The Federation Of Malaysia Hardware, Machinery & Building Materials Dealers' Association (FMHMBA)

Food for thought: Supply Chain Security for Iron and Steel – An Opinion Piece from FMHMBA

The Russian invasion of Ukraine triggered numerous negative impacts on the global economy, particularly on energy, food security, supply chain disruptions but more importantly the economic sanctions by many countries, especially the US, the EU and UK (though they may have their own justifications) on Russia that has exacerbated the negative impact.

Just as the global economy was recovering from the Covid-19 pandemic effects with lock-downs and supply-chain disruption and learning to live with trying to meander through the supply chain confusion created by the US-China trade war, the Russian-Ukraine war has added salt to injury to the businesses world-wide. We, especially at the end point of the supply chain, are facing disastrous impact. These events are in fact reversing globalisation, especially moving away from the competitive supply chain networks for just-in-time delivery to seeking multiple sources of supply and choosing suppliers close to them; and countries moving away from open market principles of internationalisation of trade and investment towards protectionism.

Case in point is the example, where the EU that largely depended on the competitive supply ofsteel, Aluminium, nickel, potash, palladium, vadadium, ferrrovanadium and energy from Russia and Belarus, and for their own geopolitical reasons, imposed economic sanctions on Russia – import ban/sanctions on these supplies from Russia and Belarus. The EU then redesigned entry of these imports through import quota to Turkey, India and Asian countries which has massively changed the landscape of global supply chain. Such re-drawing of established supply-chain through unilateral actions has also other consequential effects/impacts.

For example, as a result of such sanctions, prices of oil, gas and agricultural products and metals have rocketed leading to supply uncertainties of many raw materials and fertilisers resulting in acute shortages which have disrupted the production chain of many inter-connected down-stream industries in the food-chain. As a result, intensifying inflationary pressures and threatening food security issues worldwide. We all understand that the most affected by inflationary pressures are not the elite or the rich but the poor common man in the street.

Another example is the US-China trade war related to decoupling of China from not only the US but also attempts to get the world to isolate China in hi-tech industry. This has added to the already supply chain disruptions as mentioned earlier but also led to serious microchips shortage that resulted in serious supply bottlenecks and production problems for wide range of products in many sectors ranging from smart-phone, electrical appliances to vehicles and machinery that has negatively impacted on all walks of life, again higher impact on the common poor.

All these actions leading to greater market distortion, establishing new trade agreements/deals, trade sanctions by other countries to fall in line with those creating these uncertainties, variety of important trade policies to be negotiated/re-negotiated. While all these government actions add to greater chaos, the private sector in the meantime has no choice but to bear the brunt of costs to doing business and swallow the bitter pill – and if they cannot absorb the additional costs – they will just pass the costs to the consumer – again the one losing the most is the poor man in the street.

In view of the brewing global supply chain risks, apart from the supply chain security for food, energy and healthcare and related to our areas of interest, it is suggested for the Malaysian Government to consider embarking on iron and steel supply towards self-sustenance to minimise the vulnerabilities and logistical bottlenecks in the face of external shocks and wider risks. For example, the US under Section 232 of the Trade Expansion Act, 1962 imposed 25% tariffs on selected iron & steel products to reduce dependency on imports, for national security reasons.
As for Malaysia, we do not want to take such unilateral action inconsistent with WTO but could look into following key considerations for the policy makers:
 To reduce dependency on imports of iron and steel. Identify the imported iron and steel materials to be progressively replaced with local production.
 The availability of critical raw materials can be negotiated with considering a number of factors, including production concentration, economic, political and constraints in expanding production capacities. Improve transparency of iron and steel materials in the supply chains and governance challenges.
 Identify, explore and review matters related to reserves of iron ore, scrap and other raw materials. However, there may be several reasons why some reserves have remained untapped, notably environmental implications, social concerns and economic viability – these may need to be re-visited.
 Seek investments inflows into existing and new production to supplement and support local production.
 Enhance policy formulation and support recycling, secondary raw materials and circular economy also have the potential to mitigate supply concentration.
 Export restrictions are the most widespread trade policy measure – need to review the need for some products – scrap of certain product is not used in Malaysia but imposed with export tax. They can have distorting effects on international markets by reducing global supply and raising prices, while creating supply uncertainty.
 Disciplining export restrictions through existing trade policy tools and new commitments at the multilateral, regional or bilateral level can ensure that domestic-oriented policies of some countries are not detrimental to the fair access to critical materials.
 Avoiding trade restrictions and reducing the cost of technical barriers to trade in iron and steel products and supply of critical raw materials are important steps in ensuring the smooth functioning of value chains relying on the supply of iron and steel products.
 Addressing the bottlenecks to the whole iron and steel value chain, in particular refining the end-to-end processing of iron and steel products.
 The Government needs to identify the reasons behind the lag behind other ASEAN counterparts in the last 10 years and take appropriate policy directions;
 The Government take steps to enforce “Buy Malaysian Made Products” policy in all the Government projects.
 Strict and vigilant enforcement of declarations of imports of steel at entry points into the country by Customs, especially on under declaration, fake/false declarations including illegal steel imports to ensure no market disruptions affecting steel pricing vis-à-vis cheap steel imports versus local steel producers.

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