Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift

Transcription

1 Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift Nozomu Kawabata Graduate School of Economics and Management, Tohoku University, Japan VDF Workshop, August 28,

2 The Purpose of this study This study will illustrate that The iron and steel industry in Viet Nam is entering a new phase A policy shift is needed to fit the new phase VDF Workshop, August 28,

3 Industrial policy studies in Viet Nam General condition Transition to a market-oriented economy Progress of the international economic integration Biased view should be avoided Old style protection policy does not work well Laissez-faire ideology has no concrete implication VDF Workshop, August 28,

4 Concrete analysis is needed Economic theory shows general direction Abolishment of privilege of SOEs Promotion of effective competition Amendment of market failures Arrangement of investment environment Decentralization of administration But general theory does not show the concrete form, timing, sequence, speed and combination of the policies Approach Recognition of developmental phase Optimal policies for each phase VDF Workshop, August 28,

5 The Structure of this presentation 1 Structure of trade and production of the Vietnamese iron and steel industry 2 Characteristics of large-scale steel projects with foreign investment 3 Policy issues regarding the industry 4 Conclusion VDF Workshop, August 28,

6 I. Changing Structure of Production and Trade in the Vietnamese Steel Industry VDF Workshop, August 28,

7 Demand and Supply of Steel in Viet Nam Unit:1000t Source: SEAISI (2006b). VDF Workshop, August 28,

8 The features of demand-supply relations Demand increased by a factor of 1.9 in Demand level is stll far below those of Japan, South Korea and Thailand. Domestic production increased by a factor of 2.1 in But 40% of products consumed are imported. VDF Workshop, August 28,

9 Material Flow of the Vietnamese Iron and Steel Industry, Based on Classification of Major Product Categories (2005) Iron production by blast furnaces 202 Domestic supply of scrap 433 EAF-Billet continuous casting factories Production 875 Long rolling mills Production 3,264 Market of long products 3,506 Export of long products 150 Scrap import 260 Import of billets 2,158 Import of long products 504 Import of flat products 2,958 (In SEAISI statistics classified by products, 1,367 for hotrolled flat products, 857 for cold rolled and surface treated products and 25 for welded pipes. Total of these three sub-categories is 2,250) Pipe fitters Production 450 Cold rolling mill Production 80 Galvanizing and color coating factories Market of flat products and pipes 2,958 Export of flat product and pipes 19 Production 450 Unit:1000 tons. Source: Author compiled from SEAISI (2006a, 2006b). VDF Workshop, August 28,

10 The features of material flow in 2005 (1) Long sector Rolling capacity (6 mill) is more than demand (3.5 mill). Steelmaking capacity is in short. Over half of billet demand is satisfied with imports The picture is changing because of the investment rush to melting shop (EAF and CC) Billet shortage will turn in to the scrap (and iron) shortage Flat (and pipe) sector Rolling capacity is very small Only 1 cold rolling mill (PFS). In 2006, one was added by Lotus Steel No hot strip mill. All hot coils are imported VDF Workshop, August 28,

11 Investment by VSC group Guided by the first master plan (2001), VSC group (SOE) has invested in steel industry Two major new factories. Phu My Steelworks under construction, Taken by the author, May Now it is in commercial operation. Reversing cold rolling mill of PFS. From leaflet of the company. VDF Workshop, August 28,

12 The roles of new factories Phu My Steelworks (SSC) Most modern EAF-rolling mill in Vietnam EAF: 70 t /charge. 500 thou. t/year. Long rolling: 400 thou. t/year. Import substitution of billet Phy My Flat Steel (PFS) First cold rolling mill in Viet Nam. 2 rolling mills: 400 thou. t/year. Import substitution of cold rolled sheet The roles of new factories are significant But the situation is changing now VDF Workshop, August 28,

13 The producers are being diversified Private companies (including joint stock company) Hoa Phat, Van Loi, Dinh Vuu, Thep Viet Over 30% of steelmaking capacity will be held by them in near future Lotus Steel started the second cold rolling mill in % foreign invested companies SUNSCO, BlueScope, POSCO Some of them are planning and executing large-scale project in upstream processes and flat sector VDF Workshop, August 28,

14 New challenges for the industry Long sector Initial investment by VSC Groups was important In future, should SOEs invest in such a competitive sector? Flat sector and upstream processes The large scale projects is too difficult for both VSC and private companies because of.. The big scale of finance The necessity of sophisticated technologies FDI attraction is a focal point VDF Workshop, August 28,

