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Iron and Steel Industry of Developing Countries in the Era of Globalization: The Case of Vietnam. Symposium on Advanced Material Flow Analysis for the Sustainable Society September 25-26, 2006, Tohoku University Nozomu Kawabata

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Iron and Steel Industry of Developing Countries in the Era of Globalization: The Case of Vietnam

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Iron and steel industry of developing countries in the era of globalization the case of vietnam l.jpg

Iron and Steel Industry of Developing Countries in the Era of Globalization: The Case of Vietnam

Symposium on Advanced Material Flow Analysis for the Sustainable Society

September 25-26, 2006, Tohoku University

Nozomu Kawabata

Graduate School of Economics and Management, Tohoku University, Japan


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Structure of this presentation

  • 1 Steel industry in the process of industrialization

  • 2 Overview of iron and steel industry in Vietnam

  • 3 New Policy Direction

  • 4 Reinforcing market function

  • 5 Trade Policy for Steel and User Industries

  • 6 FDI Attraction as a Policy for Industrialization

  • 7 Conclusion


1 steel industry in the process of industrialization l.jpg

1 Steel industry in the process of industrialization


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Major contradictions of steel industry in developing countries

Small domestic market

High level of minimum efficient scale of production capacity

Necessity of coordination among small numbers of big project

Necessity of competition for efficiency

Necessity of technology and capital from foreign sources

Nationalistic feeling to basic material industries


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Industrialization strategy under globalization

  • Collapse of CPEs

  • Bad performance of import substituting industrialization

    • High protection

  • Good performance of export oriented industrialization (Especially in East Asia)

    • Lower protection

  • Importance of foreign investment and TNCs

  • Policy trend to liberalization

    • WTO

    • AFTA

    • EPA


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Until the midst of 1980s

State-led promotion

Central state of SOE

Creation of integrated steel works

High level protection

Center industry for import substituting industrialization

From the late 1980s

FDI and private sector-led promotion

Major role of FDI and local business group

Incremental building from downstream to upstream processes

Reasonable level of protection

Backseat player for export-oriented industrialization

Steel strategies have changed in advanced ASEAN countries


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Until the midst of 1980s

Construction failure or financial/technological troubles

NASCO (Philippines)

Krakatau Steel (Indonesia)

Perwaja Steel (Malaysia)

From the late 1980s

Import substitution of high grade steel sheets by FDI companies

SUS, TCRSS (Thailand)

Import substitution of low grade steel sheets by local companies

SSI, G-Steel (Thailand)

Mega Steel (Malaysia)

Policy change produced good results


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Capacity for policy change

  • Under economic integration, developing countries should accelerate the industrialization process

  • Accelerated development necessitates the speedy policy change

    • State-led investment →Promotion of FDI and private investment

    • Direct control →Indirect support to reinforce market function

  • Promoting policy of the Vietnamese steel industry is one of such a case


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2 Overview of Iron and Steel Industry in Vietnam


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Production Structure of the Vietnamese iron and steel industry (2004)

Blast Furnace Pro. 187

Long rolling mills

Pro. 2366

(Cap. 4600 overcapacity)

Market of long products

About 2600

EAF-Billet CC, Ingot casting factories Pro.658

(full operation)

Domestic Supply of Scrap 718

Import of Scrap 163

Import of billet

2174

Import of long products 257

Import of hot rolled coil, sheet, plate and tube products 1773

Market of flat and tube products

About 2900

Pipe fitter

Pro. 236

Import of cold rolled and surface treated coil and sheet products 1112

Galvanizing and color coating factories

Pro. 176

Unit: 1000 ton Source: Author edited from data of SEAISI and VSA.


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Major problems

  • Large scale production and distribution systems are not established

  • Long sector

    • Over capacity of rolling mills

    • Shortage of steelmaking capacity →Change to scrap shortage?

