"The latest adjustment was not announced to the public because it is only a temporary measure before the government adopts the APM in the fourth quarter. A decision will have to be made by the end of the year before raw material prices go up further and demand for bars increases due to the implementation of Ninth Malaysia Plan projects. The APM will put an end to the hassle of adjusting the ceiling price whenever raw material prices go up," says a source.
The government is currently deliberating on the formula for the APM. The source says the domestic selling price for steel bars may be set at a margin of about 20% on top of the cost of scrap metal consumed, based on international scrap prices. And instead of iron ore, the cost of scrap will be used as a benchmark to determine steel bar prices as it is the main feed material used by most local producers to make construction-grade steel bars.
The international price for scrap metal is about US$380 (about RM1,294) per tonne, say industry players. However, one cannot just apply a 20% margin on the scrap price because more than one tonne of scrap has to be melted to produce one tonne of steel bars. A yield factor will be incorporated into the calculation to ensure a gross product margin of about 20% for steel makers on each tonne of steel bars. The APM will however exclude energy cost as this has not been fluctuating like scrap prices.
"A gross product margin of about 20% is 'fair'. This will translate into an operating profit margin of between 10% and 15% for steel bar makers. Most steel players, such as Ann Joo Steel Bhd and Malaysia Steel Works (KL) Bhd, are currently operating at this level," says a steel analyst.
"Should the APM be implemented, an audit firm will be appointed to review it and come up with the prices on a quarterly basis, based on the methodology that has been set. Due to a lack of manpower in the Ministry of Domestic Trade and Consumer Affairs, steel players are willing to fork out the auditor's bill to ensure the system runs smoothly," says a source.
In a nutshell, steel players will not reap extra gains or profits from the implementation of the APM. This is because they are already selling bars at grey market prices by imposing additional handling fees or surcharges on top of the ceiling price set by the government. Nevertheless, the APM will be an effective way of putting an end to grey market prices, as long as it ensures reasonable and steady margins for the steel makers despite fluctuations in raw material costs. Also, there will be more transparency in the market and fewer supply disruptions.
Still, steel players would prefer free market forces to prevail than the APM. The latter has its advantages compared to the present price control mechanism, but it is stil less efficient than a free market. In fact, industry players have been urging the government to liberalise the steel bar market, which would allow local steel players to sell on the domestic market at international prices and enable the free import of steel bars by traders. Steel players do not see imports as a threat because importers have to come up with huge investments for stockholding, storage and logistics management.
"Unfortunately, the government has told us that it is not ready to give up control at this stage. It would be difficult for contractors to manage costs if a free market system is adopted," says a source.
