11

Improving the Promotion Improving the Promotion Policy for the Policy for the

Vietnamese Iron and Vietnamese Iron and Steel IndustrySteel Industry

VDF Seminar, June 16, 2006VDF Seminar, June 16, 2006

Nozomu KawabataNozomu Kawabata

Tohoku University, JapanTohoku University, Japan

2

Structure of this presentationStructure of this presentation

►1 Steel industry in the process of 1 Steel industry in the process of industrializationindustrialization

►2 Overview of iron and steel industry 2 Overview of iron and steel industry in Vietnamin Vietnam

►3 Long Sector3 Long Sector►4 Flat Sector4 Flat Sector

4-1 Rolling and galvanizing sector4-1 Rolling and galvanizing sector 4-2 4-2 Future expansion programs in flat sectorFuture expansion programs in flat sector

►5 Conclusion5 Conclusion

3

1 Steel industry in the process 1 Steel industry in the process of industrializationof industrialization

4

Nature of steel industry in Nature of steel industry in process of industrializationprocess of industrialization

► Basic featuresBasic features Capital intensiveCapital intensive Low degree of fragmentation Low degree of fragmentation

► Features in promoting processFeatures in promoting process High risk, small number, large scale investmentHigh risk, small number, large scale investment Introduction of various technologies all togetherIntroduction of various technologies all together

► Realistic positionRealistic position One import substitution industry under the One import substitution industry under the

export-oriented industrialization of national export-oriented industrialization of national economyeconomy

Backward linkage effect is criticalBackward linkage effect is critical

5

Major contradictions of steel Major contradictions of steel industry in developing countriesindustry 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

Steel strategies have been changed in Steel strategies have been changed in advanced ASEAN countriesadvanced ASEAN countries

► Until the midst of Until the midst of 1980s1980s State-led promotionState-led promotion Center state of SOE Center state of SOE

and local firmand local firm Creation of Creation of

integrated steel integrated steel worksworks

High level High level protectionprotection

Center industry for Center industry for import substituting import substituting industrializationindustrialization

► From the late From the late 1980s1980s FDI and private FDI and private

sector-led promotionsector-led promotion Major role of FDI and Major role of FDI and

local business grouplocal business group Incremental building Incremental building

from downstream to from downstream to upstream processesupstream processes

Reasonable level of Reasonable level of protectionprotection

Backseat player for Backseat player for export-oriented export-oriented industrializationindustrialization

7

Policy Change produced good Policy Change produced good resultsresults

► Until the midst of 198Until the midst of 1980s0s Construction failure or Construction failure or

financial/technological financial/technological troublestroubles

► NASCO (Philippines)NASCO (Philippines)► Krakatau Steel (IndonesKrakatau Steel (Indones

ia)ia)► Perwaja Steel (MalaysiPerwaja Steel (Malaysi

a)a)

► From the late 1980sFrom the late 1980s Import substitution Import substitution

of high grade steel of high grade steel sheets sheets

► SUS, TCRSS SUS, TCRSS (Thailand)(Thailand)

Import substitution Import substitution of low -medium of low -medium grade steel sheetsgrade steel sheets

► SSI, G-Steel SSI, G-Steel (Thailand)(Thailand)

► Mega Steel (Malaysia)Mega Steel (Malaysia)

8

Capacity for policy changeCapacity for policy change

► Under economic integration, developing Under economic integration, developing countries should accelerated its countries should accelerated its industrialization process industrialization process

► Accelerated development necessitates the Accelerated development necessitates the speedy policy changespeedy policy change State-led investment State-led investment →Promotion of FDI and private →Promotion of FDI and private

investment investment Direct control →Indirect support to reinforce the Direct control →Indirect support to reinforce the

market functionmarket function

► Promoting policy of the Vietnamese steel Promoting policy of the Vietnamese steel industry is one of such a caseindustry is one of such a case

