining from the 2020 peak (Figure 10).These shifts have unveiled structural changes in China, as steelconsumption transitions from the real estate sector to infrastructure andmanufacturing, reflecting the challenges in its property market (Figure 9).

• Signs of unsustainable overcapacity in ASEAN. The South East Asia Iron& Steel Institute (SEAISI) revealed that ASEAN is on the brink of a massiveinflux of integrated mega mills (Figure 15). If these plans come to fruition,over 71 tonnes of steel capacity could flood the market by 2026. This is acause for concern, as capacity would outpace demand or the apparent steelconsumption (ASC) in the region.

• The challenge extends to Malaysia, where overcapacity andunderutilisation issues are looming large. In the domain of long products,Alliance Steel expects to add another 6.5m MT to its current installedcapacity of 14.1m MT. Eastern Steel is in the process of establishingMalaysia’s first integrated hot-rolled coiled plant with 2.7m MT capacity. Asof 2022, only hot metal (HM) and pig iron (PI) have achieved capacityutilisation above the global average of 74% and sustainable threshold of85%, while other products fall significantly below these levels at <51%(Figure 20). According to MISIF, Malaysia’s ASC is still trending far behind,in view of the increasing overcapacity and low utilisation rates.

Source: RHB Securities Research - 7 Nov 2023