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Demand And Supply Of Steel Industry Around Nilai

“What is the demand [1] and supply [2] of steel industries around Nilai at the beginning of the recession?”

Nilai is one of the hectic towns in Negeri Sembilan, Malaysia. Due to its proximity to Kuala Lumpur and Kuala Lumpur International Airport, it is rapidly a developing town. Other than that, Nilai also filled with various kinds of industries like steel industry, plastic industry and some other more. Steel industry in Nilai is improving in a very great progress and consists of many steel companies. This industry somehow gives significant effect to the economic growth of the country and also the gross domestic product [3] (GDP). As part of the busy world in Malaysia, there were vast amount of companies based on the steels and metals production in Nilai. The impact of 2008-2009 recession stage had clearly struck most of steels companies at Nilai. Clear observations and researches had been done in the steels and metals industry in Nilai. The research done based on a few steels and metals companies and to more than 100 employers involve in the industry. The main companies which had been investigated were MOZA Enterprise, Sepakat Muhibbah Steel Sdn. Bhd., Nilai Impian Metal Sdn Bhd, Aluminium Alloy Industries Sdn. Bhd, Tunas Asal Sdn. Bhd, and Advance Metal Substrate Sdn. Bhd. All of these companies are mostly supply metals and stainless steels raw materials to the steels and metals wholesaler.

STEEL AND METAL INDUSTRY IN MALAYSIA

There are currently 230 companies producing these products with an annual output of RM32.2 billion and total employment of 30,100 workers. The iron & steel industries provide an important linkage for the supply of basic raw materials and components to other sectors of the Malaysian economy, especially the construction industry, electrical or electronic industry, automotive industry, furniture industry, machinery industry and engineering fabrication industry. Meanwhile non-ferrous metals sectors in Malaysia covered about 180 companies with annual output of RM 8.9 billion and total employment of 18,300 workers.

The non-ferrous metal [4] industries provide linkages mainly in the construction industry, electrical or electronic industry, automotive industry, food and packaging industry. However, 2008-2009 had reported the slump of steel and metal industry in Malaysia due to the great changes of world prices of product from steel and metals basis. The outlook for the Malaysian steel industry was poor in 2009 where many steels plants were running at 35-50% of nameplate capacity according to the Malaysian Iron and Steel Industry Federation. However, statistical sources showed that the situation was far from good. In June 2009, Malaysia’s manufacturing sales fell 25.5% year over year, led by a large fall in the iron and steel sector. This followed a similar decline in the previous month. Sales are still likely to be down by 19%by the year-end, with major infrastructural projects likely to take time to plan and implement, with finished steel consumption falling to 8.64mn tonnes, crude output down 24% to 5.15mn tonnes and hot rolled production down 27% to 4.17mn tonnes.

http://www.mida.gov.my/en_v2/index.php?page=basic-metal-products

BMI believes that the Malaysian steel industry will rebound strongly in 2010 and by 2013 should have reached or exceeded pre-recession levels. Over the medium-term, the industry’s development will be determined by trade liberalisation, with the move towards the reduction of duties on imported flat products from August 1, 2009. This should improve the competitiveness of cold rolled mills, whose capacity far exceeds domestic consumption and are therefore reliant on export markets for growth. While domestic flats producers have voiced concerns over the measures, their anxieties should be allayed by the government’s pledge to enforce rigorous quality standards on both imports and domestically produced steel products to prevent the market from being flooded with substandard material.

1.2 HYPOTHESIS

Due to the recession which cause the slowdown of the economy, the world price of the steel goods will likely decreases at a very high rate. This will cause great loss profit to the steel producers. In order to reduce the costs of production, most producers will reduce the supply of the steel goods. With low price and less supply of steels, the investment in this industry will decrease and reduce the aggregate demand of the steel goods.

1.3 OBJECTIVES OF RESEARCH

The first objective is to investigate the impact of recession to the changes of demand and supply of steels and metals in some of steels companies in Nilai. The investigation will include the price changes of steels materials throughout the year from early of 2008 to the mid of 2009. Besides that, the occurrence of the recession would also be investigated due to its impact on the strategies of those companies in coping with the circumstances. The other objective of this investigation is to observe the changes of the demand and supply of the steels and metals in the steel industry in Nilai. These changes of price and the demand of steels production then will be compared with the changes of steels world price and the world demand from 2008 to 2009.

