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Market Review of Building Materials in the Construction Industry | PDF Free Download.
Market structure and pricing
The domestic steel industry was significantly affected by the overcapacity in China’s steel industry which led to a surge in cheap steel exports to Malaysia from 2012 - 2015. These exports were alleged to be product dumping at very low prices.
Safeguard duty was subsequently imposed to control the import of these products. As of 2016, there were 12 manufacturers with 18 plants nationwide which are involved in the manufacturing of semi-finished (billets) and finished long steel products (bars, rods, sections), with a combined production capacity of 15.6 million MT per annum.
Capacity utilization, at below 50% from 2012 – 2015, remains a key issue facing the industry players. Most manufacturers are vertically integrated into different parts of the manufacturing value chain.
The average market price of round and deformed bars (R10 / R12 / Y10 / Y12) was RM2,400 and RM2,700 per MT from January to May 2017 in Peninsular and East Malaysia respectively.
The main cost components in steelmaking, excluding capital expenditure, are raw materials that account for up to 70% of total production cost (mainly scrap metal or iron ore) and energy. Steel pricing in China is one of the factors that influence local steel prices.
Meanwhile, in the cement industry, the manufacturers have enjoyed continuous growth in demand since 2009. However, supply exceeded demand in 2016 due to overcapacity and contraction in local demand.
This led to intense price pressure in 2016. Although improvement has been observed in the second half of 2017, the issues with extra capacity and slow growth in demand are expected to continue for the rest of the year.
There are 8 cement manufacturers with 18 plants nationwide and a total estimated annual production capacity of 40.2 million MT in 2017.
Capacity utilization recorded a low of 59% in 2016 from 67% - 72% in the past few years. Most cement manufacturers are vertically integrated with ready-mixed concrete manufacturing (downstream).
The average market price of ordinary Portland cement (OPC) in bulk was RM350 and RM390 per MT from January to May 2017 in Peninsular and East Malaysia respectively.
The main cost components in clinker and cement production, excluding capital expenditure, are the raw materials (e.g. limestone, clay) and energy. Cement manufacturing is highly energy-intensive; energy costs account for approximately 40-50% of the total production cost.
On the other hand, ready-mixed concrete production is much less capital intensive with a lot more players involved.
There are an estimated 150 companies with about 10 large companies and approximately 1,000 batching plants in 2017. Some of the large players are owned by companies that are involved in cement manufacturing.
The average market price of Grade 30 normal mix was RM230 and RM290 per cubic meter from January to May 2017 in Peninsular and East Malaysia respectively.
The main cost component in ready-mixed concrete production, excluding capital expenditure, are the raw materials (cement, sand, and aggregates).
Cement accounted for approximately half of the total production cost, hence, it is a key factor influencing the pricing of ready-mixed concrete.
Lastly, the sand mining industry which falls under the jurisdiction of state governments has been and continues to be affected by the issues of illegal sand mining and under-declaration of sand extracted.
Although improvement has been observed over the years, these issues have led to substantial losses in royalty income to all states and negative environmental impact.
There were 914 permits issued for sand mining in 2015. Perak, Pahang, Kedah, and Johor had the highest number of permits, while Johor, Perak, Selangor, and Negeri Sembilan registered the highest production of sand in 2015, at 76% of national production.
The average market price of normal river sand was RM35 and RM40 per MT from January to May 2017 in Peninsular and East Malaysia respectively, and RM35 per MT for normal mining sand in Peninsular Malaysia.
The main cost components for sand mining, excluding capital expenditure, are labor, royalty payment, and transportation of sand to the end-users.
Market concentration, measured by the Concentration Ratio (CR) and Herfindahl Index (HHI), refers to the extent to which the largest companies dominate the total production in the market.
A low concentration means that these companies have minimal influence on production and the industry is considered to be competitive, and vice versa.
Overall, market concentration nationwide is moderate for long steel production, moderate-high for cement production, and low for ready-mixed concrete production as well as distribution market of building materials.
Estimated Concentration Ratios (i.e. share of total production in the country) for the top 4 manufacturers (CR-4) in 2015/16 are 79% for long steel, 82% for cement, and 50% for ready-mixed concrete.
The market concentration provides a preliminary indication of the market power of these top players (i.e. the ability to increase the price of materials).
However, market power is also influenced by other factors such as regulations, low barriers to market entry, and imports.
Competition concerns and recommendations
Competition in long steel, cement, ready-mixed concrete, and sand markets is primarily shaped by several key characteristics - lack of product substitution, minor product differentiation, territorial-based operations, high financial barrier to entry in upstream manufacturing, and vertical integration as a common business strategy.
No obvious or major anti-competitive concerns are found during this market review, however, there are several areas that may possibly restrict competition in the future or competitiveness of local industry players.
Chief among these is the high financial barrier to entry for upstream steel and cement manufacturing, import of steel from China, as well as the common vertical integration and territorial-based operational structure among industry players.
Ten measures are proposed following this market review to address these key areas and other challenges that may affect industry players’ competitiveness, as well as to further promote competition.
The key recommendations include regular assessment of the potential impact of China’s steel industry development to the local players, incentives that will encourage steel industry players to improve efficiency,
and monitoring of prices by vertically integrated and regionally dominant players across all materials. There is also a need to educate both industry players and users of building materials on the Competition Act.
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