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

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

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

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  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, 2007

  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, 2007

  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, 2007

  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, 2007

  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, 2007

  6. I. Changing Structure of Production and Trade in the Vietnamese Steel Industry VDF Workshop, August 28, 2007

  7. Demand and Supply of Steel in Viet Nam Unit:1000t VDF Workshop, August 28, 2007 Source: SEAISI (2006b).

  8. The features of demand-supply relations • Demand increased by a factor of 1.9 in 2000-2005 • Demand level is stll far below those of Japan, South Korea and Thailand. • Domestic production increased by a factor of 2.1 in 2000-2005 • But 40% of products consumed are imported. VDF Workshop, August 28, 2007

  9. Material Flow of the Vietnamese Iron and Steel Industry, Based on Classification of Major Product Categories (2005) Iron production by blast furnaces 202 Long rolling mills Production 3,264 Market of long products 3,506 Export of long products 150 EAF-Billet continuous casting factories Production875 Domestic supply of scrap 433 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 hot-rolled 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 Market of flat products and pipes 2,958 Export of flat product and pipes 19 Cold rolling mill Production 80 Galvanizing and color coating factories Production 450 VDF Workshop, August 28, 2007 Unit:1000 tons. Source: Author compiled from SEAISI (2006a, 2006b).

  10. The features of material flow in 2005 • 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, 2007

  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 2005. Now it is in commercial operation. Reversing cold rolling mill of PFS. From leaflet of the company. VDF Workshop, August 28, 2007

  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, 2007

  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 2007 • 100% 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, 2007

  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, 2007

  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, 2007

  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, 2007

  18. Unit price of steel export from Japan to Viet Nam and all countries of destination by products (2005) VDF Workshop, August 28, 2007

  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, 2007

  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

  21. Material Flow of Cold Rolled and Surface Treated Flat Products in Vietnam, Based on Classification of Applications, Product Categories and Specifications (2005-2006) Import of high grade surface treated sheets (Galvannealed sheet, Electrolytic galvanized sheet, etc) Market I (High grade application for Automobile, Electrical and electronic equipment, motorbike, home appliance for export) Import of tinplates Competition Import of high grade cold rolled sheets (Deep drawing sheet, electrical sheet, tin mill black plate, etc) Tinplating factory (Perstima) Import of cold rolled sheets for conventional use Market II (Conventional application for construction and manufacturing for domestic consumption) Galvanizing and color coating factories (BlueScope, SSSC, etc) Competition Cold rolling mill (PFS) Import of hot coils Competition Import of galvanized sheet and prepainted galvanized sheet for construction use Source: Author compiled based on factory visits, interviews and various materials.

  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, 2007

  23. II. Large-Scale Steel Projects with Foreign Direct Investment VDF Workshop, August 28, 2007

  24. Large-Scale Steel Projects by FDI in Viet Nam (1) Source: See Table 5 in full paper.

  25. Large-Scale Steel Projects by FDI in Viet Nam (1) Source: See Table 5 in full paper.

  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, 2007

  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, 2007

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

  29. Forecast of demand-supply relations in flat steel sector Essar-VSC and POSCO POSCO E United Group Lotus and Sunsco PFS POSCO-Vinashin? Tata-VSC Source: Table in the former slide. VDF Workshop, August 28, 2007

  30. III. Future Policy Issues for the Vietnamese Steel Industry VDF Workshop, August 28, 2007

  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, 2007

  32. 1. SOE reform and VSC’s future VDF Workshop, August 28, 2007

  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, 2007

  34. Features of Chinese style State Asset Management Bureau of Central or Regional Government • 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 100% ownership State Owned Limited Company=Group Corporation (ex Shanhai Bao Steel Group Corporation) Other investors Minority ownership Majority ownership Public Offered Joint Stock Corporation=Major Steel Producer (ex Baoshan Iron and Steel Corporation) Non Public Offered Company 100% Ownership Non Public Offered Company Non Public Offered Company VDF Workshop, August 28, 2007

  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, 2007

  36. 2. Scrap procurement and environmental control VDF Workshop, August 28, 2007

  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 2008.

  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, 2007

  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, 2007

  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, 2007

  41. 3. The method of scrap substitute production(not included in my papar) VDF Workshop, August 28, 2007

  42. Mini blast furnace problem • Some mini-mills (EAF producers) in Viet Nam have the plans to install mini blast furnaces. • Internal volume is 180-500 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, 2007

  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, 2007

  44. Micro blast furnaces (<100m3) in Shanxi Province, China All photoes in Shanxi were taken by the research group of Tohoku University in 2001. VDF Workshop, August 28, 2007

  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 1998. VDF Workshop, August 28, 2007

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

  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 (450m3) VDF Workshop, August 28, 2007

  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, 2007

  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, 2007

  50. 4. Japan-Viet Nam EPA and steel industry VDF Workshop, August 28, 2007