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  • Good morning everyone. I am an industry researcher in Japan. I have been studying the Vietnamese steel industry for seven years. Recently my Japanese book titled the “Structure and dynamism of the iron and steel industry in east Asia” was published. There is one chapter about Vietnam. I think I could give a correct explanation of the Vietnamese steel industry to reader in Japan. But the situation changes day by day. So I should revise my chapter based on the latest information. Today I make a presentation on the promotion policy for the Vietnamese steel industry. I will write a research paper in English based on this presentation and your comments to it.
  • Vd Fsteelfinal

    1. 1. Improving the Promotion Policy for the Vietnamese Iron and Steel Industry VDF Seminar, June 16, 2006 Nozomu Kawabata Tohoku University, Japan
    2. 2. Structure of this presentation <ul><li>1 Steel industry in the process of industrialization </li></ul><ul><li>2 Overview of iron and steel industry in Vietnam </li></ul><ul><li>3 Long Sector </li></ul><ul><li>4 Flat Sector </li></ul><ul><ul><li>4-1 Rolling and galvanizing sector </li></ul></ul><ul><ul><li>4-2 Future expansion programs in flat sector </li></ul></ul><ul><li>5 Conclusion </li></ul>
    3. 3. 1 Steel industry in the process of industrialization
    4. 4. Nature of steel industry in process of industrialization <ul><li>Basic features </li></ul><ul><ul><li>Capital intensive </li></ul></ul><ul><ul><li>Low degree of fragmentation </li></ul></ul><ul><li>Features in promoting process </li></ul><ul><ul><li>High risk, small number, large scale investment </li></ul></ul><ul><ul><li>Introduction of various technologies all together </li></ul></ul><ul><li>Realistic position </li></ul><ul><ul><li>One import substitution industry under the export-oriented industrialization of national economy </li></ul></ul><ul><ul><li>Backward linkage effect is critical </li></ul></ul>
    5. 5. 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 Nationalistic feeling to basic material industries Necessity of technology and capital from foreign sources
    6. 6. Steel strategies have been changed in advanced ASEAN countries <ul><li>Until the midst of 1980s </li></ul><ul><ul><li>State-led promotion </li></ul></ul><ul><ul><li>Center state of SOE and local firm </li></ul></ul><ul><ul><li>Creation of integrated steel works </li></ul></ul><ul><ul><li>High level protection </li></ul></ul><ul><ul><li>Center industry for import substituting industrialization </li></ul></ul><ul><li>From the late 1980s </li></ul><ul><ul><li>FDI and private sector-led promotion </li></ul></ul><ul><ul><li>Major role of FDI and local business group </li></ul></ul><ul><ul><li>Incremental building from downstream to upstream processes </li></ul></ul><ul><ul><li>Reasonable level of protection </li></ul></ul><ul><ul><li>Backseat player for export-oriented industrialization </li></ul></ul>
    7. 7. Policy Change produced good results <ul><li>Until the midst of 1980s </li></ul><ul><ul><li>Construction failure or financial/technological troubles </li></ul></ul><ul><ul><ul><li>NASCO (Philippines) </li></ul></ul></ul><ul><ul><ul><li>Krakatau Steel (Indonesia) </li></ul></ul></ul><ul><ul><ul><li>Perwaja Steel (Malaysia) </li></ul></ul></ul><ul><li>From the late 1980s </li></ul><ul><ul><li>Import substitution of high grade steel sheets </li></ul></ul><ul><ul><ul><li>SUS, TCRSS (Thailand) </li></ul></ul></ul><ul><ul><li>Import substitution of low -medium grade steel sheets </li></ul></ul><ul><ul><ul><li>SSI, G-Steel (Thailand) </li></ul></ul></ul><ul><ul><ul><li>Mega Steel (Malaysia) </li></ul></ul></ul>
    8. 8. Capacity for policy change <ul><li>Under economic integration, developing countries should accelerated its industrialization process </li></ul><ul><li>Accelerated development necessitates the speedy policy change </li></ul><ul><ul><li>State-led investment ->Promotion of FDI and private investment </li></ul></ul><ul><ul><li>Direct control ->Indirect support to reinforce the market function </li></ul></ul><ul><li>Promoting policy of the Vietnamese steel industry is one of such a case </li></ul>