15 15 Steel imports in Viet Nam by major countries of origin (2005)

16 Unit price of imported steel in Viet Nam by major countries of origin (2005) VDF Workshop, August 28,

17 Hierarchical division of labor? Two types of countries of origin China and Russia----Supplier of billet and some low value-added products. Japan---Supplier of sheets and strip But the price of Japanese products is not necessarily the highest. Why? VDF Workshop, August 28,

18 Unit price of steel export from Japan to Viet Nam and all countries of destination by products (2005) VDF Workshop, August 28,

19 High grade steel market in Viet Nam is very small Viet Nam is an export market of lower grade steel for Japan Significant fraction of exports is inexpensive products as billet and hot coil. The export unit price to Viet Nam is lower than that to others, about the same product category. The grade of imports from Russia, Ukraine and China are lower than that from Japan. VDF Workshop, August 28,

20 Market segmentation of sheet steel products Market I: Higher-grade sheets and strip that are for Automotive bodies Motorcycles Home appliances Steel furniture for export Motors Market II: Conventional sheets and strip that are for Construction Bicycles Steel furniture for domestic consumption Welded pipe for general use Parts for motorcycle repair 20

21 Material Flow of Cold Rolled and Surface Treated Flat Products in Vietnam, Based on Classification of Applications, Product Categories and Specifications ( ) Import of high grade cold rolled sheets (Deep drawing sheet, electrical sheet, tin mill black plate, etc) Import of high grade surface treated sheets (Galvannealed sheet, Electrolytic galvanized sheet, etc) Import of tinplates Competition Tinplating factory (Perstima) Market I (High grade application for Automobile, Electrical and electronic equipment, motorbike, home appliance for export) Import of hot coils Import of cold rolled sheets for conventional use Competition Cold rolling mill (PFS) Galvanizing and color coating factories (BlueScope, SSSC, etc) Competition Market II (Conventional application for construction and manufacturing for domestic consumption) Source: Author compiled based on factory visits, interviews and various materials. Import of galvanized sheet and prepainted galvanized sheet for construction use 21

22 Hierarchical Division of Labor The market of high-grade sheets is small. Most high-grade sheets are imported. There is only one producer: Perstima Vietnam (Tinplate). Its technology source is Japan Most producers in Viet Nam are producing low and medium grade sheets. PFS: Cold rolled sheet for galvanizing. BSV, SSSC: GI sheets for roof and wall. It reflects the limited achievement of the industrialization in Viet Nam. VDF Workshop, August 28,

23 II. Large-Scale Steel Projects with Foreign Direct Investment VDF Workshop, August 28,

24 Large-Scale Steel Projects by FDI in Viet Nam (1) Investor POSCO (South Korea):100% Essar Steel (India):65%, VSC:20%, Vietnam General Rubber Corporation (GERUCO):15% Tycoons Worldwide Group (Taiwan):60%, Jinan Steel and Iron Group (China):40% E-United Group: 90% Sun Steel (Taiwan), Koncett (Taiwan), Minmetan (Australia) Location Phu My Industrial Zone, Ba Ria Vung Tau Province Phu My Industrial Zone, Ba Ria Vung Tau Province Dung Quat Economic Zone, Quang Ngai Province Ha Tinh Province Process and Production Capacity 1st stage: Cold rolling mill (1.2 million t/y) 2nd stage: Hot strip mill (3 million t/y), Hot-dip galvanizing line (0.4 million t/y) Hot strip mill (2 million t/y) Integrated steelworks (1st: 2 million t/y. Blast furnace and steelmaking) (2nd: additional 2.5 million t/y. Integrated process) 1st: 2.5 million Integrated steelworks (4.5 million t/y) Thach Khe iron mine Products 1st stage: Cold rolled sheets and strip 2nd stage: Hot coil and hotdipped galvanized sheet are added Hot coil 1st stage: Billet (Partly exported) 2nd stage: Hot coil and cold rolled sheets and strip are added Unannounced Investment Amount 1st stage: USD 491 million 2nd stage: Unannounced Total: Unannounced (Probably about USD 1.1 billion) USD 527 million 1st stage: USD 556 million 2nd stage: USD 500 million Total: USD billion Total: USD183 billion USD 1.95 billion Construction Period 1st stage: 2007-end of nd stage: Until st stage: until nd stage: until 2014 Unannounced Status Licensed in November 2006 Construction started in August Contract was placed in February 2007 Licensed in September 2006 Construction will start in October 2007 Applied for a license in May or June 2006 Source: See Table 5 in full paper. 24

