Local steel industry faces pressure to restructure
12-11-2012The consumption of construction steel decreased 10 per cent year-on-year in the first eight months of the year to a total of 2.9 million tonnes, the largest decline in the past several years, according to the Viet Nam Steel Association, which blamed the downturn on the frozen real estate market.
Average monthly consumption reached just 360,000 tonnes, while it needed to be 420,000 tonnes for steelmakers to maintain stable production, the association said.
Yet the demand for construction steel has been predicted to continue low throughout the rest of the year.
Production capacity within the industry was now twice the level of domestic demand. Steel prices have therefore dropped 2-4 per cent and many steel mills were now operating at only 30-45 per cent of capacity. Gross profit margins for the industry were therefore forecast to fall to 3-4 per cent, even if 40 per cent capacity can be sustained.
With Chinese steel entering the market at about $560-600 per tonne less than the price of domestic steel, imports from China have also become a substantial threat. China's cost advantage has also allowed it to boost imports to other countries in the region, keeping prices low.
As an industry requiring large amounts of capital, steelmakers often have a high leverage coefficient. Among five listed steel companies – Hoa Phat (HPG), Pomina (POM), Thai Nguyen Iron and Steel (TIS), Viet Nam-Italy (VIS) and Dana-Y Steel (DNY) – that has climbed to 1.9. Therefore, financial costs have become a burden that also affects the business results of these enterprises, even as borrowing interest rates have declined.
The steel industry has a large surplus inventory, much of it generated by smaller firms. The industry needs to restructure to eliminate inefficient companies and ensure a market share for the five listed companies of 60-80 per cent. Hoa Phat and Pomina in particular have advantages in scale and technology over other players in the industry, allowing them to reduce costs and save energy.
HPG shares can currently be acquired at as low as VND26,000 per share, making the stock appropriate for a long-term buy strategy. Moreover, the company's industry-leading position and plans to expand production capacity by 77 per cent next year will ensure stable growth during the upcoming restructuring of the sector. The company's profit during 2012-16 was also expected to grow by 20 per cent per year.
