Metal Products. Description of the Sector. Chapter 7

Transcription

1 Chapter 7 Metal Products Vietnam currently imports 94 percent of its metalworking equipment and mechanical products. Only 6 percent of the country s demand is met by local manufacturers. Yet, labor costs in the metal sector are low; productivity is high; and the demand associated with investment projects is outstripping supply. Production costs are lower in Vietnam than in China. The constraints in the sector include the inadequate domestic supply of inputs, the excessive use of utilities, and significant worker absenteeism in some firms. Policies to address these issues might include increasing the exploitation of iron ore deposits subject to environmental protection; developing plug-and-play industrial parks to facilitate the access of small and medium enterprises (SMEs) to utilities, land, and financing, as well as to improved skills through technical assistance programs for owner-managers and workers; and promoting foreign direct investment (FDI) to make up for the capital shortages. Description of the Sector According to the World Steel Association, total global crude steel production in 2008 amounted to 1.3 billion tons. 1 The global export value of items made of iron or steel was $226 billion in China was the leading exporter that year, at $34 billion (15 percent of global exports) (figure 7.1). According to the South East Asia Iron and Steel Institute, the total consumption of steel products in Vietnam reached approximately 10.6 million metric tons in 2009, and more than 40 percent of this total was accounted for by imports (SEAISI 2012). By 2015, Vietnam will require an estimated 15 million tons of steel a year. Only 6 percent of the demand for metalworking equipment and mechanical products is satisfied by local manufacturers. Similarly, because industrial production in Vietnam is growing at 19 percent a year, imports of steel products have been increasing at an annual rate of 30 percent. In 2010, the industry met 54 percent of the country s total demand for steel ingots, 40 percent of the demand for cold steel, and 100 percent of the demand for building steel. 85

2 86 Metal Products Figure 7.1 Leading Exporters of Iron or Steel Products, Worldwide, 2009 China Rest of the world Germany Italy United States Korea, Rep. France Japan Source: GDS Note: The world aggregation represents the sum of reporting and nonreporting countries. Vietnam is a major importer of low- and medium-grade steel products from Japan and imports even lower-grade steel from China, the Russian Federation, and Ukraine, which suggests that the market for high-grade steel is limited. While the demand for high-grade hot coil and cold rolled sheets for the manufacture of mechanical products, such as motorcycles, is substantial, the demand is restrained for other high-grade products, such as the heavy plates used in large-scale industrial production (in shipbuilding, for instance) and the galvanized steel used in automotive production. The metals industry in Vietnam employs over 130,000 workers across more than 3,700 enterprises, compared with 3.6 million workers in more than 24,500 firms in China (table 7.1). In both countries, men dominate, representing approximately three-quarters of the workforce. Our analysis is based on 12 firms in China and 10 firms in Vietnam. We use crown corks (bottle caps) as the reference product. Tariffs and taxes raise the production prices in Vietnam. The tariff rates (preferential) for the base metals and metal parts relevant to our analysis are around 27 percent (20 percent in China). The common effective preferential tariff covers other products at an average of 2.3 percent. There is also a value added tax of 10 percent (17 percent in China, which is, however, reimbursed), an income tax of 28 percent (25 percent in China), and an export tax that reaches as high as 45 percent. While Vietnamese enterprises enjoy preferential

3 Metal Products 87 Table 7.1 The Processed Metal Industry, China and Vietnam, 2009 Indicator China Vietnam Total imports, $, millions 8, ,548.4 Total exports, $, millions 33, Companies, total 24,547 3,762 Small, % Medium, % Large, % Workers, total (estimate) 3,561, ,436 Men, % Women, % Sources: GDS 2011; UN Comtrade (United Nations Commodity Trade Statistics Database), Statistics Division, Department of Economic and Social Affairs, United Nations, New York, rates for utilities (electricity and water), there are no other subsidies. Similar firms in China enjoy a subsidy of 9 percent for iron sheets and subsidies of 5 13 percent for iron products. The Potential Vietnam exported approximately $706 million worth of processed metal products in 2009, while importing more than $1.5 billion worth of such products. This shows that there is an immediate opportunity for the sector to meet the demands of the rapidly growing domestic market. SMEs dominate the market. In crown corks, our survey reveals that, relative to China, Vietnam could become a higher-productivity, lower-cost production location, though the firms in our survey in Vietnam do not appear to be exporting yet. The cost of producing crown corks in Vietnam averages $4.72 per 1,000 pieces (table 7.2). Corks of the same quality cost approximately $5.07 per 1,000 pieces to produce in China. The primary raw material (tin-free steel) accounts for 72 percent of the value chain in Vietnam; in China, where locally available tin-free steel is cheaper, it accounts for only 42 percent. However, the prices are lower in Vietnam. Factors that could allow Vietnam to develop a competitive domestic metal products industry include the following: Low labor costs: Similar to the situation in the apparel and leather sectors, the labor costs of skilled metalworkers in Vietnam are less than 22 percent of the corresponding costs in China. High productivity: Workers in best practice firms produce pieces a day in Vietnam, but only pieces a day in China. Many metal products are heavy and bulky: The low value-to-weight ratio typical of metal products makes local or regional imports preferable. This is especially important because China imports such large quantities.