25 Source: See Table 5 in full paper. Large-Scale Steel Projects by FDI in Viet Nam (1) Investor Samoa Qian Ding Group (Group firm of Chien Shing Stainless Steel) (Taiwan) POSCO, Vietnam Shipbuilding Industry Corporation (Vinashin) Tata Steel (India), VSC Steelworks: Tata 65%, VSC 35% Thach Khe Mine: Tata 30%, details of Vietnamese investors not announced Location My Xuan A Industrial Zone, Ba Ria Vung Tau Province Unannounced Ha Tinh Province Process and Production Capacity Stainless factory (0.72 million t/y) (Probably EAF-rolling mill) Integrated steelworks (4-5 million t/y) Integrated steelworks (4.5 million t/y) Thach Khe iron mine Products Stainless sheet (80% is exported to Taiwan) Unannounced Unannounced USD 700 million USD 4 billion USD billion Investment Amount Construction Period Unannounced Unannounced Unannounced Status Licensed in November 2005 Cooperation of feasibility studies. MoU signed on May 23, 2007 MoU signed on May 29,

26 Project quality should be observed Some questionable projects No progress: Sunsco, Chien Shing, No reality: Eminence E-United Group bought 90% of Tycoons World Wide Steel (Vietnam). Tycoons project was questionable from the beginning. E-United Group is more experienced in steel producing than Tycoons. It should be observed. Large-scale projects by experienced producers Flat rolling projects POSCO (HR, CR and CGL) Essar-VSC-GERUCO (HR) Integrated Steelworks POSCO-Vinashin Tata-VSC (with Iron Ore Mining) VDF Workshop, August 28,

27 The New Challenges Healthy competition or overlapping? POSCO-Vinashin and Tata-VSC VSC s alliance strategy is not clear. Tata is a competitor of Essar Demand-supply relations should be observed closely. The lack of consistent statistics prevents the understanding the real situation Now the prospect of demand will be balanced if Viet Nam will keep high economic growth. But if POSCO-Vinashin or Tata-VSC projects starts, the picture will change. VDF Workshop, August 28,

28 Forecast of demand-supply relations in flat steel sector Source: Author compiled. 28

29 Forecast of demand-supply relations in flat steel sector Essar-VSC and POSCO Lotus and Sunsco PFS Source: Table in the former slide. POSCO E United Group POSCO-Vinashin? Tata-VSC VDF Workshop, August 28,

30 III. Future Policy Issues for the Vietnamese Steel Industry VDF Workshop, August 28,

31 The major policy issues SOE reform and VSC s future Scrap procurement and environmental control The method of scrap substitute production Japan-Viet Nam EPA and steel industry FDI attraction and review for licensing projects VDF Workshop, August 28,

32 1. SOE reform and VSC s future VDF Workshop, August 28,

33 SOE reform for GC91 Radical style Both GC91 and operating units will change to joint stock company The former GC91 will be a shareholder of subsidiaries. Stocks will be publicly offered Chinese style GC91 will change to 100% state owned limited enterprise (SOLE) The operating units will change to joint stock company SOLE will be a share holder of subsidiaries. Only a part of subsidiaries stocks will be publicly offered VDF Workshop, August 28,

34 Majority ownership 100% Ownership Features of Chinese style State Asset Management Bureau of Central or Regional Government 100% ownership State Owned Limited Company=Group Corporation (ex Shanhai Bao Steel Group Corporation) Other investors Public Offered Joint Stock Corporation=Major Steel Producer (ex Baoshan Iron and Steel Corporation) Non Public Offered Company Non Public Offered Company Non Public Offered Company Minority ownership Indirect state control through shareholding Expanding the independence producer corporation Improvement of transparency with some limitation Administrative manipulation through SOLE is possible Financing through public offer Distortion of security market Possibility of boom and burst VDF Workshop, August 28,

35 SOE reform and VSC Reform of VSC means. Independent management decision The necessity of sound management based on profitability Overinvestment and clouding out should be avoided through the reform of VSC group. VSC group should survive on the basis of the sound management Success of PFS, Phu My Steelworks, and JV with Essar will become the evidence of VSC group s capability. VDF Workshop, August 28,

