There appeared to be a sense of dissatisfaction among company leaders in the construction materials sector when asked about their business performance. Most acknowledged that all suppliers have been badly hit by the downturn in the real estate market. And as uncertainty about recovery of the sector increases, companies have been forced to cut their costs and investment and have hesitated before increasing their own prices. Overall, companies paint a grey picture for the sector for the remainder of the year and early next, as there are so few new property projects due to the frozen real estate market. 

Deputy Minister of Construction Nguyen Tran Nam pointed to the relationship between the real estate market and suppliers as the reason why the latter is suffering. “Companies in the construction materials sector depend on building and road construction to keep their businesses going but both residential and non-residential construction have slowed down significantly,” he said.

A number of small- and medium-sized material suppliers have had to cease production, lay off staff and cut their product prices. Those with greater financial capacity are patiently waiting for a market rebound. Big or small, suppliers recognise that the tough times will continue at least until the macro instabilities in the economy, especially inflation, are brought under control.

According to Mr Hideaki Asakura, General Director of Nghi Son Cement, demand for cement primarily comes from the construction sector, especially the building of private apartments and public buildings such as bridges and ports. “I understand that the government wants to concentrate on inflation control and is basically freezing the real estate sector,” he said. “Moreover, real estate companies can’t borrow money from banks for their business needs due to the high interest rates.”

Consequently, the cement segment’s capacity only reached 22.33 million tonnes in the first half of 2011, equal to 46.5 per cent of the full year’s target, according to a report from the Ministry of Construction. High inventory levels are also an issue. The Vietnam Cement Industry Corporation (VICEM) reported that total inventories in the segment stand at 1.35 million tonnes. Meanwhile, the inventories of steel producers are reported at 500,000 tonnes, and inventory costs now exceed VND150 billion ($7.2 million) per month. 

Corporate leaders also pointed to the challenges for both the economy and their sector. Mr Asakura told VET that he is only 50 to 60 per cent satisfied with the company’s business performance in the first half of the year. “The key challenge for the sector is significant cost increases, especially in coal and electricity,” he said. “As the cement industry consumes quite a lot of energy, we suffer a great deal from higher prices.”

Another factor affecting the cement segment in general and his company in particular is that coal supplies are insufficient for 2011. “The company must buy coal at the export price, which is 30 per cent higher than domestic price,” he explained. “We are reluctant to pay this price.”

The Vietnam Construction Industry Group, better known as Song Da Holdings, is typical of those suffering under the challenging economic conditions. According to CEO Duong Khanh Toan, the company’s profit for the first half of 2011 was only VND314 billion ($15.1 million), or 2.3 per cent of its total assets. “Pre-tax profits were only VND560 billion ($27 million), or 18 per cent of our annual target,” he added. 

He also explained how the decline in the real estate market impacts on business performance. “The property segment contributes greatly to our profits but has been severely affected by the real estate market,” he said. “Moreover, accumulated debts and high bank lending rates are two factors behind the company’s underachievement.” 

Given that they are strong in terms of presence and offer competitive products, it is easy to imagine how serious the effect is on small businesses. While Nghi Son Cement and Song Da Holdings can still plan to introduce more cost savings, many other enterprises are without new business development plans and having a tough time surviving.

In the steel sector, Mr Nguyen Ngoc Anh, Chairman and CEO of the SMC Steel Company, believes that the second quarter was a particularly difficult time for steel producers due to falling consumption. “We had some orders with ‘zero profit’ but we still took them so we could retain the customer and secure market share,” he said. Steel processing contributed 25 per cent of profits at SMC in the first half of the year and the company has been able to maintain a reasonable growth rate.

Apart from reducing production costs, some construction material producers have devoted a great deal of time to developing better performing equipment or new products to increase production efficiency. Mr Asakura from Nghi Son Cement said that the company’s top priority is to implement cost-cutting wherever possible, from production costs and transportation costs to office rental costs. “We are also investing in new technology to generate power by ourselves in order to increase our competitiveness,” he said. Product diversification is also on the cards. “At the moment our only product is PCB 40 (Portland cement), but it cannot satisfy customer needs. A new product is under research and will probably be in the market in the third or fourth quarter.” 

For Song Da Holdings, the situation may spiral out of control unless the company and its subsidiaries receive government support. Mr Toan said that the company had petitioned the government, asking the State Bank of Vietnam and commercial banks to further reduce their lending rates and offer loans. Song Da’s total asset stands at VND15,600 billion ($750 million) but their debts total VND5,500 billion ($264 million).

At SMC Steel Company, even if the construction steel segment faces difficulties at the moment it can still rely on steel processing to make up for losses. The company’s new factory came into operation at the beginning of the year and uses Taiwanese technology. “The technology is three times more expensive than that used by small producers but we can offer high quality products at competitive prices,” Mr Anh said. “We are now receiving processing orders from Japanese and Taiwanese companies.” 

There is, however, little enthusiasm among industry players for the remainder of 2011 and next year, unless the economy turns around and a new wave of real estate development emerges. Mr Asakura predicts two scenarios for the cement industry next year. “If inflation can’t be controlled by the end of this year, 2012 will be similar to what we are experiencing now,” he said. “But I hope for a better scenario.

Maybe next spring, when Vietnam has inflation almost under control, the market will rebound.” Mr Anh from SMC does not have a positive outlook for the evolution of the steel market to the end of the year and expects to continue to struggle in 2012.