Cement Industry: Lessons from Lack of Planning

Previously, when the Vietnam real estate market was in its peak with high construction demand, the cement industry in Vietnam enjoyed huge profits. This made many provinces one after another build cement factories, and the number of factories mushroomed in a short period of time. At the moment, when most industries encounter problems, the cement industry has realised their mistakes when the development plan had not been carefully reviewed in the past

 

According to reports from government agencies, cement sales reached 28 million tonnes during the first six months of 2012. However, the accumulated inventory from 2011 is 2.8 million tonnes. With a huge inventory, losses and unpaid bank interest, many cement manufacturing businesses are facing a dilemma of “damned if you do and damned if you don’t”. Experts remarked that this is the result of a long investment process in technology of outdated and small-capacity factories. In general, the development strategy of the cement industry in Vietnam has a mismatch between supply and demand

 

Besides, when the economy tumbles, when banks tighten real estate credits leading to an increase in input cost and when people have low purchasing power, supply will outstrip demand. According to Mr Le Hoang Chau, Chairman of Ho Chi Minh City Real Estate Association, “Huge inventory means business and market liquidity is extremely bad; there is low absorption rate and capital flow is greatly curtailed. The output of real estate businesses is also the input of other businesses; an increasing inventory means a stagnant economy, a lower economic growth rate, which is a sign of deflation. In order to clear out inventory, we need concerted efforts to facilitate the output – meaning to boost local demand and encourage credit policies with acceptable interests.”

 

Recently, the Ministry of Construction (MOC) reveals that the reduced investment capital as well as impacts from a frozen real estate market has halted the production and sale activities of construction materials. There is a huge inventory. Many businesses have to decrease excavation rates in order not to suffer more losses

In the cement industry, some factories already have to temporarily halt excavation activities. The same situation occurs in the steel industry, high-end brick slips, sanitary porcelain, construction glass, etc. According to MOC, ceasing production or decreasing excavation capacity has negatively impacted production and lessened the businesses’ ability to repay debts

 

As mentioned above, apart from a difficult economic environment, the inner weaknesses of the cement industry in Vietnam are also to blame.

 

Above all is the frantic and inconsistent planning, emulating one another to build cement factories; some communes even have three factories. This leads to a surplus of supply over demand.

 

In addition, another weakness resulting in low production efficiency is the fact that there are too many small-capacity factories (factories with minimum capacity of below 1 million tonnes per year and above 2.5 million tonnes per year at maximum capacity). As of 2012, the cement industry has a designed capacity of 70 million tonnes, production from 62 to 64 million tonnes; in which 46-47 million tonnes are for local consumption and 7-8 million tonnes for exportation. Therefore, the surplus is about 10 million tonnes.

 

According to Mr Tran Van Huynh, Chairman of Construction Materials Association, these small-capacity factories utilise obsolete technologies from China, leading to a waste of energy and materials, environmental pollution and low efficiency. In the meantime, the continual increase of price of energy (electricity, coal) as well as input materials, high interest rate, increase in exchange rate, financial expenses from 20-30 per cent, and lack of working capital have knocked out many factories.

 

Moreover, finding an output for the cement industry is still uncertain and puzzling. The suggestion to use cement to build roads and export though brings positive result but could not do much to resolve the surplus. Boosting export only helps sell 700,000 tonnes in the first six months.

 

In order to free up the huge inventory and resolve issues that businesses are facing, Mr Tran Van Huynh proposed, “The Government should be aggressive in accelerating the rate of building rural, provincial, inter-provincial roads and industrial parks’ areas using cement concrete.”

 

However, the fundamental and long-term solution, according Mr Huynh, is guidance from MOC to restructure the cement industry, re-examine and fine-tune development plan of the cement industry to match the demand. Besides, the Government also needs to decrease taxes and value-added taxes to below five per cent regarding construction material products in 2012 in order to boost demand and make it easier for businesses to clear out inventory and turnover capital to repay banks’ debts. Recently, the Vietnam Cement Association has issued an official document to help cement businesses overcome difficulties. Among the proposed solutions are extending foreign debts’ period, restructuring debt portfolio, quarantining debt and postponing due debts of local banks.

 

The inventory and losses of cement businesses are a lesson from which many other industries, especially those that produce necessities, could learn from in order to have the right plan to avoid unnecessary consequences in the future.