4 88 Metal Products Table 7.2 Benchmarking Key Production Variables, Crown Corks, China and Vietnam, 2010 Indicator China Vietnam Factory Capacity utilization, % Installed capacity, pieces per day, 1,000s 427 2, ,000 Labor absenteeism rate, % Average monthly salary or wage Skilled, $ Unskilled, $ Days of operation per month Average age of major equipment, years Exported output, finished primary product Direct export without consolidators or brokers, % 0 0 Indirect export through local consolidators, % Indirect export through overseas consolidators, % 0 0 Domestically sold output, finished primary product Direct sales to wholesalers or retailers without consolidators, % Direct sales through own outlets, shops, or showrooms, % Indirect sales through local consolidators or traders, % 0 0 Unit production cost, $ per 1,000 pieces Average selling price, $ per 1,000 pieces Factory gate Wholesale n.a. Free on board n.a. Source: GDS Note: n.a. = not applicable. The demand associated with investment projects is outstripping supply: According to the Ministry of Industry and Trade, as many as 65 steel projects (7 FDI projects and 58 domestic and joint venture projects) are in the pipeline, and these represent an aggregate yearly capacity of more than 100,000 tons spread across 30 provinces in the country. Because of this surge in activity, the ministry has asked cities and provinces to stop granting new investment licenses for steel projects and to revise existing contracts. The distribution of resources across the value chain is somewhat similar in both countries. If we exclude primary raw materials, the seal making and sealing stage of crown cork production accounts for percent of the value chain, of which more than 78 percent is comprised of consumables, such as polyvinyl chloride compound and bonding chemicals. Coating and printing represent the third-largest segment of the value chain among enterprises in China, accounting for percent, compared with about 5.4 percent in Vietnam.

5 Metal Products 89 The Main Constraints on Competitiveness Despite higher steel prices, the manufacturing costs of metal products are lower in Vietnam than in China. However, as in the apparel and leather sectors, the lower production costs arise because of the lower wage rates, which will not always be available. Certain issues must be addressed to maintain long-term competitiveness, as follows: The inadequate domestic supply of inputs is the main driver of the high price of imported steel in Vietnam. The high prices of the raw materials and the steel products make Vietnam s steel industry vulnerable to price fluctuations on the world market. As the country integrates more fully in the global economy, the steel industry needs to address this high import dependence to compete in the more open economic environment. The most daunting challenge facing the Vietnamese steel industry is access to and the price of raw materials. Excessive utility use is characteristic of this sector despite fairly new equipment. In China, crown cork manufacturing firms spend $8 on utilities per million pieces produced; the corresponding amount in Vietnam is $70. In addition, Vietnamese firms spend 250 times more than Chinese firms on the water needed to produce the same quantity and quality of crown corks. Vietnamese enterprises use 1,115 1,633 kilowatt hours of electricity per million pieces, but Chinese enterprises use only kilowatt hours per million. The fuel consumption rate of a factory in Vietnam is more than 40 times that of a factory in China. All these factors add up to higher-than-necessary production costs in Vietnam that nearly wipe out the advantage that low labor costs provide. Significant worker absenteeism is an issue in some Vietnamese firms in the sector (up to 5 percent, as opposed to 2 percent in China). Perhaps more noteworthy, while labor costs in Vietnam are competitive, the labor cost differential between China and Vietnam, particularly relative to skilled workers, is substantially narrower than the gap found in other, less technical sectors such as apparel, where the cost of skilled labor in Vietnam is less than one-third that in China. Policy Recommendations To remain competitive in the long run and to exploit fully Vietnam s potential in this sector, the government should consider the following measures: Promote the exploitation of the country s iron ore deposits subject to environmental protection and conduct an in-depth feasibility study to assess the potential competitiveness of the domestic steel industry. The export of iron ore affects domestic steel manufacturing enterprises to the extent that they face shortages in raw materials and are forced to import these raw materials

6 90 Metal Products at substantial cost. (Steel is a low value-to-weight item and is subject to import tariffs of 27 percent.) According to Vietnam Steel Association estimates, the country has combined deposits of more than 1.2 billion tons of iron ore. The largest mines are in Thach Khe, in central Ha Tinh Province, where there is a deposit of more than 544 million tons, and Quy Xa, in northern Lao Cai Province, where there is an estimated deposit of 112 million tons. The untapped iron ore deposits could substantially reduce the production costs associated with imported steel. More exploration of iron ore and coal deposits while taking proper measures to protect the environment could enhance the competitiveness of the steel industry in the world market. Develop plug-and-play industrial parks to facilitate the access of SMEs to land and financing, as well as to skills through technical assistance programs for owner-managers and workers. This would help especially in identifying ways to reduce the overuse of utilities. Promote FDI to make up for capital shortages. Local industry has been able to build only one production chain to produce steel ingots from iron ore. Most of Vietnam s iron ore must therefore be sold abroad unprocessed. Attracting f oreign capital is essential for larger projects in the steel industry. In addition, the transfer of technologies and managerial skills from foreign enterprises will be critical for the development of Vietnamese steel technology. Note 1. Annual Crude Steel Production, , World Steel Association, Brussels (accessed March 23, 2013), / statistics-archive/production-archive/steel-archive/steel-annually/annual -steel /document/Annual%20steel% pdf. References GDS (Global Development Solutions) The Value Chain and Feasibility Analysis; Domestic Resource Cost Analysis. Vol. 2 of Light Manufacturing in Africa: Targeted Policies to Enhance Private Investment and Create Jobs. Washington, DC: World Bank. SEAISI (South East Asia Iron and Steel Institute) Steel Statistical Yearbook. Selangor, Malaysia: SEAISI.