9

2 Overview of iron and steel 2 Overview of iron and steel industry in Vietnamindustry in Vietnam

10

Production Structure of the Vietnamese iron and steel Production Structure of the Vietnamese iron and steel industry (2004)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

Major problemsMajor problems

► Large scale production and distribution systems are Large scale production and distribution systems are not establishednot established

► Long sectorLong sector Over capacity of rolling millsOver capacity of rolling mills Shortage of steelmaking capacity Shortage of steelmaking capacity →Change to scrap →Change to scrap

shortage?shortage?► Flat sectorFlat sector

Shortage of rolling capacityShortage of rolling capacity Over capacity of galvanizing and pipe fitting factoriesOver capacity of galvanizing and pipe fitting factories Lack of production capacity of high grade steel Lack of production capacity of high grade steel

► Foreign trade systemForeign trade system General direction to liberalization and impromptu protectionGeneral direction to liberalization and impromptu protection Underdeveloped arrangementsUnderdeveloped arrangements

12

3 Long Sector3 Long Sector

Phu My Steelworks, SSC

Taken by the author, May 2005

13

The market structure is The market structure is changingchanging

► 1990s1990s VSC: Major player for VSC: Major player for

modernization modernization ► Subsidiaries (TISCO, Subsidiaries (TISCO,

SSC, Danang Steel SSC, Danang Steel Cevimetal)Cevimetal)

► Foreign affiliated JVs Foreign affiliated JVs (Vina Kyoei, VSC-(Vina Kyoei, VSC-POSCO, Vinausteel, etc)POSCO, Vinausteel, etc)

Small companies and Small companies and householdshouseholds

► Opportunistic entry and Opportunistic entry and exitexit

► Outdated technologyOutdated technology

► NowNow VSC GroupVSC Group

► SubsidiariesSubsidiaries► Foreign affiliated JVsForeign affiliated JVs

Private and 100% FDI compPrivate and 100% FDI companies (Hoa Phat, Pomina, Sanies (Hoa Phat, Pomina, SSE, etc)SE, etc)

► Standard technologyStandard technology► Expansion from rolling to sExpansion from rolling to s

teelmakingteelmaking

14

Significance of SSC’s Phu My SteelwSignificance of SSC’s Phu My Steelworksorks

►Phu My Steelworks is the most Phu My Steelworks is the most modernized EAF-rolling mill in modernized EAF-rolling mill in VietnamVietnam EAF-billet CC: 500,000 tonsEAF-billet CC: 500,000 tons Long rolling: 300,000 tonsLong rolling: 300,000 tons

►SSC/VSC should establish a SSC/VSC should establish a competitive, flagship, and model competitive, flagship, and model factory.factory. It is the test case for VSC’s futureIt is the test case for VSC’s future

15

Change to “Equal Footing” Change to “Equal Footing”

► VSC’s investment and public support for VSC’s investment and public support for them were necessary at initial stage of the them were necessary at initial stage of the industryindustry Other companies were not viableOther companies were not viable

► Now long sector entered the next stageNow long sector entered the next stage Emergence of viable private companies and Emergence of viable private companies and

100% FDI companies100% FDI companies► Investment from rolling to steelmakingInvestment from rolling to steelmaking

► Government should give all companies Government should give all companies equal footingequal footing

16

Old style policies lead Old style policies lead troublestroubles

►VSC’s investment without equal VSC’s investment without equal footing has a problemfooting has a problem Exacerbating overcapacityExacerbating overcapacity Crowding out the investment of private Crowding out the investment of private

companiescompanies Distortion of market selectionDistortion of market selection

17

Basic direction of new policyBasic direction of new policy

►Reinforcing the function of market Reinforcing the function of market economyeconomy Construction of infrastructureConstruction of infrastructure Arrangement of rules and procedures in Arrangement of rules and procedures in

marketsmarkets Amendment of market failuresAmendment of market failures

18

Example: Scrap import Example: Scrap import problem(1)problem(1)

