Foreign Direct Investment (FDI) is an attractive proposition for southeast Asian countries, but its long-term risks must be assessed, according to an Association of Southeast Asian Nations (ASEAN) research analyzed by the South East Asia Iron and Steel Institute (SEAISI).
The ASEAN research indicates a regional overcapacity of more than 60mn mt including the proposed investment from China of up to 50mn mt and JV investments from other countries that will total 151mn mt. With a 4-5pc annual growth in the region, capacity in this scenario exceeds consumption for 20-23 years, especially, in light of the slowdown of steel demand by the COVID-19 pandemic. The 60mn mt overcapacity risk is heightened by the fact that it is being achieved via integrated mill projects which must operate at high capacity rates and cannot be tapered.
According to SEAISI’s analysis steel consumption in the region in 2018 was estimated at 80mn mt which at the demand of 84mn mt leaves an overcapacity of 14-20mn mt today.
FDI is attractive to developing countries due to its numerous benefits to the population as well as the government of a country. However, the research warns of a scenario in which ASEAN countries face overcapacity simultaneously. This situation could create severe competition and financial losses within domestic markets, which could lead to job cuts, closures, and lower government tax revenues at higher leverage points.
Giving an example from the research SEAISI noted, Malaysia’s wire rod exports rode significantly in the first five months of 2020 to 1.6mn mt, or 8.6 times growth, from 185,000 mt in the same period last year with half of the volume exported to neighboring countries in the region. At the rate of production expected, market share within the country and export market in the ASEAN region will be exceeded in the near future the agencies noted.