Which Prospect for Steel Industry in 2009?

Mr Pham Chi Cuong, Chairman of the Vietnam Steel Association (VSA), said: The steel sales fell to a smaller amount than previous monthly sales because of shrinking demand.

 

The volume of stockpiled steel remained in a large number. According to VSA, the inventory is now about 550,000 tonnes of steel ingots and 400,000 tonnes of steel. The Vietnam Small and Medium Enterprise Association has a shocking amount of 3 million tonnes of steel and ingot in stock. Although the exact volume has not been calculated, the examination workgroup led by the Ministry of Industry and Trade has counted nearly 2 million tonnes stockpiled by several visited steelmakers like Van Loi Co., Ltd, Dinh Vu Steel Joint Stock Company, Hoa Phat Group Joint Stock Company and Hung Yen Metalware Joint Stock Company.

 

Since its operational debut in March 2006, Dinh Vu Steel Joint Stock Company has never fallen into such a difficult period until now. The company invested VND396 billion to build the steel ingot production plant with an annual output of 200,000 tonnes in the first phase and an oxygen production factory. The company had to scale down production in the first phase because it was unable to compensate the production costs amid weak sales. An official from the company said the mill was turning out 500-600 tonnes of steel ingot but there was no selling contract.

 

According to the calculation by the Ministry of Industry and Trade, with the current selling price of VND11 million more or less per tonne, steelmakers suffer a loss of VND6 million a tonne. With the current estimated 2 million tonnes in stockpile, the losses incurred by steelmakers are huge. Besides, they are under the heavy pressure from banks.

 

To deal with the mishap, the steel industry used the fiscal policy adjustment. However, after 10 times of revisions of import and export taxes within a year, this issue has not been settled because of interest conflicts between two groups of enterprises: Steel ingot producers and steelmakers using imported steel ingots.

 

The reason for the conflict is if the export tariff on steel ingot is revised up, producers of steel ingot will face operating losses and if the duty is scrapped to 0 per cent, producers of steel ingots will export their products and local steelmakers will have not have enough materials. At this time, steelmakers want to keep steel ingot to feed their mills when the market demand is higher but they do not want to spend money on buying ingots.

 

Meanwhile, steel ingot producers are worrying about the operating closure. They said if the tax is not reduced, the only way to rescue producers of steel ingots is the State buys the surplus. However, the time is not in favour for them.

 

In the last days of 2008, the Ministry of Industry and Trade’s proposal concerning the tax change encountered strong opposition from steelmakers. According to VSA, the hike of VAT from 5 per cent to 10 per cent, effective from the start of 2009, will raise difficulties for many domestic producers. They are trying to keep the price unchanged to stimulate sales. Meanwhile, the tax increase will add the steel price by VND500,000. This is why VSA proposed the Ministry of Industry and Trade to delay the collection of VAT in at least six months to improve the purchasing power which is at low level now.

 

After ineffectively applying relative taxes, the Ministry of Industry and Trade has submitted a plan to collect absolute tax to the government. The ministry said this method is more flexible amid the volatile and unpredictable market.

 

Either the taxation method is relative or absolute. Market regulators will hardly harmonise interests of steelmakers and steel ingot producers. The Government has revealed a “safer” solution: Instructing banks to lend money to steel companies, loosen the credit limit for them and delay debt collections for enterprises in severe trouble. In addition, market authorities will intensify the work over speculation, cornering, smuggling, trade frauds and bad behaviours. However, according to many specialists, the steel industry needs to look at a more long-term solution. They forecast that the steel industry will fall into an overproduction crisis in a short time to come.

 

Mr Phan Dang Tuat, chief of Institute for Industry Policy and Research (the Ministry of Industry and Trade), forecasted that the steel industry will meet up with overproduction crisis by 2030, based on past investments.

 

He pointed out six weaknesses of the steel industry; namely low added value, little technology transfer, small workforce (around 1,000 workers each mill), environment contamination, consumption of valuable natural resources and energy consumption.

 

According to the steel industry development plan for the period from 2007 - 2015 and vision to 2025, Vietnam has set a goal to manufacture only 18 million tonnes of steel by 2020, including 8 -10 million tonnes of flat steel and 7 million tonnes of steel bars. With this plan, Vietnam only needs 1-2 steel refining complexes in the next 10 years. However, more than 10 projects were licensed over the past two years! The output capacity of steel bars and rolls is more than double the demand.

 

In 2009, the steel industry is forecast to undergo another hard year, but it will be many years before the suitable measures develop the steel industry.