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Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift. Nozomu Kawabata Graduate School of Economics and Management, Tohoku University, Japan. The Purpose of this study. This study will illustrate that … The iron and steel industry in Viet Nam is entering a new phase

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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

Nozomu Kawabata

Graduate School of Economics and Management, Tohoku University, Japan

VDF Workshop, August 28, 2007

the purpose of this study
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

industrial policy studies in viet nam
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

concrete analysis is needed
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

the structure of this presentation
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

i changing structure of production and trade in the vietnamese steel industry
I. Changing Structure of Production and Trade in the Vietnamese Steel Industry

VDF Workshop, August 28, 2007

demand and supply of steel in viet nam
Demand and Supply of Steel in Viet Nam

Unit:1000t

VDF Workshop, August 28, 2007

Source: SEAISI (2006b).

the features of demand supply relations
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

slide9
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).

the features of material flow in 2005
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

investment by vsc group
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

the roles of new factories
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

the producers are being diversified
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

new challenges for the industry
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

unit price of imported steel in viet nam by major countries of origin 2005
Unit price of imported steel in Viet Nam by major countries of origin (2005)

VDF Workshop, August 28, 2007

hierarchical division of labor
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

unit price of steel export from japan to viet nam and all countries of destination by products 2005
Unit price of steel export from Japan to Viet Nam and all countries of destination by products (2005)

VDF Workshop, August 28, 2007

high grade steel market in viet nam is very small
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

market segmentation of sheet steel products
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
slide21

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.

hierarchical division of labor22
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

ii large scale steel projects with foreign direct investment
II. Large-Scale Steel Projects with Foreign Direct Investment

VDF Workshop, August 28, 2007

large scale steel projects by fdi in viet nam 1
Large-Scale Steel Projects by FDI in Viet Nam (1)

Source: See Table 5 in full paper.

large scale steel projects by fdi in viet nam 125
Large-Scale Steel Projects by FDI in Viet Nam (1)

Source: See Table 5 in full paper.

project quality should be observed
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

the new challenges
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

forecast of demand supply relations in flat steel sector29
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

the major policy issues
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

1 soe reform and vsc s future
1. SOE reform and VSC’s future

VDF Workshop, August 28, 2007

soe reform for gc91
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

features of chinese style
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

soe reform and vsc
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

scrap balance of some asean countries in 2005
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.

the importance of the system for scrap recovery and trade
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

examples of regulation for scrap and eafs
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

recycling issue is suitable for international cooperation
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

3 the method of scrap substitute production not included in my papar
3. The method of scrap substitute production(not included in my papar)

VDF Workshop, August 28, 2007

mini blast furnace problem
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

mini blast furnace technology in china has many problems
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

micro blast furnaces 100m3 in shanxi province china
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

non mechanized coke production
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

a japanese engineer made technical assistance
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.

a success case shanxi antai group
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

lesson from the case of china
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

dri system as an alternative of mini blast furnace
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

4 japan viet nam epa and steel industry
4. Japan-Viet Nam EPA and steel industry

VDF Workshop, August 28, 2007

epa and steel industry
EPA and steel industry
  • Viet Nam has liberalized the steel trade
    • Tariff rates have been reduced
    • HS code has been sophisticated
  • FTA/EPA negotiations with some countries will make a pressure to zero tariff
  • But it is hard for Viet Nam to make all tariff zero immediately

VDF Workshop, August 28, 2007

import tariff rates for major steel products in viet nam
Import tariff rates for major steel products in Viet Nam

Source: World Tariff Database, interview records, company documents, websites and newspapers.

examples of epa between japan and advanced asean countries
Examples of EPA between Japan and advanced ASEAN countries
  • All tariff will be lifted 10-15 years later
  • Before that, import of high grade products that are not produced in ASEAN countries are liberalized.
  • Two methods for concrete scheme
    • Tariff-rate quota system
    • User-specific duty free scheme

VDF Workshop, August 28, 2007

the issue of japan viet nam epa
The issue of Japan-Viet Nam EPA
  • Steel import from Japan includes some lower grade steel products. It is different condition from other ASEAN countries
    • Zero tariff
      • Hard for the Vietnamese steel industry.
      • Profit of the Japanese steel industry.
    • Liberalization of high grade steel trade
      • Limited effect for the Japanese steel producers
      • Acceptable for the Vietnamese steel industry.