  • Flat sector

    • Shortage of rolling capacity

    • Over capacity of galvanizing and pipe fitting factories

    • Lack of production capacity of high grade steel

  • Foreign trade system

    • General direction to liberalization and impromptu protection

    • Underdevelopment of concrete arrangements


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3 New Policy Direction


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1990s

VSC Group: Major player for modernization

Subsidiaries (TISCO, SSC, Danang Steel, Cevimetal)

Foreign affiliated JVs (Vina Kyoei, VSC-POSCO, Vinausteel, SSSC,etc)

Small companies and households

Opportunistic entry and exit

Outdated technology

Now

VSC Group

2.7 mil ton of annual capacity

Private and 100% FDI companies (Hoa Phat, Pomina, Sunsteel, etc)

2.23 mil. ton

Standard technology

Expansion from rolling to steelmaking

The Market Structure is Changing


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Investment by VSC(PFS, SSC)(1)

  • SSC/VSC’s Phu My Steelworks (started in 2006) is the most modernized EAF-rolling mill in Vietnam

    • EAF-billet CC: 500,000 t/y

    • Long rolling: 300,000 t/y

  • PFS (started in 2005) is the first cold rolling mill in Vietnam

    • Pickling and Cold rolling: 400,000 t/y


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Investment by VSC(PFS, SSC)(2)

Phu My Steelworks under construction,

Taken by the author, May 2005

Reversing cold rolling mill of PFS. From leaflet of the company.


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Significance of new factories

  • VSC(SSC/PFS) should make new factories competitive

    • It is the test case for VSC’s future.

    • If VSC fails to operate these new factories, foreign inventors will suspect the VSC’s capability as a business partner.


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Necessity of policy change

  • VSC’s overinvestment in long sector (EAF-rolling mill) may lead to troubles

    • Exacerbating overcapacity of rolling mill

    • Crowding out the investment of private companies

    • Distortion of market selection

  • VSC cannot work on a big project (especially in flat sector) by itself

    • Financial and technological problems


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New direction of promotion policy

  • Government should give all companies equal footing

  • Reinforcing the function of market economy

    • Construction of infrastructure

    • Setting rules on quality, safety an environment

    • Amendment of market failures

  • Absorbing the shock of liberalization

  • FDI attraction


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4 Reinforcing Market Function


Example scrap import problem 1 l.jpg

Pig Iron 187

EAF-Billet CC, Ingot casting factories

658

Long rolling mills

2366

Scrap 718

Import of Scrap 163

Import of billet 2174

Pig Iron 200

EAF-Billet CC, Ingot casting factories

About 2500

Long rolling mills

Scrap 720

Import of Scrap About 2000

Import of billet

Example: Scrap import problem(1)

  • Situation in 2004

  • Possible situation in near future


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Example: Scrap import problem(2)

  • In keeping with construction of EAF, fatal point will change

    • Billet import → scrap import

  • Urgent challenge for government

    • Support to construction of port facility

    • Establishment of import procedures

    • Adjustment between import promotion and environmental regulation


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Proper regulation to reinforce market function

  • Reinforcing the Construction Law

  • Reinforcing the industrial standard

    →Exclusion of under qualified products (re-rolled scrap, narrow strip, fake brand etc)

  • Standard of safety and environment

     →Exclusion of inferior machines (Pollution from EAF, induction furnace etc)


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5 Trade Policy for Steel and User Industries


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Two-tiered market structure of cold rolled and surface treated sheet products

Customer I

(FDI manufacturers like car, motorbike, export-oriented appliance producers)

Import of high grade surface treated sheets (Galvannealed, color-coated, tinplated)

Import of high grade cold rolled sheets (Deep drawing sheet, electrical sheet, IF steel, loam plate,etc)

Import of hot coils

No competition

Import of normal grade cold rolled sheets

Customer II (Mainly construction industry, partly domestic manufactures)

Galvanizing and color coating factories (BlueScope, SSSC etc)

Competition

Cold Rolling Mill (PFS)

Pro. 180-240

(Cap. 400)

Competition

Import of normal grade galvanized and color-coated sheets


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Irrationality of current import duty on sheet products

  • Current import duty

    • Cold rolled sheet product: 7%.