1.4 METHODOLOGY

In order to prove the hypothesis, an extensive research base on some methodologies had been done. Firstly, few well known steel companies around Nilai provision is been identified. There are six chosen steel companies in the research and the companies are MOZA Enterprise, Nilai Metal Sdn. Bhd., Sepakat Muhibbah Steel, Nilai Impian Metal, Aluminium Alloy Sdn. Bhd., Tunas Asal Enterprise, and Advance Metal Substrate. Questionnaires were distributed to the employess encompassed the high and low management in getting some extra information. These questionnaires were used in obtaining the condition and opinions of the employee due to the economy condition in the country. Interview sessions also had been done to some of the owner of the steel companies in getting solid answers of the impact of the recession to the supply and demand of steels. Other than that, those companies’ annual report is surveyed to get the accurate data of the steels supply in 2008.Secondary sources of information like economic books and internet are referred in strengthen the research outcome. Economic books are well referred in order to apply correct economic concepts in the research. Daily newspapers and Internet however referred to attain current condition of economy development not only in Malaysia but also worldwide. This secondary information are very crucial in getting points of expectations of the future economy condition predicted by economist along with the current changes of steels’ price.

1.5 RESEARCH LIMITATIONS

Throughout the research made, there are few limitations and constraints encountered and affected the investigation result. The main limitation is the number of companies based on steels and metals are more than 30 companies. It is best to get all of the information from all of those companies but somehow it is almost impossible to do so as Nilai is very big and some of the companies are undetected. Moreover, not all of the companies would like to give their best cooperation as they would like to keep their business information confidential. Hence, this would prevent this investigation to successfully attain its best and precise result. Other than that, there are thousands of products base on steels were produced but it is impossible to address all of them and their change in price in this research due to the limited words. Thus, the result obtain might be less accurate and it will produce weak conclusion to the research question.

2.0 RESEARCH FINDING AND EVALUATION

2.1 CHANGES OF PRICES ON STEELS AND METALS IN NILAI.

The demand and supply of steels materials are very dependent to the changes of the price. Based on the interview, the changes of steels’ price in Nilai can be divided into three terms from 2008 to 2009. This could be seen more clearly in the following table and diagram.

Based on the table 1.0 above, from 2008 to 2009, the prices of steels and metals had changed from RM 2.20/kg at January to July of 2008 to RM 0.40/kg at the end of 2008. The percentage decrease of the prices between these two periods is almost 82%. However, the price starts to slowly increase from the end of 2008 to the early year of 2009 (Jan-Jun 2009) for about 50% which is from RM 0.40/kg to RM0.80/kg.

The main factor which causes the fluctuation of the price is the recession in United State of America (USA). As the global price of steels is controlled by USA, the degradation of economy in USA will give such an adversely effect to the changes of the steels price in Nilai industry. USA economy is only halfway through a recession started in December 2007. USA GDP is predicted to undergo severe contraction till 2009 with a cumulative output loss of 5%. Furthermore, the USA GDP growth in 2008 contracting about -6% in the wake of sharp fall in personal consumption also the private investment. This global breakdown of the economy had cause the unstable price of steels in the world market. However, due to the 30 billion dollar stimulus revitalized by US president, the price of steels slightly increases. Holistically, the steel and metal industry in Nilai is depending on the world market, thus Nilai industry significantly affected by the unstable price of steels and metal in the world market.

Based on the law of demand, the changes of price of steels product significantly affect the increase or the decrease of the demand on the steels product. The higher the price, thus the demand on the product will significantly decrease in given time. The theory can be well presented by using the following graph:

Based on the changes of price of the steels product, from the January to July, the percentage of price reduced as much as 82% and mostly affected the steel industry as a whole in Nilai. During this term, recession was likely to occur and reduce the consumption also the investment in this industry. The demand on steels and metals are reduce to a very minimum consumption and generally caused the industry to reduce the price of steels and metals to the lowest price. In order to cope with the

condition, most of steel companies reduce their cost of production. One of the way taken by those companies are to eliminate their employees yet give out more problem to the economy as the rate of unemployment will increase to a very higher rate as due to the importance of this industry. However, from the August to December, the prices of products were slowly increased and it is clearly stated that there are appreciation of steels’ price was about 50%. This improvement then will give much space for the steels companies to recover their loss back and reduce the effect of recession.

2.2 DEMAND AND SUPPLY OF STEELS AND METALS IN NILAI STEEL INDUSTRY.

DEMAND OF STEELS IN NILAI STEEL INDUSTRY

Six companies in Nilai were taken to observe the changes of demand and supply steels and metals products. The increase in demand is due to the substitution effect and implies that as the prices of product falls and then the product will be relatively purchased by consumers. Thus, the changes of demand are investigated by the changes of price of product made up from steels and metals in Malaysia’s market from 2008 to 2009. The changes of price are shown according to the table below.