36 2. Scrap procurement and environmental control VDF Workshop, August 28,

37 Scrap balance of some ASEAN countries in 2005 Consumption of Viet Nam will increase to more than 2 million tons in 2008 Import of Viet Nam will increase to 2 million tons in

38 The importance of the system for scrap recovery and trade Steel scrap should be treated as basic material for steel production. It is different from hazardous waste After the policy confusion in 2006, a barrier of scrap import was removed Now a systematic policy is necessary. The government should arrange infrastructure for scrap imports VSA should cover the steel scrap industry and design the steel recycle systems Cooperation should be arranged among government ministries and industry association. VDF Workshop, August 28,

39 Examples of regulation for scrap and EAFs Scrap specification should be standardized Compulsory regulation for EAF factory should be enforced A dust chamber should be installed Dust from EAF should be collected for recovery Air pollution measurement and report should be obliged Water recovery and treatment should be obliged Slag treatment should be enforced Measuring the radioactive substance should be obliged Technological guideline for standard EAF factory should be drafted VDF Workshop, August 28,

40 Recycling issue is suitable for international cooperation Industrialized countries have already established systems and policies in this field. Viet Nam should learn it. Viet Nam should treat this issue as a part of environmental protection and recycling It is easier for Viet Nam to get foreign aid for environmental issues than to get it for industry promotion issue. VDF Workshop, August 28,

41 3. The method of scrap substitute production (not included in my papar) VDF Workshop, August 28,

42 Mini blast furnace problem Some mini-mills (EAF producers) in Viet Nam have the plans to install mini blast furnaces. Internal volume is m3 Chinese technology will be used It is not clear whether coke ovens will be installed side by side. A part of iron ore will be procured from domestic ore mine. But volume will be in short VDF Workshop, August 28,

43 Mini blast furnace technology in China has many problems Low efficiency Blast furnace Low level of productivity, coke rate, ore rate Similar to TISCO Iron quality is not stable Beehive coke oven No recovery of by products Environmental Problem Air pollution Water pollution Solid waste VDF Workshop, August 28,

44 Micro blast furnaces (<100 m3 ) in Shanxi Province, China All photoes in Shanxi were taken by the research group of Tohoku University in VDF Workshop, August 28,

45 Non-mechanized coke production Non-mechanized (burn off, beehive) coke production led to serious pollution In 2003, non-mechanized production occupied 32.4% of coke production in Shanxi Beehive coke oven in 2002 Burn off style coke production in VDF Workshop, August 28,

46 A Japanese engineer made technical assistance Kawahara s record of operational improvement of one micro blast furnace. Mr. Gyozo Kawahara, former engineer (and executive) of Iwate Iron Co. was invited by Provincial government for technical assistance Only a few company understood the importance of Kawahara s activity 46

47 A success case: Shanxi Antai Group Antai Group improved the operation with the support of Kawahara s guidance. Improvement led to profit and replacement of production facilities. Beehive coke ovens were repleced by new mechanized ovens Micro blast furnaces were replaced by new mini blast furnaces (450 m3 VDF Workshop, August 28,

48 Lesson from the case of China Pollutive facilities beyond salvation should be banned Burn off style coke production and sintering Beehive coke oven Without the technical assistance by skilled engineer, mini blast furnace does not work well. Strict environmental regulation should be set and enforced. The example is as follows: Air pollution measurement and report should be obliged Water recovery and treatment should be obliged Slag treatment should be enforced Recovery of B gas and C gas should be obliged Install of energy saving facilities like coke dry quenching system should be recommended with the pursue of Clean Development Mechanism (CDM) VDF Workshop, August 28,

49 DRI system as an alternative of mini blast furnace Feasibility of coal based DRI should be investigated Sojitz and IPSI presented some points in the seminar on this August Some points should be checked Iron ore supply from iron ore mine is limited. Import of iron ore mine will lead two problems. Infrastructure of seaport and transportation High unit cost of marine transport because of small volume DRI has to compete with scrap in market. Cost consciousness and speedy management is necessary. History of failures of SOEs in many countries, and the following success of Mittal Steel should be remembered. VDF Workshop, August 28,

50 4. Japan-Viet Nam EPA and steel industry VDF Workshop, August 28,

51 EPA and steel industry Viet Nam has liberalized the steel trade Tariff rates has been reduced HS code has been sophisticated FTA/EPA negotiations with some country will make a pressure to zero tariff But it is hard for Viet Nam to make all tariff zero immediately VDF Workshop, August 28,

