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Steelmakers face falling demand
The steel industry has been an unexpected casualty of the sluggish real estate market, as new construction has slowed to a trickle. The Government austerity plan under Resolution 11 has also called for a halt to non-essential State-funded building projects.
"The steel industry is strongly interrelated with the real estate sector," said Viet Nam Steel Association chairman Pham Chi Cuong. "Along with demand for steel, demand for other building materials such as cement and bricks has also dropped."
Foreign direct investment in the real estate sector in the first six months of the year totalled just US$275 million in new registered capital and $30 million of additional capital added to existing projects, the lowest level of foreign investment in the sector in five years, said Phan Huu Thang, former director of the Ministry of Planning and Investment's Foreign Investment Agency.
Meanwhile, steel production capacity is abundant and the industry has large inventories. Steelmakers earlier this month reported stockpiles as high as 500,000 tonnes. Overall production rose by 16.76 per cent in the first half of the year, compared to the same period a year ago, while consumption fell nearly 4 per cent.
"The decline in demand will be even more severe this month," Cuong predicted.
"I believe that the situation in the steel industry will last at least until the end of the third quarter," commented Saigon Securities Inc analyst Do Viet Khoa. "After that, the industry might see better times if interest rates and the real estate sector improve."
High interest costs of 20-22 per cent have also pushed up financing costs and added to the price structures of the steel industry.
The costs of raw materials have risen dramatically, reducing the profit margin of a domestic steel industry already dealing with falling demand. The price of pig iron in the Asian region, for instance, is now at its highest level in about two years.
Many steelmakers have had to cut production or prices in the face of the oversupply and falling demand. "Our company has had to cut production by 50 per cent," said Pomina Steel Co general director Do Duy Thai.
Retail prices have been trimmed by an average of VND100,000-200,000 per tonne in a bid to boost consumption, Cuong said, adding, "Companies cannot continue to reduce prices, or else they will not be able to revive when business becomes unprofitable."
Many steelmakers therefore continue to produce structural steelwork, steel piles and alloys at rates twice actual demand. At the same time, Viet Nam continues to import about five tonnes per year of steel plate, hot-rolled steel and stainless steel.
"The majority of Vietnamese steel producers do not have the capability to refine steel from ore," Cuong said. "They often use semi-finished steel to roll into finished steel products."
Steel companies are facing the pressure of improving technology. By 2017, there will be no more subsidy for the industry, competition will be harsher.
The new Government, including leaders of the banking and construction sectors, has promised to issue new policies to help the steel industry.
To encourage exports of these products, the Ministry of Finance recently accepted a proposal from the Viet Nam Steel Association to waive the export tax on steel.
Cuong said that as the ministry's decision had come into practice for only two weeks, there were not any clear signals of improvement in steel exports.
"However, the exemption steel imports from the tax is intended to address the imbalance between domestic supply and demand, enhance profits for producers and reduce the nation's trade deficit," said Cuong.
Vietnamese steel prices continued to be competitive internationally, and the quality of products was competitive with other big exporters like China and South Korea, he said, noting that Viet Nam had a longstanding trade in steel with the US, the EU and the Middle East, making steel a consistent foreign currency earner.
Bich Ngoc
vietnamnews
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