Last week, Japanese steel giant Nippon Steel announced it would be buying a pair of Thai steel companies for a combined $783 million. As reported by Reuters, the combined annual output of the two Thai steelmakers is 3 million tons, which will bring Nippon’s total global capacity to 69 million and help expand its footprint in Southeast Asia. It’s an interesting move, given that steel is a very tough business. It’s resource and capital intensive, intensely political, and many Southeast Asian steel companies have been losing money for years.
That one of Donald Trump’s signature economic policies was to impose big tariffs on imported steel shows how nakedly political the international steel business is. But for emerging markets, the birth of a domestic steel industry has often been considered an important benchmark of economic progress and industrialization. This was especially true back in the 1960s and 1970s, when import substitution was a popular development strategy. Having a local steel mill proved that not only could you mine the raw ore, but you could process it into an important industrial input and lessen your dependence on foreign suppliers and technology.
Steel warranted a mention in a 1960 Lee Kuan Yew radio address[1] touting Singapore’s nascent industrial ambitions: “The wheels for industrial expansion have been put into motion, albeit slowly… We have started with two oil refineries, a small steel mill, and several small factories for tiles, biscuits, and so on.” That small steel mill would go on to play an important part in Singapore’s early industrialization, eventually becoming NatSteel in which state investment fund Temasek was a significant shareholder. By 2004, the steel industry was on a downturn and NatSteel was sold to India’s Tata Steel for $285 million.
Singapore has always been fairly adept at exiting industries – even legacy ones that might entail an element of national pride – if it makes financial sense to do so. But some of its neighbors have been less so. Two major regional steelmakers, Thailand’s Sahaviriya Steel Industries (SSI) and Indonesia’s Krakatau Steel, have stayed in the steel game despite taking huge losses and both recently needing financial restructurings to remain solvent.
For both companies, the problems stemmed from over-investment and over-production. In 2011, SSI acquired Teesside Steelworks in the United Kingdom (which itself had been around since the early stirrings of British industrialization in the 19th century) for £291 million. The timing was very unfortunate, as global steel prices were about to drop and SSI began accruing huge losses. From 2011 to 2016, SSI recorded total after-tax losses of 72.5 billion baht (at current exchange rates that’s about $2.17 billion). In 2015 Teesside Steelworks was liquidated and written off at a loss. By 2018, SSI had negative 39.4 billion baht in equity stemming primarily from over 57 billion baht in liabilities it incurred under the restructuring plan.
Indonesia’s Krakatau Steel suffered a similar experience. Around 2010 it also mistimed the market and overproduced, leading to a large surplus. In 2011, the firm had $779 million worth of inventory sitting on its balance sheet. As the market turned unfavorable over the last several years, Krakatau Steel’s equity has shrunk and they too have posted large negative earnings. In 2020, CEO Silmy Karim, who has a reputation for turning around struggling state-owned companies, helped strike a deal to restructure about $2 billion in debt.
Both cases are pretty classic examples of mistiming the market. But, then again, steel is not exactly a free market. It is intensely political, shaped by all sorts of external factors related to industrial and trade policies that go far beyond simple supply and demand. The reason the market turned so sour when it did is because China, the world’s largest steel producer, was massively over-producing to fuel its investment-led growth and then flooded global markets with its surplus steel, depressing prices and putting immense pressure on competitors.
And yet, despite wracking up losses in an unfriendly market saturated with cheap Chinese steel, both SSI and Krakatau appear willing to stay in it for the long-haul. And both can do so because they are backed by powerful political and economic interests which allow them to continue operating, profitably or otherwise. Krakatau Steel is 80 percent owned by the Indonesian government and is deeply intertwined with the state’s vision of economic development, while SSI’s two main shareholders since the restructuring are majority state-owned Krungthai Bank and Siam Commercial Bank, in which the King of Thailand is the largest shareholder.
In a completely free market, it is normal for prices to rise and fall. Private businesses and investors bear the risk of these fluctuations, incentivized by the potential profits to be made on the upswing. But in a market like steel, which is so heavily shaped by politics and by owners whose interests go well beyond simple financial calculus, we need to adopt a different lens if we want to make any sense at all of what is going on.
[1] The text of the speech can be found in The Papers of Lee Kuan Yew Vol 1 under the title “People, Administration and the Economy.”