    9. 9. 2 Overview of iron and steel industry in Vietnam
    10. 10. Production Structure of the Vietnamese iron and steel industry (2004) Blast Furnace Pro. 187 Import of Scrap 163 EAF-Billet CC, Ingot casting factories Pro.658 ( full operation ) Long rolling mills Pro. 2366 ( Cap. 4600 overcapacity ) Market of long products About 2600 Import of billet 2174 Import of long products 257 Import of hot rolled coil, sheet, plate and tube products 1773 Import of cold rolled and surface treated coil and sheet products 1112 Pipe fitter Pro. 236 Galvanizing and color coating factories Pro. 176 Unit: 1000 ton Source: Author edited from data of SEAISI and VSA. Market of flat and tube products About 2900 Domestic Supply of Scrap 718
    11. 11. Major problems <ul><li>Large scale production and distribution systems are not established </li></ul><ul><li>Long sector </li></ul><ul><ul><li>Over capacity of rolling mills </li></ul></ul><ul><ul><li>Shortage of steelmaking capacity ->Change to scrap shortage? </li></ul></ul><ul><li>Flat sector </li></ul><ul><ul><li>Shortage of rolling capacity </li></ul></ul><ul><ul><li>Over capacity of galvanizing and pipe fitting factories </li></ul></ul><ul><ul><li>Lack of production capacity of high grade steel </li></ul></ul><ul><li>Foreign trade system </li></ul><ul><ul><li>General direction to liberalization and impromptu protection </li></ul></ul><ul><ul><li>Underdeveloped arrangements </li></ul></ul>
    12. 12. 3 Long Sector Phu My Steelworks, SSC Taken by the author, May 2005
    13. 13. The market structure is changing <ul><li>1990s </li></ul><ul><ul><li>VSC: Major player for modernization </li></ul></ul><ul><ul><ul><li>Subsidiaries (TISCO, SSC, Danang Steel Cevimetal) </li></ul></ul></ul><ul><ul><ul><li>Foreign affiliated JVs (Vina Kyoei, VSC-POSCO, Vinausteel, etc) </li></ul></ul></ul><ul><ul><li>Small companies and households </li></ul></ul><ul><ul><ul><li>Opportunistic entry and exit </li></ul></ul></ul><ul><ul><ul><li>Outdated technology </li></ul></ul></ul><ul><li>Now </li></ul><ul><ul><li>VSC Group </li></ul></ul><ul><ul><ul><li>Subsidiaries </li></ul></ul></ul><ul><ul><ul><li>Foreign affiliated JVs </li></ul></ul></ul><ul><ul><li>Private and 100% FDI companies (Hoa Phat, Pomina, SSE, etc) </li></ul></ul><ul><ul><ul><li>Standard technology </li></ul></ul></ul><ul><ul><ul><li>Expansion from rolling to steelmaking </li></ul></ul></ul>
    14. 14. Significance of SSC’s Phu My Steelworks <ul><li>Phu My Steelworks is the most modernized EAF-rolling mill in Vietnam </li></ul><ul><ul><li>EAF-billet CC: 500,000 tons </li></ul></ul><ul><ul><li>Long rolling: 300,000 tons </li></ul></ul><ul><li>SSC/VSC should establish a competitive, flagship, and model factory. </li></ul><ul><ul><li>It is the test case for VSC’s future </li></ul></ul>
    15. 15. Change to “Equal Footing” <ul><li>VSC’s investment and public support for them were necessary at initial stage of the industry </li></ul><ul><ul><li>Other companies were not viable </li></ul></ul><ul><li>Now long sector entered the next stage </li></ul><ul><ul><li>Emergence of viable private companies and 100% FDI companies </li></ul></ul><ul><ul><ul><li>Investment from rolling to steelmaking </li></ul></ul></ul><ul><li>Government should give all companies equal footing </li></ul>
    16. 16. Old style policies lead troubles <ul><li>VSC’s investment without equal footing has a problem </li></ul><ul><ul><li>Exacerbating overcapacity </li></ul></ul><ul><ul><li>Crowding out the investment of private companies </li></ul></ul><ul><ul><li>Distortion of market selection </li></ul></ul>
    17. 17. Basic direction of new policy <ul><li>Reinforcing the function of market economy </li></ul><ul><ul><li>Construction of infrastructure </li></ul></ul><ul><ul><li>Arrangement of rules and procedures in markets </li></ul></ul><ul><ul><li>Amendment of market failures </li></ul></ul>