Situation Situation in 2004in 2004

Possible Possible situation situation in near in near futurefuture

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

Example: Scrap import Example: Scrap import problem(2)problem(2)

In keeping with construction of EAF, fatal In keeping with construction of EAF, fatal point will changepoint will change

►Billet import → scrap importBillet import → scrap import

Urgent challenge for governmentUrgent challenge for government►Support to construction of port facilitySupport to construction of port facility►Establishment of import proceduresEstablishment of import procedures►Adjustment with environmental regulationAdjustment with environmental regulation

20

Example: Scrap import Example: Scrap import problem(3)problem(3)

► Regulation based on Law on Environmental Regulation based on Law on Environmental ProtectionProtection Limiting scrap importers only to steel producers Limiting scrap importers only to steel producers

equipped with scrap yard and scrap processing equipped with scrap yard and scrap processing facilitiesfacilities

Exclusion of trading companiesExclusion of trading companies► Adjustment of regulation methodAdjustment of regulation method

Steel scrap is neither harmful substance nor control Steel scrap is neither harmful substance nor control subject of Basel Conventionsubject of Basel Convention

The problem is interfusion of harmful materialsThe problem is interfusion of harmful materials Normal method of regulation : Checking whether the Normal method of regulation : Checking whether the

imported scrap contains harmful waste materialsimported scrap contains harmful waste materials China case should be referencedChina case should be referenced

21

Proper regulation to reinforce Proper regulation to reinforce market functionmarket function

►Proper regulations of quality, safety and enviProper regulations of quality, safety and environment will reinforce market functionronment will reinforce market function Reinforcing the Construction LawReinforcing the Construction Law Reinforcing the industrial standardReinforcing the industrial standard → →Exclusion of under qualified products (re-rolled Exclusion of under qualified products (re-rolled

scrap, narrow strip, fake brand etc)scrap, narrow strip, fake brand etc) Standard of safety and environmentStandard of safety and environment　→　→ Exclusion of inferior machines (Pollutive furnaExclusion of inferior machines (Pollutive furna

ces, induction furnace etc)ces, induction furnace etc)

22

Two types of trade policyTwo types of trade policy

► Protection of infant industry and temporal Protection of infant industry and temporal barrier to the influx of dumped products barrier to the influx of dumped products should be dividedshould be divided

► Heavy duty protection of long products and Heavy duty protection of long products and billet are not normal in many countriesbillet are not normal in many countries

► Countermeasure to unfair-trade should be Countermeasure to unfair-trade should be arranged in law on international tradearranged in law on international trade Anti dumpingAnti dumping Safe guardSafe guard Countervailing dutyCountervailing duty

23

4 Flat sector4 Flat sector

24

4-1 Rolling and galvanizing 4-1 Rolling and galvanizing sectorsector

PFS

Taken by the author, May 2005

25

Significance of Phu My Flat Steel Significance of Phu My Flat Steel (PFS)(PFS)

►PFS is the first cold rolling mill in PFS is the first cold rolling mill in VietnamVietnam

►PFS/VSC must make the new factory PFS/VSC must make the new factory competitivecompetitive It is the test case for VSC’s future with the It is the test case for VSC’s future with the

case of SSC Phu My Steelworkscase of SSC Phu My Steelworks If VSC fails to operate these new factories, If VSC fails to operate these new factories,

foreign inventors will suspect the VSC’s foreign inventors will suspect the VSC’s capability as a business partner. capability as a business partner.

