“Steel price may rise by VND600,000/tonne this year”

The devaluation of the Vietnamese dong against the US dollar by the State Bank of Vietnam has exerted impacts on several economic sectors, particularly import and export-related activities. Vietnam Business Forum reporter Luong Tuan interviewed Mr Pham Chi Cuong, Chairman of the Vietnam Steel Association (VSA), on the steel industry which is currently relying 70 percent on imported materials.

With a heavy reliance on global markets, how has the devaluation of Vietnamese dong against the US dollar affected operations of Vietnam steelmakers?

Indeed, so far, our steel industry has never enjoyed preferential exchange rates quoted by commercial banks and steelmakers will pay at higher rates. This adjustment by the State Bank of Vietnam has helped the steel industry to have clearer income/expense statements to a certain extent.

However, the Vietnamese steel industry is largely dependent on imported materials. At present, it has to import 40 percent of ingot and 70 percent of scrap steel. Apart from bank loans, many steelmakers still have to borrow USD on the free market where the USD/VND exchange rate is usually higher and much more volatile. Vietnam’s forex reserve is limited and bank loans are not always available, forcing steel producers to buy on the black market. Even when they can purchase dollars at banks, they must pay extra fees. This practice also results to higher input prices.

The exchange rate adjustment does not have much direct effect on the steel industry. So, why were steel prices raised by up to 10 percent following the dong devaluation?

The rise in steel prices is mainly a result of higher input costs on global markets, particularly ores and coals. Currently, prices of iron ores have soared to some US$190 per tonne, a substantial impact on costs. In 2010, steel companies in Vietnam suffered big losses because they were not allowed to raise selling prices on fears of escalating inflation. This year, we are forced to augment prices because input prices accelerated. Presently, prices of input materials are on the decline and we are keeping track of this movement.

Global material prices now tend to fall, but domestic prices tend to rise on power price hikes. Is this an artificial fever of short supply?

In my opinion, domestic steel price trends match world movements and there is no artificial fever. In January 2011, domestic steel output totalled 462,571 tonnes, down 0.85 percent from December 2010 but up 14.82 percent from the same month in 2010. Steel sales reached 469,189 tonnes in the month, up 7.2 percent from the previous month and 34.99 percent from a year earlier.

At the end of January 2010, steel company inventories reached 317,551 tonnes and the volume of ingots for the next two months was over 500,000 tonnes. With such reserves, the supply is guaranteed.

In March, the electricity industry of Vietnam increased selling prices by 15.28 percent. The steel industry is a big power consumer. Will this move continue to drive up steel prices?

Although the steel industry is using electricity for production activities, I think the price hike will not have a significant effect on steel prices because the new power price adds only 0.5 – 0.6 percent to production costs (a tonne of steel requires about 600 kWh of electricity). In my opinion, the higher electricity price is also a good opportunity for the steel industry to improve its technology to keep up with the level of regional countries and the world.

At the present time, Vietnam has 32 steel rolling mills but only four of them use modern technologies, 10 utilise medium technologies and remaining 18 plants run on very outdated technologies and have individual output of as small as 10,000-20,000 tonnes a year. Different technologies require different energy consumption. While four modern mills need only 30 litres of oil to produce a tonne of steel, outdated ones require 60-70 litres. Similarly, a modern smelter consumes 350 – 400 kWh of electricity to turn out a tonne, but an outdated one needs up to 600 kWh.

Could you predict steel prices in the coming time?

In an interview with the Vietnam Business Forum in late 2010, I said that steel prices in 2011 will not be as volatile as in 2010. But after the State Bank of Vietnam adjusted the exchange rate, I think, the market will have to respond. Steel prices in Vietnam may climb 10 percent, an equivalent of VND500,000 – 600,000 per tonne. That may be the highest growth this year.

Tags: Vietnam steel industry, Vietnam steel market, Vietnam steel prices