Foreign steel firms wary about entering Vietnam amid glut

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A worker stands on steel bars at a port in Hai Phong City

JFE Holding Inc., Japan's second-biggest steel producer, has delayed a decision to build a US$3.6-billion integrated steel plant in Vietnam, saying it is worried that the poorly developed market could hinder its operations.

JFE had said earlier it would defer a decision on the project, its first outside Japan, as it assesses competitive risks.

"We initially said a conclusion will be reached by the end of this year, but we'll need a bit more time," Bloomberg quoted Eiji Hayashida, president of JFE Steel Corp., the group's steel unit, as saying in an interview December 5 at the company's Tokyo headquarters.

"Things won't go smoothly until we make sure that we'll beat the competition as many projects are being lined up to build new mills in southern China and Vietnam."

Shinya Yamada, an analyst with Credit Suisse Securities Japan Ltd., who has an "outperform" rating for JFE shares, said: "It's no use going ahead with the project when the industry is struggling with excess steel supply.

"The risk is high."

Vietnam Steel Association Deputy Chairman Nguyen Tien Nghi blamed this problem on provincial authorities around the country, saying they have licensed projects, mainly small ones with outdated technologies, without careful consideration.

The resultant development has been haphazard and there is an oversupply of regular steel, he said.

Foreign investors like JFE, worried about the glut, hesitate to come to Vietnam, making it hard for the country to access high technologies, he pointed out.

"We have too many steel mills, but none with good financial and professional capabilities like JFE. We have a surplus of regular products like construction steel, but lack high-technology products like hot laminated steel and stainless steel."

There are some 400 steel plants in the country with a combined capacity of 10 million tons of construction steel, far in excess of the demand of six million tons this year.

The country's cold laminated steel mills have a capacity of over three million tons, double the demand.

Some localities have licensed projects that are not part of the industry's development blueprint, and many firms produce regular steel products without using new technologies or equipment, Nghi said.

He traced the glut to the situation in 2005 when prices rose, making the Vietnamese steel industry attractive for both local and foreign investors.

He also blamed it on the race among localities to attract investment and an overlap in authority over the sector. For instance, in Ba Ria-Vung Tau Province, the industrial parks authority licenses steel projects while the Department of Industry and Trade oversees implementation of the steel industry development plans.

To compound investors' concerns, Formosa Plastics, one of Taiwan's largest conglomerates, has started construction of a steel plant with an annual capacity of 22 million tons, Nghi said.

The company plans to have its first blast furnace up and running by 2015 and add a second in 2016. In the first phase Formosa will invest around $10 billion.

Also on the horizon is Indian conglomerate Tata Steel Ltd. It first signed an agreement with Vietnam Steel Corp. in May 2007 to build a $5 billion plant with a capacity of 4.5 million tons in Ha Tinh Province. But the project has been repeatedly delayed over land allocation while a site previously earmarked for Tata was handed to a competitor.

Under Vietnamese law, the government pays for land clearance. But the province wants Tata to cover some of the cost, and the two sides have been unable to reach a consensus.


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Pressure from imports

But despite the glut, Vietnam still imports some $6 billion worth of steel products annually, many of them the local industry cannot produce.

Chinese firms with huge production volume offer more competitive prices than local ones, Nghi said.

"This has also caused concern among foreign steel producers who want to invest in Vietnam."

At a recent meeting of the Vietnam Business Forum, the investment and trade working group expressed concern about the steel sector and the imbalance between supply and demand.

Fred Burker, co-chairman of the group, said low-priced imports are causing difficulties to local producers, and Vietnam should strengthen anti-dumping investigations to ensure the steel industry develops smoothly, but without affecting competition.

Deputy Minister of Industry and Trade Tran Tuan Anh said the imbalance has been caused because localities have not strictly adhered to industry development plans.

So the government will consider drafting a new plan with measures to deal with the massive inflow of imports and huge inventory.

The steel industry is likely to be mired in difficulties next year since demand is forecast to remain low because of the frozen property market, Nghi said.

Steel stockpiles are now an estimated 370,000 tons against an "acceptable" level of 250,000 tons.

The US and Europe are forecast to reduce imports, which will affect Vietnam.

In 2011 the country exported two million tons of steel for $2 billion, a 56.2 percent rise in value year-on-year, according to the industry association.

The steel firms are also worried about higher production costs since the prices of electricity, fuel, and coal have increased.

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