26

Two-tiered market structure Two-tiered market structure of cold rolled and surface of cold rolled and surface treated sheet productstreated 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

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Irrationality of current import Irrationality of current import duty on sheet productsduty on sheet products

► Current import duty Current import duty Cold rolled sheet product: 7%. VSA hopes to rise it Cold rolled sheet product: 7%. VSA hopes to rise it

to 10%to 10% Surface treated sheet : 0-10%Surface treated sheet : 0-10%

► Taxation on high grade sheets does not Taxation on high grade sheets does not improve the status of PFS and galvanizing improve the status of PFS and galvanizing companiescompanies No competition between sheets for Customer I and No competition between sheets for Customer I and

sheets for Customer IIsheets for Customer II► Import duty on high grade cold rolled sheets Import duty on high grade cold rolled sheets

and surface treated sheets have a damaging and surface treated sheets have a damaging effect on Vietnamese economyeffect on Vietnamese economy Damage on competitiveness of FDI manufacturersDamage on competitiveness of FDI manufacturers

28

Level and style of protection Level and style of protection should be refinedshould be refined

►Decent and temporal taxation on Decent and temporal taxation on conventional sheets is understandableconventional sheets is understandable Improving the dynamic economies of Improving the dynamic economies of

scale at new domestic factoriesscale at new domestic factories

►Countermeasures to dumped products Countermeasures to dumped products based on trade law will be justifiedbased on trade law will be justified

29

Differentiation between high Differentiation between high grade steel and conventional grade steel and conventional

steelsteel► It is very important to distinguish high It is very important to distinguish high

grade steel for specific manufacturers grade steel for specific manufacturers from the others.from the others. A problem: HS code system is not always A problem: HS code system is not always

relevant to the classification of steel relevant to the classification of steel products by qualityproducts by quality

Galvannealed sheet for automotive

Galvanized sheet for construction

Same HS code

30

New option: “User Specific Duty New option: “User Specific Duty Free Scheme (USDFS)”(1)Free Scheme (USDFS)”(1)

►When specific industries import the When specific industries import the specific parts and materials classified specific parts and materials classified by HS code, such imports are duty by HS code, such imports are duty free.free. 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

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USDFS as a proven scheme in USDFS as a proven scheme in several countriesseveral countries

►USDFS will strike a balance between USDFS will strike a balance between the promotion of competitiveness of the promotion of competitiveness of FDI manufacturers and the protection FDI manufacturers and the protection of steel sheet producersof steel sheet producers

►USDFS and similar policies are/will be USDFS and similar policies are/will be installed by Mexican, Malaysian, installed by Mexican, Malaysian, Indonesian and Thai governmentsIndonesian and Thai governments

32

USDFS and current scheme of USDFS and current scheme of preferential treatmentpreferential treatment

►Apart from steel industry, USDFS can Apart from steel industry, USDFS can be an alternative to current preferential be an alternative to current preferential scheme.scheme. WTO accession may lead to abolition or WTO accession may lead to abolition or

contraction of current preferential scheme contraction of current preferential scheme to EPE and FDIto EPE and FDI

USDFS may be alternative to strike a USDFS may be alternative to strike a balance between promotion of balance between promotion of industrialization and economic integrationindustrialization and economic integration

USDFS does not violate WTO ruleUSDFS does not violate WTO rule►Detailed study is necessaryDetailed study is necessary

33

4-2 Future expansion 4-2 Future expansion programs in flat sectorprograms in flat sector

Blast furnace and basic oxygen furnace of Nippon Steel Kimitsu Steelworks. From Company Pamphlet

34

Possible projects in futurePossible projects in future

►Large scale galvanizing factory for high Large scale galvanizing factory for high grade sheetsgrade sheets

►Large scale cold rolling mill for high Large scale cold rolling mill for high grade sheetsgrade sheets

►Compact hot strip mill next to PFSCompact hot strip mill next to PFS►Large scale hot strip mill as a first stage Large scale hot strip mill as a first stage

of integrated steelworks (ISW) in central of integrated steelworks (ISW) in central areaarea

► ISW in central areaISW in central area

35

Necessity of FDI in flat sectorNecessity of FDI in flat sector

►Based on the experience of PFS and Based on the experience of PFS and SSC, VSC cannot work on a big SSC, VSC cannot work on a big project in flat sector by itselfproject in flat sector by itself Finance and technology problemFinance and technology problem

