Vietnamese Steel Demand Decreasing as Construction Halts
Hoa Phat Group, the largest steelmaker in Southeast Asia, suspended operation of four blast furnaces in Vietnam in autumn 2022. Other Vietnamese steelmakers using electric furnaces have also been forced to cut production sharply.
“Our impression is that things have finally hit bottom, but they are still in bad shape,” said one industry executive. “We are unlikely to see recovery at least until the middle of 2023.”
Operating rates at makers using electric furnaces in southern Vietnam started declining around September 2022. Many of these plants are believed to be working at less than 50% of capacity, and some have laid off employees.
The combined sales of Vietnam’s three largest steelmakers — Hoa Phat, Hoa Sen Group and Nam Kim Group — plunged 25% in the July-September quarter from a year earlier, according to local media, as both production and steel prices sank.
Since November, Hoa Phat has suspended the tapping of molten pig iron from two of the four operating furnaces at its flagship Dung Quat steel plant in the central province of Quang Ngai. The company has also suspended tapping at one blast furnace in northern Hai Duong province.
As a result, three of the maker’s seven blast furnaces are currently not producing steel. Blast furnaces are designed to run at full capacity around the clock. Pausing operations can damage them and bringing an idled furnace back on stream usually takes time.
Despite the huge costs of curtailing operation, Hoa Phat decided to “stop the bleeding,” according to a company official.
Consequently, the company’s crude steel production in November nose-dived 43% from a year earlier to some 380,000 tons. The output during the first 11 months of last year fell 6% on year to some 7 million tons due mainly to the sharp production cut over the past couple of months.
Hoa Phat suffered a net loss of 1,786 billion dong ($76 million) during the July-September period — the first such loss since the October-December quarter of 2008 in the wake of the Asian financial crisis.
The war in Ukraine resulted in a tight supply-demand balance in Vietnam’s steel market in the spring of 2022. At that time, domestic steelmakers struggled to meet demand even if they operated at full capacity.
But things have changed dramatically.
In the Communist Party-ruled country, General Secretary Nguyen Phu Trong has been spearheading a campaign to crack down on corruption, focusing on illegal deals in financial and capital markets linked to the real estate industry.
In early 2022, Trinh Van Quyet, chairman of property and leisure company FLC Group, was arrested on suspicion of manipulating the stock market. Shortly before the high-profile law-enforcement move, Do Anh Dung, chairman of real estate developer Tan Hoang Minh Group, was arrested on charges of fraudulent appropriation of property related to 10 trillion dong in bond floats at three group companies.
These anti-corruption actions triggered a downturn in the property market.
Things got ugly in October when Truong My Lan, founder and chairwoman of property developer Van Thinh Phat Group Holdings, was detained along with three other executives of the company. This spawned widespread anxiety about the financial health of real estate companies and banks. To make matters worse, the government began to slow the granting of permits for development projects, causing long delays in a wide range of condominium and infrastructure projects.
The real estate market in China, which consumes about 60% of global steel production, is also weakening. Amid a capacity glut in China, discounted Chinese steel products have been flooding Southeast Asian markets including Vietnam, delivering an additional blow to Vietnamese steelmakers.
Vietnam is the largest steel producer among the 10 members of the Association of Southeast Asian Nations. Sluggish demand at home puts a damper on the country’s overall economy.
Prices of steel products have tanked, as a result. Asking prices of hot-rolled steel coils, used widely in automobiles and electric appliances, were around $600 per ton in late December, down from around $950 in spring 2022.
On the other hand, the price of materials for steel production, such as coking coal for blast furnaces and steel scrap for electric furnaces, have not declined as much as steel prices. This is putting an additional strain on the earning performances of Vietnam’s steelmakers.
One piece of good news is China’s move to scrap its draconian COVID-19 restrictions. Steel prices in China are beginning to bounce back due to the removal of the distribution gridlock caused by Beijing’s zero-COVID policy and growing expectations of demand recovery.
In a report published in December, VNDirect Securities, a major Vietnamese brokerage, pointed to several “signals” for improvement in the steel industry, as many industry executives clamor for fiscal expansion to accelerate public works projects.
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