Vietnam steel sector faces losses amid low sales

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A worker walking a bicycle loaded with construction steel on his way to a construction site in Hanoi

The frozen property market and high interest rates have pushed steel producers into the red and some even face the risk of shutting down their business.

Pham Chi Cuong, chairman of the Vietnam Steel Association, said sales have plummeted because many projects have been cut, or delayed, and the property market is frozen as the government started cutting public investment and tightening monetary policy to curb high inflation.

Steel sales are estimated to drop by some 7.7 percent to 10.3 million tons this year compared to last year, according to the association. The sale of the material is expected to drop by 21 percent in October over the previous month, to only 300,000 tons.

Due to the slow sales, steel firms now are facing a surplus of some 900,000 tons of steel billet and steel products.

Cuong said many producers have cut their prices 2-2.5 percent to VND15.6-15.7 million (US$743-748) per ton to boost sales. Meanwhile, production costs have been estimated at VND15.5-16 million per ton.

"Steel makers are suffering losses," said Cuong. "Although no firms have gone into bankruptcy, there are steel makers that cannot sell their products and have had to stop production."

Hai Phong steel company Van Loi, for instance, has stopped production. Another firm, Dinh Vu, which has suffered losses over the past few years, has sold up to 70 percent of stake to an Australian investor.

Nghiem Xuan Da, vice general director of the Vietnam Steel Corporation, said his firm reduced its production of construction steel by 2 percent to 1.9 million tons in the first 10 months. Many of its subsidiaries have implemented only 60 percent of their 2011 production plans.

Tran Tuan Duong, general director of Hoa Phat, the country's second biggest steel producer, said his firm now runs at 80 percent of production capacity to avoid pile-up in the context of low consumption.

Steel makers are also having trouble getting good bank loans and buying foreign currencies. The firms still borrow from banks at interest rates of over 20 percent, although lenders are supposed to offer loans to companies at 17-19 percent only, said industry insiders.

Despite accepting high interest rates, the companies still find it hard to access bank loans, especially those in foreign currencies.

Vu Van Chuyen, deputy head of the heavy industry department at the Ministry of Industry and Trade, said the steel industry is not given foreign currency incentives for borrowing and buying dollars, although it imports up to 70 percent of its steel billet and scrap for production.

He said his ministry will work with the State Bank of Vietnam to seek ways to help companies deal with the difficulties.

Another problem is the rampant development of steel mills. "This has created a surplus," said Dinh Huy Tam, general secretary of the Vietnam Steel Association. "Their combined capacity is some eight million tons per annum, far exceeding the demand of five million tons."

To deal with the issue, many companies have increased their steel exports. They are expected to ship abroad some 1.8 million tons of steel this year, up 39 percent over last year, according to the association.

The difficulties are expected to last through 2012, as the property market is forecast to continue to slump, industry insiders said.

Deputy Minister of Industry and Trade Le Duong Quang said steel firms should cut production to comply with market demand, and try to reduce stockpiles of steel products.

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