►Unlike the advanced ASEAN Unlike the advanced ASEAN countries, there is no private big countries, there is no private big business group in Vietnambusiness group in Vietnam

►FDI attraction is necessaryFDI attraction is necessary

36

Conditions for FDI Conditions for FDI attraction(1)attraction(1)

►Vietnam is one candidate of Vietnam is one candidate of investment for foreign steel investment for foreign steel enterprisesenterprises

►Domestic market is still small. But it Domestic market is still small. But it will be expanded by industrializationwill be expanded by industrialization Timing of construction is an important Timing of construction is an important

issueissue JICA team proposed the start up of ISW JICA team proposed the start up of ISW

in 2017 in MPI-JICA Projectin 2017 in MPI-JICA Project

37

Conditions for FDI Conditions for FDI attraction(2)attraction(2)

►Consistency among market size, Consistency among market size, product mix, technology, feature of FDI product mix, technology, feature of FDI companiescompanies 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

Conditions for FDI Conditions for FDI attraction(3)attraction(3)

►Ex. Production of automotive steel sheetEx. Production of automotive steel sheet Vietnam has to wait some years until market expVietnam has to wait some years until market exp

ansionansion State of the art technology for integrated productState of the art technology for integrated product

ion is necessaryion is necessary Candidate list of FDI producers is short oneCandidate list of FDI producers is short one

►OK: Integrated producers in advanced countries (incluOK: Integrated producers in advanced countries (including South Korea)ding South Korea)

►Questionable: Integrated producers in Taiwan and BRIQuestionable: Integrated producers in Taiwan and BRICs Cs

►Impossible: Producers with no experience in automotiImpossible: Producers with no experience in automotive steelve steel

39

International rivalry in FDI International rivalry in FDI attractionattraction

►China and Thailand are strong rivalsChina and Thailand are strong rivals►But they are not necessarily attractive But they are not necessarily attractive

to foreign investors in case of steelto foreign investors in case of steel Giving priority to other types of industry Giving priority to other types of industry

(Thailand)(Thailand) Ban of majority ownership of foreign Ban of majority ownership of foreign

capital (China)capital (China)

40

Role of government in attracting Role of government in attracting FDI (1)FDI (1)

►Giving a welcome to majority Giving a welcome to majority ownership of FDI producesownership of FDI produces For FDI producer it is necessary to be For FDI producer it is necessary to be

able to make important decisions able to make important decisions without troubleswithout troubles

Project integrity is importantProject integrity is important

►Reliability is critical for joint venturesReliability is critical for joint ventures VSC should prove its managerial VSC should prove its managerial

capacity as a reliable partner in Vietnamcapacity as a reliable partner in Vietnam

41

Role of government in attracting Role of government in attracting FDI(2)FDI(2)

► In case of ISW, strong commitment to In case of ISW, strong commitment to provision of infrastructure is necessaryprovision of infrastructure is necessary FDI producers cannot build up large scale FDI producers cannot build up large scale

infrastructure by themselvesinfrastructure by themselves Land clearance and compensation issue. 375-Land clearance and compensation issue. 375-

425ha is necessary425ha is necessary Power supply. ISW has to buy 200MWPower supply. ISW has to buy 200MW Water supply. 170,000 m3/dayWater supply. 170,000 m3/day Port facilityPort facility Other transportation facilityOther transportation facility

42

Unbundling the development of Unbundling the development of Thach Khe mine from building of Thach Khe mine from building of

ISWISW► If Vietnamese government bans majority If Vietnamese government bans majority

ownership of FDI on Thach Khe mine, ISW and ownership of FDI on Thach Khe mine, ISW and Thach Khe mine should not be bundledThach Khe mine should not be bundled

► ISW company should have a right to select the ISW company should have a right to select the source of materialssource of materials Thach Khe ore has a problem with quality Thach Khe ore has a problem with quality

► Thach Khe mine company should make efforts to Thach Khe mine company should make efforts to enrich its ore and offer it to ISW on business base. enrich its ore and offer it to ISW on business base.