→That is a point to be negotiated

policy cooperation should be combined with epa negotiation
Policy cooperation should be combined with EPA negotiation
  • EPA is going with technical cooperation in Thailand and Indonesia
    • But the hard negotiation is observed
  • Policy cooperation will be the base for the rational negotiation and more advanced cooperation
    • Industry survey
    • Compilation of statistics
    • Arrangement of recycling systems
    • Arrangement of environmental regulations
    • Help for designing CDM

VDF Workshop, August 28, 2007

the importance of fdi attraction for the vietnamese steel industry
The importance of FDI attraction for the Vietnamese steel industry
  • Under the economic integration, the content of industrial policy should be changed
    • Traditional protection policy does not work
    • Foreign companies that have financial, technological and managerial capabilities should be attracted
  • Liberalization is a basic condition. But it does not mean that laissez-faire is desirable
    • Arrangement of large-scale infrastructure is not easy for steel producers
    • Available location for large-scale project is limited

→Coordination by government is necessary

the questionable licensing in the vietnamese steel industry
The questionable licensing in the Vietnamese steel industry
  • Licensed projects do not necessarily make progress. Now Viet Nam is a target of license hunting
    • The initial version of Tycoons plan
    • The case of Chen Shing Stainless
  • Licensing process should be improved with the help of industrial experts
    • Experts from VSA and other steel-related institutions should participate the licensing process
conclusion
Ⅳ. Conclusion

VDF Workshop, August 28, 2007

the new phase of iron and steel industry in viet nam
Old phase

From the mid-1990 to the mid-2000s

Market underdevelopment

Absence of modern players

Important role of governmental plan and investment by SOEs

Protection policies

New phase

From the mid-2000s

Expansion of market competition

Various type of modern players

Important role of competition and investment by private and foreign enterprises

Policy shift is needed for the government

The new phase of iron and steel industry in Viet Nam
new policy for industry promotion 1
New policy for industry promotion (1)
  • Promoting equal-footing among the all enterprises
    • Equitisation of VSC Group and other SOEs
  • Policy arrangements for the mini-mill production on the basis of EAF technology
    • Infrastructure for the scrap recovery and import
    • Environmental protection policy for scrap treatment and mini-mill production
    • International cooperation from the view of environmental protection and recycling
    • Institution of technical guideline for the mini-mill production
new policy for industry promotion 2
New policy for industry promotion (2)
  • Policy arrangements for the large-scale projects like the flat-mill and the integrated steelworks
    • Capacity building of the government for the improvement of licensing process
    • Strong commitment for the arrangement of infrastructure
  • Request of policy cooperation in EPA negotiation with Japan
    • Industry survey and compilation of statistics
    • Cooperation for the design of trade legislations, environmental regulations, technology standard and recycling system
  • Expansion of the VSA’s role in some areas
    • Industry survey and compilation of statistics
    • Design of institutional arrangements
    • Participation to licensing process
    • Participation to international negotiation
reference
Reference
  • Kawabata, Nozomu (2007) “Iron and Steel Industry in Viet Nam: A New Phase and Policy Shift,” VDF Discussion Paper No. 9, Vietnam Development Forum, August.
    • Japanese version (1st version)
      • http://www.ide.go.jp/Japanese/Publish/Report/2006_04_23.html
    • English version (2nd version)
      • http://www.econ.tohoku.ac.jp/~kawabata/research.htm#dis
    • Vietnamese version (Translated from English version)
      • http://www.econ.tohoku.ac.jp/~kawabata/research.htm#dis
  • 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).

VDF Workshop, August 28, 2007

thank you
Thank you !

VDF Workshop, August 28, 2007