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COMMENT: Southeast Asia toys with protectionism

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Never mind the eurozone debt crisis.

For just a while, forget about talk of China having a hard or soft landing.

In Southeast Asia, where economic growth is still robust and steel consumption is still growing fast, the steel industry had plenty to cheer at its annual gathering in Bali this week.

Steel consumption in Southeast Asia crossed 50 million tonnes for the first time in 2011.

The 10 countries’ economies which form the Assn of Southeast Asia Nations (Asean) are expected to grow at a combined 5.6% this year.

Steel consumption in some of these countries could rise as much as 10%, according to figures from the South East Asia Iron and Steel Institute (Seaisi), which hosted the Bali event.

Meanwhile, foreign investment continues to pour in.

Taiwan's Formosa Plastics Group and China Steel Corp are building a 22.5 million tpy integrated steel plant – the region’s largest – in Vietnam. It is set for completion by 2020.

The first stage of Indonesia’s Krakatau Steel’s joint venture 3 million tpy integrated steel plant with South Korea’s Posco is set for commissioning in a year’s time.

For the first time, the region’s steel industry also welcomed Myanmar, a rising hotspot with plenty of potential.

“Southeast Asia seems to be the apple of everybody’s eye now,” said Wellington Tong, president of Pag-asa Steel Works in the Philippines.

Complaints against Chinese imports
The cheerful mood at Seaisi's conference was however marred by some unhappiness about cheap imports from China.

In fact, the possibility of putting up some protective measures against imports, especially those from China, was a major talking point among delegates during the three days of the conference.

In recent months, Chinese mills and traders have flooded the Southeast Asian region with cheap steel offers.

Steel prices in Southeast Asia are generally higher than prices in China, which made the region an obvious target for exports.

Some of the region’s mills claimed that their sales suffered in the face of these cheap Chinese imports.

Tata Steel Thailand and some Malaysian mills have already lodged complaints with their governments against cheap boron-containing wire rod imports from China.

“It’s [common] that countries build walls or curtains or whatever, to provide some kind of hurdle against cheap imports,” Wikrom Vajragupta, chairman of the Iron and Steel Institute of Thailand, said.

Third cry for protection
Ongoing talks about protective measures against cheap imports to protect the region’s domestic mills are the third in recent years.

The first round came soon after the 2008 financial crisis. It led Indonesia and Vietnam to raise import duties for some steel products then by putting steel mills under the “sensitive industries” category.

Non-fiscal measures were attempted too, with Indonesia implementing a national standard of steel (SNI) in 2009, which all exporters had to adhere to before being certified to export into the country.

The measures helped local mills to weather the crisis.

The SNI saw steel imports into Indonesia falling by as much as 50% in the first half of 2010, preventing the closure of many small domestic mills in the country.

The second cry for protection was in 2010 as Asean was about to sign a free trade agreement with China that would see the scraping of import tariffs for 90% of goods, including electronics, auto parts, as well as steel products.

Indonesia’s local steel industry pushed its government to renegotiate the FTA to protect its steelmakers against any future flooding of cheap steel imports from China.

But the renegotiation stopped halfway with little fanfare as the fear of cheap imports flooding domestic markets did not materialise.

What differentiates the call for protection this time around is its unique timing.

Today, Southeast Asia is in much better shape than two years ago. The region’s economy has performed better compared with Europe, the USA, or even other countries in Asia.

The manufacturing sectors did suffer because of slowdown in orders from Europe and the USA. But the construction and service sectors continue to grow at a healthy pace, thanks to resilient domestic demand.

Given the bullish market sentiment, the mounting calls for protectionism from the region sound rather out of place.

It took an outsider to remind the region that they are not the only ones having a difficult time.

“Are you complaining about Chinese imports? Everybody’s affected,” China Steel Corp chairman Tsou Jo-Chi said during a panel discussion.

He later qualified himself.

“[Protectionism] happens all over the globe at the same time now. [There is] no coordination,” he said.

As everyone loses money when the market slows down, self preservation kicks in, Tsou said.

Other industry insiders agree.

“I think free trade is only applicable when the global economy is in good shape,” Krakatau Steel’s president director Fazwar Bujang said.

“When the economy is in bad shape, [free trade] may not work for everybody. There will be some natural tendencies for countries to protect their own interests,” he said.

“When it’s during good time, nobody complains about imports,” Ng Sem Guan, a steel analyst in OKS Research in Malaysia, said.

“But when wire rod market is slowing down like right now, any little imports are [significant] to domestic mills,” he said.

Breaking away from commodity cycle
So is regularly calling for protective measures the only way for self-preservation?

Most importantly, are there any ways to break away from the commodity cycle?

Last year, the same conference saw a heated discussion on the benefits of consolidation.

By consolidating with competitors or other mills in the value chain, mills can reap economics of scale such as in terms of procurement of raw materials, R&D, and marketing, thus raising their competitiveness.

Unfortunately, this topic is not followed up in this conference, and mills failed to report back on whether they have attempted any consolidation efforts.

Another method suggested is through product differentiation and branding.

Tata Steel Thailand – the same company that has lodged against cheap imports from China – in one session of the conference presented a paper on how to remain competitive in rebar market in Thailand.

“We learned that 40% of the market was using rebar of below par quality. By getting this kind of market information, we can educate our market to [differentiate] between our brand from [competitors],” of Tata Steel Thailand vp of marketing and sales Sunil Seth.

Today, Tata Steel Thailand remains a market leader with 25% market share in rebar market in Thailand.

This could very well be a lesson for other steelmakers in the region and beyond to fight competition heads-on, over the alternative of asking the government for protective measures.

Megawati Wijaya
editorial@metalbulletinasia.com

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