Steel Businesses: Consequences from Trend-Following Investment

4:52:53 PM | 9/19/2014

For more than a year, impact from the gloomy real estate market has drowned the steel market in a state of oversupply. Many steel factories have stopped production or kept it at a moderate level. This situation is unlikely to improve as it’s possible that steel products imported from Russia are likely to enjoy a zero percent tax rate.
Consequences of a short-term vision
Vietnam's steel enterprises continue to wrestle with the “relegation battle” as the sector’s business and manufacture situation has not received positive signs, the number of businesses forced to cease operations or scaling back production has been increasing. The Vietnam Steel Association (VSA) has recently released a list of businesses in trouble, of which there are 11 enterprises producing construction steel and 10 embryo rolling enterprises.
As pointed out by VSA representatives, over the whole country, the capacity of steel mills is over 11 million tonnes of construction steel; 9.29 million tonnes of steel billets; more than 2.1 million tonnes of steel pipe; 3.28 million tonnes of galvanized steel sheet and over 4 million tonnes of cold-rolled steel. For such a huge amount of steel produced in one year, statistics showed that in 2013, the consumption of steel industry was about 11 million tonnes only.
That low consumption figures reflects an oversupply situation, however there are still numerous plants under construction and ready to go into production which indicates that the imbalance between supply and demand in the market would continue to grow. According to economic experts, this imbalance situation in the steel industry reflected the consequences of poor investment at many steel enterprises since the 90s. Due to the always high import tariff for steel products, at some points up to 40 percent, finished steel products had always been brought to the market with very high prices, this had created a wave of investment into imported steel-rolling lines from embryos in many localities.
In the report of the Ministry of Industry and Trade submitted to the government in early 2009 after conducting a checking of actual situation of the planning of Vietnam's steel industry stage 2007 - 2015, it was shown that there were 32 projects not on the planning list of investment certified by localities. During that same period, many local businesses also asked the Ministry of Industry and Trade for adding new steel projects to the planning, many of which were merely projects of construction steel production based on imported billets.
Soon from the end of 2009, steel industry experts had predicted in 2010, the construction steel industry would receive plants going into operation with production capacity of seven million tonnes/year. However, demand for steel in the time was just stopped at 4 million tonnes/year, and export was far out of reach for those businesses.
In fact, the risk of oversupply has been noticed by VSA since 2008 and the agency has proposed to the government on the suspension of steel plant projects under construction or about to go into construction but unable to guarantee work materials for long-term operation to reduce economic damages. Soon after that, the government issued Document 1708/2008/OOG-KTN on reorganizing the investment certificate for conventional construction steel projects.
At that time, Mr Pham Chi Cuong, the then-chairman of VSA clearly pointed out that there were many steel businesses making investment just to follow the trend. Seeing that many businesses get rich from steel production and trading had driven other units to invest without long-term calculations. As a result, poor and inadequate investment combined with outdated technology had produced low-quality products, driving numerous domestic steel enterprises to the verge of broken.
Growing pressure
Besides hundreds of businesses with small-scale production, there are projects properly invested with high technology and large production capacity such as Formosa, Hoa Phat under finishing process to go into operation, this create a considerable pressure on small-scale steel enterprises.
Not only having to compete with major domestic steel enterprises, these enterprises are also at risk facing competition with foreign steel products from Russia as information on steel import tariffs from Russia would be reduced zero percent as a result of the conclusion of the Free Trade Agreement between Vietnam and the Customs Union of Russia - Belarus - Kazakhstan.
Mr Ho Nghia Dung, Chairman of VSA, said that in fact, domestic steel enterprises were deeply concerned with Russian steel products because the competitiveness of it was considered far greater than the Chinese products.
Russian steel products are not only of high quality thanks to the application of modern technology but also have huge annual production volume. In 2013, crude steel production of Russian stood 5th in the world with a production of 68.7 million tonnes, of which 23.6 million tonnes were for export. Meanwhile, on the global steel map, Vietnam is ranked 26th with 5.6 million tonnes/year. The amount of Russian steel exported to Vietnam annually is quite substantial because part of the population still favours using imported steel from Russia.
In this context, risk of closure or bankruptcy of some Vietnamese steel businesses is getting more solid, this definitely will create a huge change for the domestic steel market in the near future.
Luong Tuan