    • Surface treated sheet (including GI): 0-10%

  • Taxation on high grade sheets does not improve the status of PFS and galvanizing companies

    • No competition between sheets for Customer I and sheets for Customer II

  • Import duty on high grade cold rolled sheets and surface treated sheets have a damaging effect on Vietnamese economy

    • Damage on competitiveness of FDI manufacturers


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Galvannealed sheet

for automotive

Galvanized sheet for construction

Differentiation between high grade steel and conventional steel

  • A problem: HS code system is not always relevant to the classification of steel products by quality

Same HS code


New option user specific duty free scheme usdfs l.jpg

(example)

Subject to “USDFS”

72・・・・

7209.15

Conventional one

High grade one for motorbike

7209.16

7209.17

7209.・・

Taxation

Duty Free

New option: “User Specific Duty Free Scheme (USDFS)”

  • When specific industries import the specific parts and materials classified by HS code, such imports are duty free.

For motorbike

For construction


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USDFS as a proven scheme in several countries

  • USDFS will strike a balance between the promotion of competitiveness of FDI manufacturers and the protection of steel sheet producers

  • USDFS and similar policies are/will be installed by Mexican, Malaysian, Indonesian governments


6 fdi attraction as a policy for industrialization l.jpg

6 FDI Attraction as a Policy for Industrialization

Blast furnace and basic oxygen furnace of Nippon Steel Kimitsu Steelworks. From Company Pamphlet


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Possible projects in flat sector

  • Large scale galvanizing factory for high grade sheets

  • Large scale cold rolling mill for high grade sheets

  • Compact hot strip mill next to PFS

  • Large scale hot strip mill

  • ISW


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Necessity of FDI in flat sector

  • VSC cannot work on a big project in flat sector by itself

  • Unlike the advanced ASEAN countries, there is no private big business group in Vietnam

  • FDI attraction is necessary

    • FDI cannot be attracted by laissez-faire regime


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Conditions for FDI attraction(1)

  • Consistency among market size, product mix, technology, feature of FDI companies

Market size of specific segment

Ex. million tons of sheets for automobile

Product mix of new factories

Ex. CR, GI, GA

Possible FDI companies

Ex. Japan, South Korea

Technology

Ex. State of the art ISW


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Conditions for FDI attraction(2)

  • Ex. Production of high-grade steel sheet

    • Vietnam has to wait some years until market expansion

    • State of the art technology for integrated production is necessary

    • Candidate list of FDI producers is short one

      • OK: Integrated producers in advanced countries (including South Korea)

      • Questionable: Integrated producers in Taiwan and BRICs

      • Impossible: Producers with no experience in high grade steel


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Role of government in attracting FDI

  • Giving a welcome to majority ownership of FDI produces

  • Capacity of review and approval is necessary at MPI and MOI

  • Reliability as a partner is critical for joint ventures

    • VSC should prove its managerial capacity as a reliable partner in Vietnam

  • In case of ISW, strong commitment to provision of infrastructure is necessary


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7 Conclusion

Hot strip mill and continuous descaling and cold rolling mill of Nippon Steel Kimitsu Steelworks

From Company Pamphlet


The time of policy change in vietnamese steel industry l.jpg

1st stage

Market underdevelopment

Absence of modern players

Central role of governmental plan and SOEs

Construction of model factories

Beginning: Drafting of Master Plan

End: Building completion of PFS and Phu My Steelworks

2nd stage

Effective market competition

Global pressure to liberalization

Growing importance of private sector and FDI sector

Changing role of government

Abolishment of privilege of SOEs

Amendment of market failure at some point

Commitment to FDI attraction

Commitment to provision of infrastructure

The time of policy change in Vietnamese steel industry


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Reference

  • 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).

  • Kawabata, Nozomu(2001), “The Current Vietnamese Steel Industry and Its Challenges,” in Study on the Economic Development Policy in The Transition toward a Market-Oriented Economy in The Socialist Republic of Vietnam (Phase 3) Final Report Vol. 2, MPI and JICA. http://www.econ.tohoku.ac.jp/~kawabata/VietnameseSteelEnglish.pdf

  • Ohno, Kenich and Nguyen Van Thuong eds.(2005), Improving Industrial Policy Formulation, The Publishing House of Political Theory, Hanoi. http://www.vdf.org.vn/bookad.htm

  • Vietnam Development Forum(2006), Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms, April 24. http://www.vdf.org.vn/WS/WS%202006/Ohno12April06/VDFreport.pdf


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Thank you for your kind attention!


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