52 Import tariff rates for major steel products in Viet Nam Source: World Tariff Database, interview records, company documents, websites and newspapers. 52

53 Examples of EPA between Japan and advanced ASEAN countries All tariff will be lifted years later Before that, import of high grade products that are not produced in ASEAN countries are liberalized. Two methods for concrete scheme Tariff-rate quota system Use-specific duty free scheme VDF Workshop, August 28,

54 The issue of Japan-Viet Nam EPA Steel import from Japan includes some lower grade steel products. It is different condition from other ASEAN countries. Zero tariff Hard for the Vietnamese steel industry. Profit of the Japanese steel industry. Liberalization of high grade steel trade Limited effect for the Japanese steel producers Acceptable for the Vietnamese steel industry. That is a point to be negotiated VDF Workshop, August 28,

55 Policy cooperation should be combined with EPA negotiation EPA is going with technical cooperation in Thailand and Indonesia But the hard negotiation is observed Policy cooperation will be the base for the rational negotiation and more advanced cooperation Industry survey Compilation of statistics Arrangement of recycling system Arrangement of environmental regulation Help for designing CDM VDF Workshop, August 28,

56 5. FDI attraction and review for licensing projects VDF Workshop, August 28,

57 The importance of FDI attraction for the Vietnamese steel industry Under the economic integration, the content of industrial policy should be changed Traditional protection policy does not work Foreign companies that have financial, technological and managerial capabilities should be attracted Liberalization is basic condition. But it does not mean that laissez-faire is desirable Arrangement of large-scale infrastructure is not easy for steel producers Available location for large-scale project is limited Coordination by government is necessary VDF Workshop, August 28,

58 The questionable licensing in the Vietnamese steel industry Licensed projects do not necessarily make progress. Now Viet Nam is a target of license hunting The initial version of Tycoons plan The case of Eminence Group The case of Chen Shing Stainless Licensing process should be improved with the help of industrial experts Experts from VSA and other steel-related institutions should participate the licensing process VDF Workshop, August 28,

59 Comparison between Viet Nam and Thailand as a location of integrated steelworks Thailand Vietnam Market size (Total) 14 mill. t > 6 mill. t Market size (High grade) Larger. Because of the development of automobile and home appliance industry for exports > Smaller. Major customer is construction industry Steel producers Half completed in steelmaking, rolling and galvanizing process in flat sector Brown field for new largescale investment < A few producers in flat rolling. No hot strip mill. Greenfield for foreign investors to make largescale investment Commitment to steel industry by government Weaker. No master plan. < Stronger. There is a master plan. It is under modification Business association Stronger. ISIT is the most organized among the steel industry association in ASEAN countries. > Weaker. VSA role is limited. 59

60 . Conclusion VDF Workshop, August 28,

61 The new phase of iron and steel industry in Old phase From the mid-1990 to the mid-2000s Market underdevelopment Absence of modern players Important role of governmental plan and investment by SOEs Protection policies Viet Nam New phase From the mid-2000s Expansion of market competition Various type of modern players Important role of competition and investment by private and foreign enterprises Policy shift is needed for the government 61

62 New policy for industry promotion (1) Promoting equal-footing among the all enterprises Equitisation of VSC Group and other SOEs Policy arrangements for the mini-mill production on the basis of EAF technology Infrastructure for the scrap recovery and import Environmental protection policy for scrap treatment and mini-mill production International cooperation from the view of environmental protection and recycling Institution of technical guideline for the mini-mill production 62

63 New policy for industry promotion (2) Policy arrangements for the large-scale projects like the flat-mill and the integrated steelworks Capacity building of the government for the improvement of licensing process Strong commitment for the arrangement of infrastructure Request of policy cooperation in EPA negotiations Industry survey and compilation of statistics Cooperation for the design of trade legislations, environmental regulations, technology standard and recycling system Expansion of the VSA s role in some areas Industry survey and compilation of statistics Design of institutional arrangements Participation to licensing process Participation to international negotiation 63

64 Reference Kawabata, Nozomu (2007) Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift, VDF Discussion Paper No. 9, Vietnam Development Forum, August. Japanese version (1st version) English version (2nd version) Vietnamese version Kawabata, Nozomu (2005), Higashi Ajia Tekko-gyo no Kouzou to Dainamizumu (Structure and Dynamism of the Iron and Steel Industry in East Asia), Kyoto: Minerva Publishing (Japanese). VDF Workshop, August 28,