Boston, MA -- (SBWIRE) -- 09/04/2012 -- Recent developments support our view that Malaysia's real GDP growth will continue to slow in 2012. Should global economic headwinds intensify over the coming months, this would increase the risk of a recession in Malaysia, which will impact heavily on the country's steel industry, which made a full recovery from the effects of the 2008 financial crisis. Malaysian manufacturing output in January 2012 grew by a modest 1.2% year-on-year (y-o-y) following 4.4% in December 2011. Malaysian basic metal and fabricated metal products output rose by 5.9% y-o-y while the sales value of basic iron and steel product manufacture totalled MYR1.9bn (US$621.6mn), increasing by 8.8% y-o-y. H112 is likely to be a challenging period for the Malaysian steel industry, with margins and earnings facing a severe squeeze, amid a slowdown on both global and domestic markets. Input costs and electricity tariffs are set to rise and domestic steel prices will weaken. Meanwhile, the eurozone crisis and a slowdown in developing countries, particularly China, will lead to resistance towards increases in the local steel price beyond MYR2,300/tonne. Iron ore prices will be affected by a rise in India's export duty from 20% to 30% and supply disruptions from Australia and Brazil. BMI forecasts output of 6.9mn tonnes in 2012, up 5.0% y-o-y with growth declining from the 14.8% seen in the previous year. The domestic market is likely to begin a recovery in H212 as infrastructural activities gain momentum under the Economic Transformation Programme. This should assist with an uplift in steel prices and spur output growth. Risks include Chinese dumping, creating an over-supply situation in the Southeast Asian steel market, although the effects on the domestic market will be ameliorated by the country's 25% import duty on hot-rolled coil; the government has refused a request by Malaysian flat steel producer Megasteel for a rise to 35%. While the Chinese government is starting to tackle the problem by ordering the closure of small blast furnaces, removing electricity subsidies and placing a moratorium on new projects, it may not be enough to deter overcapacity in 2012. This will drive down prices as well as demand for steel from Association of Southeast Asian Nations (ASEAN) producers such as Malaysia. The industry will be boosted by capacity growth over the forecast period, with Hiap Teck Venture Bhd's planned 700,000tpa first phase coming onstream in mid-2013 with a further 800,000tpa in the second phase. Around 40% of output will be exported to Asian markets, with the rest sold locally. This should help ensure output of 9.5mn tonnes in 2016, up 46% over 2011 levels.
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