KUALA LUMPUR: The introduction of a carbon tax in 2026, targeting the iron, steel, and energy industries, coupled with rising costs related to foreign workers, is expected to drive up steel production costs, according to CIMB Securities.
The investment bank said that this will add to the margin pressures for Malaysian steelmakers, who are already grappling with uncertainties over potential tariff policy changes under the incoming U.S. administration, which could further destabilise global steel markets.
"However, barring a full-blown trade war, we surmise that the threat of additional steel tariffs appears remote for now, as the Biden administration just recently imposed fresh 25 per cent levies on Chinese steel and aluminium imports under Section 301 in September 2024, adding to the earlier duties of 25 per cent and 10 per cent imposed on steel and aluminum shipments of Chinese origin that were introduced during Trump's first presidential term in March 2018.
"We estimate that average import duties for Chinese steel and aluminum now stand at 50 per cent and 35 per cent, respectively," it said.
CIMB Securities noted that China is not a major exporter of steel and aluminum to the US markets; in 2023, Chinese products only accounted for 3 per cent of US steel imports, and 4.5 per cent of aluminium imports.
"However, a prolonged escalation in retaliatory tariff polices could undermine the steel sector's recovery on at least two fronts: the imposition of tariffs on non-Chinese steel markets may close potential loopholes that allow Chinese metals to evade US tariffs, potentially prompting a diversion of China's surplus steel capacity to other markets that do not erect tariff barriers.
"This includes renewed US dollar strength could undermine the global recovery of base metals demand," it added.
CIMB Securities stated that, despite the tough operating conditions, there are factors that could help support the domestic steel industry. The investment bank expects local steel prices to fluctuate in the short term, but to stabilize in 2025 as steel manufacturers pass on the additional costs to end clients.
"To level the playing field, Malaysia's steel imports will likely be subject to the aforementioned proposed carbon tax, with proceeds to be channelled towards the country's green transition fund.
"Most significantly, there are growing signs that China could unveil fresh stimulus in 2025 that will help reverse the proliferation of cheap steel imports currently weighing on regional steel prices," it said.
CIMB Securities noted that while the tariff policies of the incoming US administration could lead to increased price volatility for construction materials in the short term, the gradual increase in government infrastructure spending is expected to drive higher demand for essential materials like cement and steel in the months ahead.
"Moreover, additional stimulus from China would help put a floor on building material prices," it adds.
The investment bank has an "Overweight" rating on the sector, naming Malayan Cement Bhd and Ann Joo Resources Bhd as its top picks due to their strong presence in the industry.