Green steel blooms in Malaysia, but new moratorium could make or break it

The green steel supply chain is gradually starting up in Malaysia, largely due to stricter decarbonization-related government policies, sources said in the week to Monday March 25. One of these policies is a two-year moratorium on all expansion and diversification of manufacturing activities in the iron and steel industry

The moratorium was imposed in August to tackle the oversupply of steel in Malaysia, as well as to provide a “timeout” for steelmakers to reconfigure their businesses in line with the country’s decarbonization agenda, the Malaysian government said.

The temporary suspension affects all inquiries, assessments of current applications and expansions of manufacturing licenses, among others, in the iron and steel industry.

Now, almost eight months later, sources told Fastmarkets that the government’s move to provide exemptions to steel manufacturing licenses that are in line with its decarbonization agenda – such as for low-carbon iron and steel products or carbon-reduction technologies – is a big push for steelmakers to invest in these technologies.

There have already been several green steel investments in Malaysia, with the latest being a 20 billion Malaysian ringgit ($4.2 billion) project launched by Malaysia-based Esteel Enterprise Sabah Sdn Bhd, which is expected to lower carbon emissions by 70%.

The three-phase project will use natural gas as a reducing agent instead of coke and coal, Fastmarkets heard.

“This shows that there is a growing focus on decarbonization. Government policies can be a big push, but the bigger push is demand and rate of consumption,” a Singapore-based consumer source said.

Impact of moratorium limited

A Singapore-based trader source said the increase in investments in green technologies and electric vehicles (EVs) flowing into Malaysia over the past year – which may or may not be due to the moratorium – has been encouraging, because it signifies Malaysia’s potential to expand on this front.

“We’re seeing more green steel and EV investments flowing into Malaysia. Even Tesla is expanding in Malaysia,” the Singapore-based trader said. “It definitely signifies that the industry is increasingly adopting green technologies.”

Malaysia scored a major victory last year after EV maker Tesla chose to set up its regional headquarters in the country, due to strong competition from other Southeast Asian countries, namely Indonesia and Thailand.

The Malaysian trade ministry had said in July that Tesla would open an office, showrooms and service centers in Malaysia and establish a network of charging stations for its cars. Prime minister Anwar Ibrahim also said then that Tesla’s office would be set up in Selangor.

But while the Malaysian government may have attracted investments in green technologies, it has yet to tackle the issue of steel oversupply through the moratorium, market participants said.

The country’s consumption peaked at 9.78 million tonnes per year in 2018, before declining by 5.8% year on year to 9.21 million tpy in 2019 and by 26% year on year to 6.81 million tpy in 2020 due to the Covid-19 pandemic, according to data from the Malaysian Iron and Steel Industry Federation (MISIF).

Steel consumption then rose by 3.2% year on year to 7.03 million tpy in 2021 and by 7% year on year to 7.52 million tpy in 2022, MISIF data showed.

Meanwhile, Malaysia’s latest steel production capacity was reported at 16.1 million tpy, more than double its consumption.

“Malaysia is facing severe excess capacity especially in the production of rebar and wire rods for construction usage,” a second Singapore-based trader source said. “That’s why Malaysian rebar to Singapore is usually priced most competitively.”

Offers of Malaysian rebar to Singapore were largely $10 per tonne lower than other offers in the spot market. Buyers in Singapore prefer buying from Malaysia due to the proximity and shorter delivery time.

Fastmarkets’ weekly price assessment for steel reinforcing bar (rebar) import, cfr Singapore, which mainly considers cargoes sold into Singapore on a theoretical-weight basis, was $535 per tonne on Monday, narrowing downward by $10 per tonne from $535-545 per tonne in the previous assessment.

Furthermore, steelmakers continued to ramp up production over the past year, exacerbating the oversupply issue in the steel industry.

Eastern Steel Sdn Bhd, for example, successfully ignited a 2 million tpy blast furnace at its Kemaman plant in August as part of a 3 billion ringgit investment that began in 2021. This increased the company’s steel production from 700,000 tpy to 2.7 million tpy.

Its domestic peer Alliance Steel is carrying out the second phase of its expansion plan in Kuantan, which will add 6.5 million tpy of steel capacity for the company in 2026.

Green steel not a priority

A source close to a Malaysian steelmaker said that most producers are more focused on increasing profit margins and filling up order books than investing in green steel, which requires significant capital.

And while there is a deluge of green technologies and EV investments flowing into the country, this does not necessarily translate into increased demand, the source said.

The Singapore-based consumer source said: “EVs don’t necessarily use green steel, so even if EV investments increase, it doesn’t mean demand will. And if demand is not there, steelmakers will not be incentivized to produce them.”

A Malaysian exporter source said that the steel industry is still lagging in terms of producing high-value products compared with its Southeast Asian counterparts. Domestic production of hot-rolled coil, for example, will only start in the third quarter of this year.

“It is also important to note that the parent companies of most local mills in Malaysia are from China, so the country’s decarbonization [ambitions are] not a priority,” the Malaysian exporter said.

“But that is not to say that they’re not looking to decarbonize,” the exporter added. “I believe if Malaysia is looking to produce green steel, it will be to cater to the Singapore market, where adoption of construction material, especially beams, is growing rapidly.”

Last year, the Singapore government said that companies that can demonstrate the sustainability credentials of their goods and services would have an advantage when bidding for certain government tenders from 2024 onward.

In line with its efforts to achieve net-zero carbon emissions by 2050, Singapore also rolled out several decarbonization initiatives in 2023. These include a carbon calculator that aims to help developers better assess construction emissions and encourage them to source greener materials from more environmentally friendly manufacturers.

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