Diagram 1.2 above summarises the changes of price of some products based on steels and metals from year 2008 to year 2009. Based on the data above, the price for the entire product undergoes quite a significant inclination from 2008 to 2009. Small lorry body which made up of wood and supported with solid steel had progressively undergoes high inclination in price of 10% from RM 2475(2008) to RM 2723(2009). Meanwhile, residential Awning and transformers also had slight increase in price from 2008 to 2009. There were 1% and 5% increased for both product which are from RM330.4 (2008) to RM347.0 (2009) for the transformers and from RM344.5 (2008) to RM350.0 (2009) for the residential awning. This also happened to residential flagpole where there 20% increase from 2008 to 2009 where RM 150.6 (2008) increase to RM159.8 (2009). According to law of demand, as the price of product rises, the quantity demanded on the product will usually decrease, ceteris paribus [5] . Thus, this clearly shows that the demand on the steels and metals are decreasing to a certain rate. Consumers were probably chose substitution products which can replace the metal or steels basis products.

SUPPLY OF STEEL IN NILAI INDUSTRY

Meanwhile, those six steel companies in Nilai were also observed and investigated for the supply of steels in 2008. One of the determinants of supply is the cost of factors of production. As the cost of production of the firms increases, they will likely to reduce the supply in order to reduce their cost. Thus, supply of steels of those companies in 2008 is summarised based on the table below.

Based on the graph above, there is various trends of steels supplied distribution by those steels companies in Nilai. The result above clearly illustrated that at the midterm of 2008, most of companies had supply their maximum number of steels into the market. As example, both companies of MOZA Enterprise and Advance Metal Substrate supplied their maximum of 25 tonne of steels which is at August 2008. The owner of MOZA Enterprise claimed that they can reach very high supply of steels at the midterm of 2008 because of the Olympic grand event held in Beijing China. He said that in order to build some extravagant sports buildings, China required a very large amount of steels and imported steels from neighbouring countries. Thus, the supplies of steels reach its peak at the middle year of 2008. However, the supply then degraded from September till the end of 2008. For instance, steels supplied by Aluminium Alloy Company had fall from 24.6 tonne at August to only average of 15 tonnes per month after that. The negative impacts were also seen in Sepakat Muhibbah Steel Company where the amount of steel supplied had plummeted about 50% fall from July 2008 to August 2008. The amount of steel supplied was reduced from 11.3 tonne to only 5.9 tonne and the amount was totally constant only at a very low amount until the end of 2008.

Based on the graph above, the supply and demand of steels in Nilai industry were reducing and implies that the supply and demand curve shift to the left. The supplies of steels were shifted to the left which is from S2 to S1 as shown above. For the fall of demand of steels, the demand curve will also shift to the left which is from D2 to D1. All of the shift of the curve of demand and supply had caused the quantity of steels demanded in Nilai industry to also fall which is from Q2 to Q1. As the demand and the supply of steels were degrade, then the price if steels to fall from RM2.20 per kg to RM0.40 per kg. This condition is clearly seen during Jan-July 2008 and Aug-Dec 2008.

2.3 IMPACT OF FALL OF SUPPLY AND DEMAND IN STEELS INDUSTRY.

After some thorough investigation on the changes of supply and demand of steels, it shows that the supply and demand of steels had fall from early 2008 to 2009. Due to the fall, there are some significant effects affecting the companies. As the industries were surprised by the sudden effect of recession, most of the companies try to reduce their cost of production by several ways like reducing their physical and human capitals. The result is clearly shown in the table below.

Prior to the recession which started at the end of 2008, some of the strategies adopted by these companies in order to reduce their cost of production is to laid off workers and reduce their physical capital. During this underwhelmed circumstance, the interest rate [6] is very high and all of the companies did not dare to take the risk of debt. The higher the interest rate, more investments between companies will be reduced in order to sustain the cost of production from exceeding the budget of the companies. From 2006 to 2008, the interest rate virtually increases from RM3.00 to RM3.50 and therefore unemployment is seen as the best option for most of the steel industries in Nilai. Another method considered is to reduce the cost of their expense like the cost of living of the employees or the salaries of the employees. Some of the company also decided to stop or cut on some of their physical capitals. Based on Table 4 shown above, almost all of the steels companies took the decision to lay off their employee(s) encompasses the high-management and also the low-management employee from 2008-2009 except for Tunas Asal Company. However, Tunas Asal Company reduced their supply of steels to attract more demand on their steels production. Meanwhile, MOZA Enterprise had to reduce its physical capital by closing on of their branch steel company at Tampin to reduce their cost of production. Aluminium Alloy Company and Advance Metal Substrate Company were taken the measures of cutting off the employees’ salaries for 20% and 15% respectively. It is believe that they could save some of the cost to roll on more business. All of the strategies taken by these companies indicate the fall in the steels market of Nilai steel industry and also the slowdown of Malaysia’s economy. However, all of these strategies taken by the companies will somehow create some problems to the country. For instances, high unemployment rate will cause loss to the country as it will reduced the effective productivity in country. This can be explained by the Productive Possibility Curve [7] (PPC) illustration below.

