Steel is about to face a new kind of cost pressure, not from scrap volatility or anti-dumping duties, but from carbon pricing under Malaysia’s proposed Climate Change Bill. For the first time, emissions will carry a direct financial value, reshaping how steelmakers finance, disclose and plan their operations.

Why Steel is the Litmus Test

Steel is one of the most emissions-intensive sectors. Traditional production relies on blast furnaces, where iron ore and coke undergo massive combustion to produce pig iron. This process emits significant volumes of carbon dioxide. The pig iron is then converted in basic oxygen furnaces (BOF) into long or flat steel, products that are traded widely by steel producers.

Unlike many other heavy industries, steel is not only consumed domestically but also exported globally, including to the European Union. As a traded commodity, it is subject to dual regulatory pressures:

• 1. Trade defence under Malaysia’s Countervailing and Anti-Dumping Act, which protects local producers from unfair imports.
• 2. Sustainability regulation under the upcoming Steel Industry Bill, which will govern the lifecycle and environmental performance of the sector.

At the same time, steel is classified as a transitioning sector. This means financing steel projects already attracts heightened scrutiny from financial institutions. Companies seeking project loans must demonstrate credible transition plans and meet stringent ESG requirements before approval is granted. Strong covenants are often imposed to ensure compliance and risk management.

Now, another layer is emerging: Malaysia’s proposed Climate Change Bill. By introducing carbon pricing mechanisms whether through tax, trading or hybrid approaches, the Bill will directly impact steel producers. Carbon costs will no longer be abstract and there will be financial liabilities embedded into operations, financing and competitiveness.

Taken together, these overlapping pressures explain why steel is the litmus test. It is the sector where trade defence, sustainability regulation, financing scrutiny and carbon pricing converge. All eyes will be on steel to see whether it can withstand these regulatory tests and set the precedent for how Malaysia balances competitiveness with compliance in the ESG era.

Financing and Operational Pressures

As scrutiny intensifies, financing becomes a critical pressure point. Financial institutions place extra caution for transitioning sectors due to the Climate Change Principal-Based Taxonomy (CCPT) framework, they will incorporate carbon pricing risk into loan underwriting, thus raising cost of capital for steel producers.

The dual legal and financial scrutiny will force steelmakers to revise their operations. They must:

• 1. Diversify scrap supply to ensure consistency;
• 2. Integrate renewable energy into production to improve efficiency
• 3. Strengthen emissions reporting which is now non-negotiable
• 4. Develop credible transition plans with clear implementation pathways.

Roadmap and Accountability

According to Steel Industry Roadmap 2035, one guiding principle is to establish a level playing field for emissions accountability. Companies with higher emissions technologies must bear responsibility for their footprint. Policies will also target environmental arbitrage, preventing the dumping of high-emissions steel imports into Malaysia.

This aligns with amendments to Malaysia’s Countervailing and Anti-Dumping Act and signals the likely introduction of carbon tax. The Climate Change Bill will legalize these frameworks, making high emitters including steel accountable for their carbon footprints. It is expected to provide clear guidance on climate governance, including carbon credits, trading and possibly taxation.

The Roadmap sets the stage for accountability, but accountability alone is not enough. In a global economy where emissions performance increasingly determines market access, financing and investor confidence, compliance must evolve into competitiveness. Steelmakers that view carbon regulation as a burden risk being sidelined, while those that embrace it as a driver of efficiency, innovation and credibility can secure a stronger foothold in international supply chains.

Compliance and Competitiveness

The Climate Change Bill is not only about compliance, it establishes binding obligations that will redefine competitiveness. Once enacted, carbon pricing will carry the force of law, and steelmakers who fail to comply risk statutory penalties, exclusion from financing and exposure to trade remedies. Compliance therefore becomes the baseline; competitiveness arises from how companies go beyond minimum obligations to align with international regimes such as the EU’s Carbon Border Adjustment Mechanism.

In legal terms, the Bill closes the gap between voluntary ESG commitments and enforceable duties. Steelmakers must treat transition plans and emissions reporting as legal instruments, not just corporate disclosures. Failure to do so risks regulatory sanctions and reputational damage that can impair market access. Conversely, those who embed compliance into their operational and financing structures will not only meet statutory requirements but also secure a competitive advantage in global supply chains.

Conclusion

Steel is Malaysia’s first industrial test case under carbon pricing. The Climate Change Bill will compel the sector to rethink both operations and financing, setting a precedent for other high-emission industries. Preparing now means avoiding cost shocks later, while failure to act risks exclusion from global markets and rising capital costs. The Bill is not merely a compliance exercise; it is a competitiveness strategy. The question remains: will Malaysia’s steel industry seize this opportunity to lead in low-carbon transition or will it struggle under the weight of new obligations?

At Halim Hong & Quek, our ESG Service Line provides carbon markets and compliance legal advisory to support corporations in navigating regulatory change and sustainability obligations. We assist clients in strengthening compliance with evolving ESG standards and sector‑specific regulations, ensuring resilience in the transition toward a low‑carbon economy.

Should your organization have any enquiry relating to carbon markets and compliance legal advisory, we would be pleased to assist. Please feel free to contact us at pohyee.tan@hhq.com.my.

About the author

Tan Poh Yee
Senior Associate
ESG Practice Group
Halim Hong & Quek
pohyee.tan@hhq.com.my

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