► Banning the export of iron ore is meaningless. Banning the export of iron ore is meaningless.

ISW

FDI majority JV or 100%

Thach Khe mine

Vietnamese company or FDI minority JV

Foreign iron ore mine

Free trade

43

5 Conclusion5 Conclusion

Hot strip mill and continuous descaling and cold rolling mill of Nippon Steel Kimitsu Steelworks

From Company Pamphlet

44

The time of policy change in The time of policy change in Vietnamese steel industryVietnamese steel industry

► 1st stage1st stage Market Market

underdevelopment, underdevelopment, absence of modern absence of modern playersplayers

Central role of Central role of governmental plan and governmental plan and SOEs (VSC affiliated SOEs (VSC affiliated companies)companies)

Construction of model Construction of model factoriesfactories

► Beginning: Drafting of Beginning: Drafting of Master PlanMaster Plan

► End: Building End: Building completion of PFS and completion of PFS and Phu My Steelworks Phu My Steelworks

► 2nd stage2nd stage Effective market Effective market

competitioncompetition Global pressure to Global pressure to

liberalizationliberalization Growing importance of Growing importance of

private sector and FDI private sector and FDI sectorsector

Changing role of Changing role of government government

► Direct production to Direct production to promotion of FDI and promotion of FDI and private investmentprivate investment

► Amendment of market Amendment of market failure at some pointfailure at some point

► Commitment to FDI Commitment to FDI attractionattraction

► Commitment to Commitment to provision of provision of infrastructureinfrastructure

45

ReferenceReference► Kawabata, Nozomu(2005), Kawabata, Nozomu(2005), Structure and Dynamism of the Iron aStructure and Dynamism of the Iron a

nd Steel Industry in East Asiand Steel Industry in East Asia, Kyoto Minerva Publishing (Japanes, Kyoto Minerva Publishing (Japanese).e).

► Kawabata, Nozomu(2003), Ngành sKawabata, Nozomu(2003), Ngành sắắt thép Thái Lan sau kht thép Thái Lan sau khủủng kng khohoảảng ting tiềền tn tệệ Châu Á - Xây d Châu Á - Xây dựựng lng lạại nhà máy Phân ngành trong •i nhà máy Phân ngành trong •doanh nghidoanh nghiệệp Các v•p Các v• ấấn đn đềề th ng mươ th ng mươ ạại -, i -, Tài liTài liệệu đu đồồng nghiên cng nghiên cứứu, thu, thảảo luo luậận Dn Dựự án NEU-JICA. http://www.econ.tohoku.ac.jp/~ka án NEU-JICA. http://www.econ.tohoku.ac.jp/~kawabata/paper/bandichsatthepftl.pdfwabata/paper/bandichsatthepftl.pdf

► Ohno, Kenich and Nguyen Van Thuong eds.(2005), Ohno, Kenich and Nguyen Van Thuong eds.(2005), Improving InduImproving Industrial Policy Formulationstrial Policy Formulation, The Publishing House of Political Theory, , The Publishing House of Political Theory, Hanoi. http://www.vdf.org.vn/bookad.htmHanoi. http://www.vdf.org.vn/bookad.htm

► Vietnam Development Forum(2006), Supporting Industries in VietVietnam Development Forum(2006), Supporting Industries in Vietnam from the Perspective of Japanese Manufacturing Firms, April nam from the Perspective of Japanese Manufacturing Firms, April 24. http://www.vdf.org.vn/WS/WS%202006/Ohno12April06/VDF24. http://www.vdf.org.vn/WS/WS%202006/Ohno12April06/VDFreport.pdfreport.pdf

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Thank you for your Thank you for your kind attention!kind attention!