    18. 18. Example: Scrap import problem(1) <ul><ul><li>Situation in 2004 </li></ul></ul><ul><ul><li>Possible situation in near future </li></ul></ul>EAF-Billet CC, Ingot casting factories 658 Long rolling mills 2366 Import of billet 2174 Pig Iron 187 Import of Scrap 163 Scrap 718 EAF-Billet CC, Ingot casting factories About 2500 Long rolling mills Import of billet Pig Iron 200 Import of Scrap About 2000 Scrap 720
    19. 19. Example: Scrap import problem(2) <ul><ul><li>In keeping with construction of EAF, fatal point will change </li></ul></ul><ul><ul><ul><li>Billet import -> scrap import </li></ul></ul></ul><ul><ul><li>Urgent challenge for government </li></ul></ul><ul><ul><ul><li>Support to construction of port facility </li></ul></ul></ul><ul><ul><ul><li>Establishment of import procedures </li></ul></ul></ul><ul><ul><ul><li>Adjustment with environmental regulation </li></ul></ul></ul>
    20. 20. Example: Scrap import problem(3) <ul><li>Regulation based on Law on Environmental Protection </li></ul><ul><ul><li>Limiting scrap importers only to steel producers equipped with scrap yard and scrap processing facilities </li></ul></ul><ul><ul><li>Exclusion of trading companies </li></ul></ul><ul><li>Adjustment of regulation method </li></ul><ul><ul><li>Steel scrap is neither harmful substance nor control subject of Basel Convention </li></ul></ul><ul><ul><li>The problem is interfusion of harmful materials </li></ul></ul><ul><ul><li>Normal method of regulation : Checking whether the imported scrap contains harmful waste materials </li></ul></ul><ul><ul><li>China case should be referenced </li></ul></ul>
    21. 21. Proper regulation to reinforce market function <ul><li>Proper regulations of quality, safety and environment will reinforce market function </li></ul><ul><ul><li>Reinforcing the Construction Law </li></ul></ul><ul><ul><li>Reinforcing the industrial standard </li></ul></ul><ul><ul><li>-> Exclusion of under qualified products (re-rolled scrap, narrow strip, fake brand etc) </li></ul></ul><ul><ul><li>Standard of safety and environment </li></ul></ul><ul><ul><li> -> Exclusion of inferior machines (Pollutive furnaces, induction furnace etc) </li></ul></ul>
    22. 22. Two types of trade policy <ul><li>Protection of infant industry and temporal barrier to the influx of dumped products should be divided </li></ul><ul><li>Heavy duty protection of long products and billet are not normal in many countries </li></ul><ul><li>Countermeasure to unfair-trade should be arranged in law on international trade </li></ul><ul><ul><li>Anti dumping </li></ul></ul><ul><ul><li>Safe guard </li></ul></ul><ul><ul><li>Countervailing duty </li></ul></ul>
    23. 23. 4 Flat sector
    24. 24. 4-1 Rolling and galvanizing sector PFS Taken by the author, May 2005
    25. 25. Significance of Phu My Flat Steel (PFS) <ul><li>PFS is the first cold rolling mill in Vietnam </li></ul><ul><li>PFS/VSC must make the new factory competitive </li></ul><ul><ul><li>It is the test case for VSC’s future with the case of SSC Phu My Steelworks </li></ul></ul><ul><ul><li>If VSC fails to operate these new factories, foreign inventors will suspect the VSC’s capability as a business partner. </li></ul></ul>
    26. 26. Two-tiered market structure of cold rolled and surface treated sheet products Cold Rolling Mill (PFS) Pro. 180-240 (Cap. 400) Import of high grade cold rolled sheets (Deep drawing sheet, electrical sheet, IF steel, loam plate,etc) Import of normal grade cold rolled sheets Galvanizing and color coating factories (BlueScope, SSSC etc) Import of high grade surface treated sheets (Galvannealed, color-coated, tinplated) Import of normal grade galvanized and color-coated sheets Customer II (Mainly construction industry, partly domestic manufactures) Customer I (FDI manufacturers like car, motorbike, export-oriented appliance producers) Import of hot coils Competition No competition Competition
    27. 27. Irrationality of current import duty on sheet products <ul><li>Current import duty </li></ul><ul><ul><li>Cold rolled sheet product: 7%. VSA hopes to rise it to 10% </li></ul></ul><ul><ul><li>Surface treated sheet : 0-10% </li></ul></ul><ul><li>Taxation on high grade sheets does not improve the status of PFS and galvanizing companies </li></ul><ul><ul><li>No competition between sheets for Customer I and sheets for Customer II </li></ul></ul><ul><li>Import duty on high grade cold rolled sheets and surface treated sheets have a damaging effect on Vietnamese economy </li></ul><ul><ul><li>Damage on competitiveness of FDI manufacturers </li></ul></ul>
