Steel Market: Struggling to Find a Way out

According to Vietnam Steel Association (VSA), the current steel inventory is rather high, reaching 500,000 tonnes, while the average allowed rate is about 250,000 tonnes. This inventory volume is much higher than normal. Therefore, many steel factories has only operated at 50-60 percent of their capacity or even stopped production.

 

With such inventory rate, according to VSA’s calculation, monthly interest paid by steel enterprises is nearly VND 150 billion. The cause of such situation of steel industry originates from highly increasing domestic inflation. The government still has to adopt many measures to curb, including cutting down public investment, pausing, suspending unnecessary works which caused real estate market really frozen in 2011. Frozen real estate market is the main reason for interruption in steel market for the past time.

 

While steel market meets difficulties in output, steel enterprises are challenged by too high capital, input costs that have all come up to double digit numbers, in which coal price increases by 41 percent since beginning of April 2011; petroleum price increases by 32-43 percent; electricity price increases by 15.28 percent. Since the early year, price of steel industry’s materials such as iron ores, coke, steel billets and steel scrap increases or stays at rate exceeding that in 2010 by 20-30 percent.

 

From such difficulties, the reason repeated for many times is steel industry planning. The unreasonableness in planning is now the drag of industrial development. At the moment, there are 32 unplanned steel projects, in which 20 ones were approved by the authority with no jurisdiction. Hai Phong, Ba Ria – Vung Tau etc are localities concentrating most steel factories in the country and other remote ones with little ore such as Cao Bang, Bac Kan, Yen Bai etc all have projects approved.

 

While domestic consumption is so grey, to tackle issue of inventory, many steel enterprises have considered exporting. At present, projects producing building steel, steel pipes, cold-rolled steel, metal galvanized steel and prepainted steel sheets have their production nearly doubled the demand, it is determined not to license investment any until at least five years later. Priority is given to investment projects of steel factories manufacturing products which Vietnam still has to import in large volumes such as steel plates, hot-rolled steel, quality steel, steel fabrication etc to reduce deficit.

 

Confronted difficulties, steel enterprises have made some adjustments to adapt by reducing production of building steel. According to statistics of VSA, in August, building steel production in VSA’s members was 437,968 tonnes, decreasing by 7.23 percent year on year. The volume sold out was 483.249 tonnes, increasing by 34.53 percent against last month and by 0.76 percent year on year.

 

As for inventory, VSA has only been informed that the volume of its member reached 375,151 tonnes, which is slightly higher than last month. Normally, building material inventory in production stays at 200,000 – 250,000 tonnes per month, however, for recent months, the production inventory has often doubled that volume, around 400,000 tonnes.

 

Looking at happenings in the market, Mr Pham Chi Cuong – Director of VSA evaluated: “ It can be a positive signal. In my opinion, increase in August consumption has two reasons: firstly, in July, seeing market’s hard status, the businesses stopped buying in and sold out their inventory. IN August, since inventory circulation decreased dramatically while the world’s steel billets price tended to increase to US$  20-25 per tonne, they decided to buy in. Secondly, the late months are building season when civil and state works all try to complete the plans, which kicked up steel output. However, whether the output is sustainable or not depends on macro-economic adjustments, on policies conditioning steel industry to access bank capital for production.

 

Most steel factories drag their production to avoid inventory by reducing working shifts from 3 to 2, as well as finding solutions to consume. Despite increasing imported material price, domestic building steel is sold at the same price. Not officially announcing price cut, actually, enterprises have reduced price in varied forms such as not charging delivery cost to agents or big customers, allowing later payment without charging interest etc – said Mr Cuong.

 

Some enterprises meeting quality standards find ways to export. Export in the first 8 months reached over one million tonnes, gaining about US$ 1billion. This year, the export volume and value are estimated to be equal or higher than those in 2010. However, Mr Cuong also said: “Crisis is a lesson, an opportunity to filter, force steel industry to restructure. Those enterprises strong will survive and continue to develop while those investing not in right track will be “drown” in bank debts and be eliminated from steel industry. That’s the rule”.