Vietnam’s steel industry was under pressure in 2011 from a range of issues and the immediate future is not much brighter.
Vietnam’s steel industry faced a range of difficulties in 2011, including huge unsold inventories, falling demand, high interest rates, increased production costs due to rising input costs, depreciation of the Vietnam dong (VND), high transportation costs and legal disputes.
Steel output in 2011 was estimated at 98 per cent of 2010 and steel demand fell by almost 3 per cent compared with the previous year.
In March to April input costs for the steel industry increased a great deal, with continuing global price rises for steel billet and scrap steel, together with higher coal, power and fuel costs pushing up the price of all steel products. Construction steel rose from VND14.5 million ($725) per ton to VND16.5 million ($825) per ton (excluding VAT).
Tightened fiscal and currency policy contributed to a slowdown in industrial and civil construction.
Decision No 11, issued by the government in February cutting down public investment to curb inflation and ensure macro-economic stability and social welfare, and Directive No 01 from the State Bank of Vietnam limiting loans to non-production sectors, which include real estate, also put the steel industry under major pressure, leading to low steel demand. Many steel plants could only run at around 40 to 45 per cent of their designed capacity.
The depreciation of the VND against the US dollar also had a negative effect on profits in the industry, as most loans in the steel industry are in foreign currencies.
The steel market narrowed while steel supply was double demand, and some steel products sold for lower than production costs. The troubled market resulted in a record unsold steel inventory of over 500,000 tons, or twice the allowable amount.
Consequently, many steel companies had to cut output, and even industry giants such as VnSteel, and Hoa Phat could only run at 80 per cent capacity. Smaller projects using outdated technologies were on the verge of bankruptcy.
The Vietnam Steel Association (VSA) revealed that consumption declined to its lowest level in June, at 298,000 tons. And in the following months, despite being the peak of the construction season, steel sales were only between 350,000 tons and 400,000 tons per month. The two main import markets - Japan and China - also continued to reduce their construction steel price, leading to unfair competition among domestic steel firms.
“The number of projects with public investment has been scaled down, and high interest rates and the decision to tighten credit for real estate led to a decline in steel consumption,” said Mr Nguyen Tien Nghi, Deputy Chairman of VSA. Lower consumption forced several enterprises to cut their prices.
Boosting exports may be a solution. According to VSA, Vietnam exported around 1.87 million tons of steel and steel ingot in 2011, 61.4 per cent higher than in 2010 and earning revenue of $ 1.89 billion, while importing 7.197 millions of various types of steel, including 827,000 tons of steel billet.
“In 2011 the export of cold-rolled steel, stainless steel, steel bars and zinc-coated steel sheets all increased significantly compared with 2010,” said VSA Chairman Pham Chi Cuong. One reason for the increase in steel exports, he said, was the positive effect of export promotion schemes, which helped companies find partners in foreign countries.
Moreover, many foreign-invested steel projects and steel ingot manufacturers based in Vietnam also began operations and exported products to their home countries and around the world.
At a meeting on January 5 to review the performance of Vietnam’s steel industry in 2011, Minister of Industry and Trade Vu Huy Hoang said he expected steel exports to join “the One Billion Dollar Club” in 2012: the 26 export items earning export revenues of more than $1 billion. Mr Cuong, though, warned that Vietnamese steel products face anti-dumping lawsuits in some countries.
The American Steel Pipe Association has officially filed a lawsuit against Vietnamese steel pipe exported to the US market. Mr Cuong said that ten Vietnamese steel manufacturers are involved, with some never having directly exported steel pipe to the US.
But they ready to fight the lawsuit because they want to protect the industry’s reputation and ensure long-term co-operation with their US partners. “Vietnamese welded carbon-quality pipe (CWP) products are cheaper than their US counterparts, because Vietnam is able to import cheap raw materials from Asian countries,” Mr Cuong explained, adding that government policies to help steel companies were entirely in accordance with the country’s commitments with the WTO and are in compliance with international law.Indonesia have also issued written warnings to Vietnam’s trade bodies about steel bar imports.
With the domestic market facing challenges, many steel manufacturers have attempted to seek foreign markets but have come up against numerous barriers. In the US, for instance, Vietnamese steel exporters have encountered many anti-dumping lawsuits due to their inexperience, so VSA has recommended that they pay greater attention to growth in steel output and export prices to the US.
According to the Ministry of Industry and Trade (MoIT), Vietnam has 65 steel projects with designed capacity of 100,000 tons per year upwards, including 58 domestic projects and seven FDI projects, with total investment of VND41.623 trillion (over $2 billion) and $19.878 billion, respectively.
Several large-scale FDI projects are years behind schedule, including some billion-dollar projects, mainly because of issues regarding financial capacity, according to an MoIT report.
Therefore, Mr Nghi suggested that future licensing of FDI steel projects should be based on the master plan and that the projects that are licensed have advanced technologies to make steel products that are not made domestically. Applications from mega-steel projects should be carefully selected and strictly supervised.
The prospects for the steel industry will remain gloomy in 2012 because Vietnam’s economy and the world economy are expected to face unpredictable challenges. If Vietnam’s real estate market remains frozen and construction projects are cut in accordance with spending reductions, steel and cement consumption will remain low and bank loans at high interest rates will continue to burden producers.
Curbing inflation and ensuring macro-economic stability are issues that the government will continue to pursue. There is no possibility of fiscal and currency policy being liberalised and Decision No 11 will be in place for the next few years. This means that interest rates will remain high and it will not be easy to gain access to bank loans, so the real estate market seems certain to remain frozen and affect the steel industry. VSA predicts that steel consumption will grow modestly this year, at around 4 percent over 2011.
Moreover, with deeper integration into the global economic community, Vietnam will have to gradually lower its tariff barriers to abide by its WTO and AFTA commitments and cheaper imported steel from China and other countries in ASEAN will put domestic steel manufacturers under even greater pressure, while steel exports may have to address more legal disputes.