    28. 28. Level and style of protection should be refined <ul><li>Decent and temporal taxation on conventional sheets is understandable </li></ul><ul><ul><li>Improving the dynamic economies of scale at new domestic factories </li></ul></ul><ul><li>Countermeasures to dumped products based on trade law will be justified </li></ul>
    29. 29. Differentiation between high grade steel and conventional steel <ul><li>It is very important to distinguish high grade steel for specific manufacturers from the others. </li></ul><ul><ul><li>A problem: HS code system is not always relevant to the classification of steel products by quality </li></ul></ul>Same HS code Galvannealed sheet for automotive Galvanized sheet for construction
    30. 30. New option: “User Specific Duty Free Scheme (USDFS)”(1) <ul><li>When specific industries import the specific parts and materials classified by HS code, such imports are duty free. </li></ul>For motorbike For construction 7209.16 7209.17 7209. ・・ 7209.15 72 ・・・・ (example) Conventional one High grade one for motorbike Subject to “USDFS” Duty Free Taxation
    31. 31. USDFS as a proven scheme in several countries <ul><li>USDFS will strike a balance between the promotion of competitiveness of FDI manufacturers and the protection of steel sheet producers </li></ul><ul><li>USDFS and similar policies are/will be installed by Mexican, Malaysian, Indonesian and Thai governments </li></ul>
    32. 32. USDFS and current scheme of preferential treatment <ul><li>Apart from steel industry, USDFS can be an alternative to current preferential scheme. </li></ul><ul><ul><li>WTO accession may lead to abolition or contraction of current preferential scheme to EPE and FDI </li></ul></ul><ul><ul><li>USDFS may be alternative to strike a balance between promotion of industrialization and economic integration </li></ul></ul><ul><ul><li>USDFS does not violate WTO rule </li></ul></ul><ul><li>Detailed study is necessary </li></ul>
    33. 33. 4-2 Future expansion programs in flat sector Blast furnace and basic oxygen furnace of Nippon Steel Kimitsu Steelworks. From Company Pamphlet
    34. 34. Possible projects in future <ul><li>Large scale galvanizing factory for high grade sheets </li></ul><ul><li>Large scale cold rolling mill for high grade sheets </li></ul><ul><li>Compact hot strip mill next to PFS </li></ul><ul><li>Large scale hot strip mill as a first stage of integrated steelworks (ISW) in central area </li></ul><ul><li>ISW in central area </li></ul>
    35. 35. Necessity of FDI in flat sector <ul><li>Based on the experience of PFS and SSC, VSC cannot work on a big project in flat sector by itself </li></ul><ul><ul><li>Finance and technology problem </li></ul></ul><ul><li>Unlike the advanced ASEAN countries, there is no private big business group in Vietnam </li></ul><ul><li>FDI attraction is necessary </li></ul>
    36. 36. Conditions for FDI attraction(1) <ul><li>Vietnam is one candidate of investment for foreign steel enterprises </li></ul><ul><li>Domestic market is still small. But it will be expanded by industrialization </li></ul><ul><ul><li>Timing of construction is an important issue </li></ul></ul><ul><ul><li>JICA team proposed the start up of ISW in 2017 in MPI-JICA Project </li></ul></ul>
    37. 37. Conditions for FDI attraction(2) <ul><li>Consistency among market size, product mix, technology, feature of FDI companies </li></ul>Market size of specific segment Ex. 1 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
    38. 38. Conditions for FDI attraction(3) <ul><li>Ex. Production of automotive steel sheet </li></ul><ul><ul><li>Vietnam has to wait some years until market expansion </li></ul></ul><ul><ul><li>State of the art technology for integrated production is necessary </li></ul></ul><ul><ul><li>Candidate list of FDI producers is short one </li></ul></ul><ul><ul><ul><li>OK: Integrated producers in advanced countries (including South Korea) </li></ul></ul></ul><ul><ul><ul><li>Questionable: Integrated producers in Taiwan and BRICs </li></ul></ul></ul><ul><ul><ul><li>Impossible: Producers with no experience in automotive steel </li></ul></ul></ul>