Based on the graph illustrated above, the productivity of the country would only achieve to the curve A only. Due to the high rate of unemployment, Malaysia cannot achieve the full level of employment of the resources. Thus, there is wide range between curve of A and B indicates that the country failed to develop its full resources in reaching the maximum productivity. High rate of unemployment not only reduce the productivity of the country not also increase the cost of the government as more people will be accounted not to pay the taxes and will increase the opportunity cost of the government. This will lead to higher consequences where the development and growth of the country will be reduced.

2.4 WORLD PRICES

Based on the graph portrayed above, it is clearly seen that price of all type of steels are rapidly increasing from January 2008 and reach it highest peak at July 2008. For the hot rolled steel coil, at January 2008, the price is 639USD per tonne. However, the price keeps increases to 1099USD per tonne. For hot rolled steel plate, the price is 847USD at January 2008 and soars into the higher price around 1300USD per tonne. Cold rolled steel coil meanwhile started at 716USD per tonne and reach highest price at July 2008 for 1186USD per tonne. It is different with the steel wire rod where the prices started only at 621USD per tonne and reach its peak at 1067USD per tonne in July 2008. For medium steel sections, at early year of 2008, the price is about 871USD per tonne and monthly increasing until July 2008 where the price is about 1234USD per tonne. Obviously, the world price of steels undergoes good inclination from the early year of 2008 until mid year of 2008. However, the price for all type of steels suddenly slump slightly at August and September of year 2008. Then the price for all type of steels persistently decreases until the end year of 2008. To be observed that the trend of world price of steels product is approximately similar to the trend of changes of price of steels in Nilai steel industry. In addition the trend is also parallel to the trend of changes of demand and supply of steels and metals in Nilai steel industry.

3.0 RECOMMENDATIONS AND CONCLUSION

3.1 CONCLUSION

In conclusion, the changes of price in steels and metals in Nilai steel industry are adversely affected by the world price in the world market. Within these two years (2008-2009) the price of steels and metals is unstable where the price reduced from RM2.20/kg to RM0.40/kg in 2008 and slightly increased in 2009 which is RM0.80/kg. Due to recession, the unstable price also affects the changes of demand and supply of steels and metals in Nilai steel industries. The price of steels based product had increased at a certain percentage and caused the demand on the products of steel basis to be reduced. Moreover, the supply of steels in Nilai steel industries were also unstable where most of the steels supplied reduced from the midterm of 2008 till the end of the year. The demand and supply of steel had reduced continuously and cause economic slowdown to the Nilai steel industry. The impacts were obviously seen where there are few measures or strategies taken by the Nilai steel industries in sustaining the cost of production. More physical capitals and employees were reduced and caused the GDP of the country to reduce along with the increase of unemployment rate. Both of these consequences were determined to be the major factors of falling economic growth and development in the country as steel industry in one of important industry in the country. The trend of changes of demand and supply of steels in Nilai steel industry is similar to the world trend proving that this industry is very depending on the stabilisation of the world market as a whole.

3.2 RECOMMENDATIONS

Throughout this research, there are few recommendations suggested in improving the steels industry in Nilai. First suggestion is to increase subsidies by government to those companies so that they were motivated to supply more steels and metals materials. This will reduce the rate of unemployment because they will employ more workers to supply more steels materials. Other than that, government also can intervene by increasing their investment into these companies. Increasing investment also will improve these companies economically. Hence, they don’t have to reduce their physical capitals and also will increase the GDP of the country. Government also can reduce the rate of unemployment in our country by reducing the taken of import workers from other countries. This then will open more jobs opportunity to domestic workers and also will increase the average income of the people in this country, Increase of income then will increase the consumption and hence increase the demand on the products made up of steels or metals. All of these recommendations will improve and develop the economy if this country.

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