GDP growth of 6.5 to 7 per cent on average over the last few years has seen investment in the steel industry given much attention. Steel consumption in the 2009-2010 period was estimated at 11 million tons, with average annual growth in production standing at between 20 and 30 per cent over the last five years.

But the workings of the steel industry still leave much to be desired. Mr Pham Chi Cuong, Chairman of the Vietnam Steel Association (VSA), said that there are now only 32 large-scale steel enterprises but approximately 100 enterprises of small and medium size with annual capacity of only 200,000-300,000 tons, with just two or three of these having an annual capacity of over 500,000 tons.

Low capacity, outdated equipment and serious waste of materials and energy have pushed up production costs and weakened the competitive capacity of steel enterprises as Vietnam integrates into the region and the world.

In addition, due to decentralisation, many projects approved by local authorities are not sustainable because of shortages of iron ore, electricity, and water, and difficulties in transportation, leading to closure after only a few months of operations. It is clear that such projects have been designed without too much thought being given to financial capacity.

Moreover, three or four foreign invested projects, with investment of some $5-7 billion each, have now been approved and have entered the construction phase.

According to Mr Cuong, the prospect of bankruptcy for Vietnam steel enterprises is not a recent occurrence; industry analysts warned of the possibility as soon as the master plan for the steel industry was approved.

Overheated growth in the industry has now destroyed the master plan, with supply far exceeding demand. Apart from the outstanding problems and the inefficiency of steel projects, the sector has also been greatly affected by economic crises both global and domestic, as demonstrated by price increases of 20-30 per cent over 2010 for iron ore, coal, raw materials and scrap steel.

The government issuing Resolution No 11, cutting public investment and suspending projects that are deemed not essential in order to curb inflation and ensure macro-economic stability has also damaged the sector. Steel consumption fell significantly as a result, most noticeably in April, May, and June this year.

According to VSA, since the second quarter of this year consumption of construction steel has continued to fall significantly, putting inventories at a record 600,000 tons. With such huge amounts in storage, steel enterprises must make monthly interest payments of up to VND120-180 billion ($6-$9 million). The excess in supply, especially in construction steel, over recent months has also forced many steel manufacturers to cease operations or operate at only 50-60 per cent of capacity.

The steel price began heading downwards in April, by some VND300,000 ($15) per ton, whereas the price of most other commodities, such as electricity and gasoline, increased. The price of steel (excluding VAT) sold at the gates of steel mills now fluctuates at around VND15.5 million ($775) to VND16.5 million ($825) per ton. Rising and falling prices is a normal part of a market economy, but in this case it also indicates instability and a range of challenges to be overcome. With interest rates at 20-22 per cent and low product sales, many steel manufacturers and enterprises will find it difficult to even cover their interest payments.

VSA points to a number of reasons for the fall in domestic steel prices, including stagnant global prices for raw materials and scrap metal and the political conflicts in North Africa. High inflation in some parts of Southeast Asia is also a contributing factor, with the governments of those countries having adopted measures to control rapid price increases.

In Vietnam, with the implementation of Resolution No 11, consumption of construction steel has fallen significantly, forcing many enterprises to cut their price to stimulate demand. According to industry analysts, overheated investment in the steel sector over the last few years is also behind the plummeting prices. A survey of the steel sector in late 2009 showed that many steel projects were being implemented that were not part of the Master Plan for the Development of the Steel

Sector, approved by the government in 2009. Of these, Ba Ria Vung Tau province has seven projects, Hai Phong five, and Ha Tinh three. VSA also revealed that from August to late this year there will be another five construction steel projects put into operation, with total annual capacity of 1.5 million tons. 

Another key concern for steel enterprises is massive steel imports, especially from China. Each year Vietnam must import over 5 million tons of steel not produced domestically, at a cost of up to $7 billion annually.

The Vietnam Steel Corporation predicts that global steel consumption will continue to fall until the end of the third quarter of this year because there is no clear sign of recovery in the global economy. In the domestic market, meanwhile, the third quarter is when steel consumption generally goes down because it’s the wet season and construction slows down. The fourth quarter is normally known as the beginning of the construction season and steel consumption increases, but according to analysts this year may be different.

The steel market in the second half of the year will greatly depend upon growth in the economy, the government’s management of macro-economic policies, and price fluctuations in imported materials, either up or down.

In order to overcome the problems facing the steel sector, VSA has recommended that the government and relevant State agencies adopt appropriate solutions. Local authorities should also take firm action and revoke projects that are not within the master plan or have failed to abide by government regulations.

The State, meanwhile, should give due regard to projects that produce construction steel, steel tubes, and steel bars, encourage the export of excess steel products and cut the VAT on steel exports, while introducing export tax preferences and supporting steel enterprises to gain access to world markets via export promotion programmes, which will also bolster the country’s foreign reserves and bridge the trade deficit.