    39. 39. International rivalry in FDI attraction <ul><li>China and Thailand are strong rivals </li></ul><ul><li>But they are not necessarily attractive to foreign investors in case of steel </li></ul><ul><ul><li>Giving priority to other types of industry (Thailand) </li></ul></ul><ul><ul><li>Ban of majority ownership of foreign capital (China) </li></ul></ul>
    40. 40. Role of government in attracting FDI (1) <ul><li>Giving a welcome to majority ownership of FDI produces </li></ul><ul><ul><li>For FDI producer it is necessary to be able to make important decisions without troubles </li></ul></ul><ul><ul><li>Project integrity is important </li></ul></ul><ul><li>Reliability is critical for joint ventures </li></ul><ul><ul><li>VSC should prove its managerial capacity as a reliable partner in Vietnam </li></ul></ul>
    41. 41. Role of government in attracting FDI(2) <ul><li>In case of ISW, strong commitment to provision of infrastructure is necessary </li></ul><ul><ul><li>FDI producers cannot build up large scale infrastructure by themselves </li></ul></ul><ul><ul><li>Land clearance and compensation issue. 375-425ha is necessary </li></ul></ul><ul><ul><li>Power supply. ISW has to buy 200MW </li></ul></ul><ul><ul><li>Water supply. 170,000 m3/day </li></ul></ul><ul><ul><li>Port facility </li></ul></ul><ul><ul><li>Other transportation facility </li></ul></ul>
    42. 42. Unbundling the development of Thach Khe mine from building of ISW <ul><li>If Vietnamese government bans majority ownership of FDI on Thach Khe mine, ISW and Thach Khe mine should not be bundled </li></ul><ul><li>ISW company should have a right to select the source of materials </li></ul><ul><ul><li>Thach Khe ore has a problem with quality </li></ul></ul><ul><li>Thach Khe mine company should make efforts to enrich its ore and offer it to ISW on business base. </li></ul><ul><li>Banning the export of iron ore is meaningless. </li></ul>ISW FDI majority JV or 100% Thach Khe mine Vietnamese company or FDI minority JV Foreign iron ore mine Free trade
    43. 43. 5 Conclusion Hot strip mill and continuous descaling and cold rolling mill of Nippon Steel Kimitsu Steelworks From Company Pamphlet
    44. 44. The time of policy change in Vietnamese steel industry <ul><li>1st stage </li></ul><ul><ul><li>Market underdevelopment, absence of modern players </li></ul></ul><ul><ul><li>Central role of governmental plan and SOEs (VSC affiliated companies) </li></ul></ul><ul><ul><li>Construction of model factories </li></ul></ul><ul><ul><ul><li>Beginning: Drafting of Master Plan </li></ul></ul></ul><ul><ul><ul><li>End: Building completion of PFS and Phu My Steelworks </li></ul></ul></ul><ul><li>2nd stage </li></ul><ul><ul><li>Effective market competition </li></ul></ul><ul><ul><li>Global pressure to liberalization </li></ul></ul><ul><ul><li>Growing importance of private sector and FDI sector </li></ul></ul><ul><ul><li>Changing role of government </li></ul></ul><ul><ul><ul><li>Direct production to promotion of FDI and private investment </li></ul></ul></ul><ul><ul><ul><li>Amendment of market failure at some point </li></ul></ul></ul><ul><ul><ul><li>Commitment to FDI attraction </li></ul></ul></ul><ul><ul><ul><li>Commitment to provision of infrastructure </li></ul></ul></ul>
    45. 45. Reference <ul><li>Kawabata, Nozomu(2005), Structure and Dynamism of the Iron and Steel Industry in East Asia , Kyoto Minerva Publishing (Japanese). </li></ul><ul><li>Kawabata, Nozomu(2003), Ngành s ắ t thép Thái Lan sau kh ủ ng kho ả ng ti ề n t ệ Châu Á - Xây d ự ng l ạ i nhà máy • Phân ngành trong doanh nghi ệ p• Các v ấ n đ ề thương m ạ i -, Tài li ệ u đ ồ ng nghiên c ứ u, th ả o lu ậ n D ự án NEU-JICA. http://www.econ.tohoku.ac.jp/~kawabata/paper/bandichsatthepftl.pdf </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
    46. 46. Thank you for your kind attention!