1. 1 Iron and Steel Industry of Developing Countries in the Era of Globalization: The Case of Vietnam Symposium on Advanced Material Flow Analysis for the Sustainable Society September 25-26, 2006, Tohoku University Nozomu Kawabata Graduate School of Economics and Management, Tohoku University, Japan

2. 2 Structure of this presentation ► 1 Steel industry in the process of industrialization ► 2 Overview of iron and steel industry in Vietnam ► 3 New Policy Direction ► 4 Reinforcing market function ► 5 Trade Policy for Steel and User Industries ► 6 FDI Attraction as a Policy for Industrialization ► 7 Conclusion

3. 3 1 Steel industry in the process of industrialization

4. 4 Major contradictions of steel industry in developing countries Small domestic marketHigh 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

5. 5 Industrialization strategy under globalization ► Collapse of CPEs ► Bad performance of import substituting industrialization  High protection ► Good performance of export oriented industrialization (Especially in East Asia)  Lower protection ► Importance of foreign investment and TNCs ► Policy trend to liberalization  WTO  AFTA  EPA

6. 6 Steel strategies have changed in advanced ASEAN countries ► Until the midst of 1980s  State-led promotion  Central state of SOE  Creation of integrated steel works  High level protection  Center industry for import substituting industrialization ► From the late 1980s  FDI and private sector- led promotion  Major role of FDI and local business group  Incremental building from downstream to upstream processes  Reasonable level of protection  Backseat player for export-oriented industrialization

7. 7 Policy change produced good results ► Until the midst of 1980s  Construction failure or financial/technological troubles ► NASCO (Philippines) ► Krakatau Steel (Indonesia) ► Perwaja Steel (Malaysia) ► From the late 1980s  Import substitution of high grade steel sheets by FDI companies ► SUS, TCRSS (Thailand)  Import substitution of low grade steel sheets by local companies ► SSI, G-Steel (Thailand) ► Mega Steel (Malaysia)

8. 8 Capacity for policy change ► Under economic integration, developing countries should accelerate the industrialization process ► Accelerated development necessitates the speedy policy change  State-led investment → Promotion of FDI and private investment  Direct control → Indirect support to reinforce market function ► Promoting policy of the Vietnamese steel industry is one of such a case

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 ► Large scale production and distribution systems are not established ► Long sector  Over capacity of rolling mills  Shortage of steelmaking capacity → Change to scrap shortage? ► Flat sector  Shortage of rolling capacity  Over capacity of galvanizing and pipe fitting factories  Lack of production capacity of high grade steel ► Foreign trade system  General direction to liberalization and impromptu protection  Underdevelopment of concrete arrangements

12. 12 3 New Policy Direction

13. 13 The Market Structure is Changing ► 1990s  VSC Group: Major player for modernization ► Subsidiaries (TISCO, SSC, Danang Steel, Cevimetal) ► Foreign affiliated JVs (Vina Kyoei, VSC-POSCO, Vinausteel, SSSC,etc)  Small companies and households ► Opportunistic entry and exit ► Outdated technology ► Now  VSC Group ► 2.7 mil ton of annual capacity  Private and 100% FDI companies (Hoa Phat, Pomina, Sunsteel, etc) ► 2.23 mil. ton ► Standard technology ► Expansion from rolling to steelmaking

14. 14 Investment by VSC(PFS, SSC)(1) ► SSC/VSC ’ s Phu My Steelworks (started in 2006) is the most modernized EAF-rolling mill in Vietnam  EAF-billet CC: 500,000 t/y  Long rolling: 300,000 t/y ► PFS (started in 2005) is the first cold rolling mill in Vietnam  Pickling and Cold rolling: 400,000 t/y

15. 15 Investment by VSC(PFS, SSC)(2) Phu My Steelworks under construction, Taken by the author, May 2005 Reversing cold rolling mill of PFS. From leaflet of the company.

16. 16 Significance of new factories ► VSC(SSC/PFS) should make new factories competitive  It is the test case for VSC ’ s future.  If VSC fails to operate these new factories, foreign inventors will suspect the VSC ’ s capability as a business partner.

17. 17 Necessity of policy change ► VSC ’ s overinvestment in long sector (EAF- rolling mill) may lead to troubles  Exacerbating overcapacity of rolling mill  Crowding out the investment of private companies  Distortion of market selection ► VSC cannot work on a big project (especially in flat sector) by itself  Financial and technological problems

18. 18 New direction of promotion policy ► Government should give all companies equal footing ► Reinforcing the function of market economy  Construction of infrastructure  Setting rules on quality, safety an environment  Amendment of market failures ► Absorbing the shock of liberalization ► FDI attraction

19. 19 4 Reinforcing Market Function

20. 20 Example: Scrap import problem(1)  Situation in 2004  Possible situation in near future 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

21. 21 Example: Scrap import problem(2) ► In keeping with construction of EAF, fatal point will change  Billet import → scrap import ► Urgent challenge for government  Support to construction of port facility  Establishment of import procedures  Adjustment between import promotion and environmental regulation

22. 22 Proper regulation to reinforce market function ► Reinforcing the Construction Law ► Reinforcing the industrial standard → Exclusion of under qualified products (re- rolled scrap, narrow strip, fake brand etc) → Exclusion of under qualified products (re- rolled scrap, narrow strip, fake brand etc) ► Standard of safety and environment → Exclusion of inferior machines (Pollution from EAF, induction furnace etc) → Exclusion of inferior machines (Pollution from EAF, induction furnace etc)

23. 23 5 Trade Policy for Steel and User Industries

24. 24 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

25. 25 Irrationality of current import duty on sheet products ► Current import duty  Cold rolled sheet product: 7%.  Surface treated sheet (including GI): 0-10% ► Taxation on high grade sheets does not improve the status of PFS and galvanizing companies  No competition between sheets for Customer I and sheets for Customer II ► Import duty on high grade cold rolled sheets and surface treated sheets have a damaging effect on Vietnamese economy  Damage on competitiveness of FDI manufacturers

26. 26 Differentiation between high grade steel and conventional steel ► A problem: HS code system is not always relevant to the classification of steel products by quality Galvannealed sheet for automotive Galvanized sheet for construction Same HS code

27. 27 New option: “ User Specific Duty Free Scheme (USDFS) ” ► When specific industries import the specific parts and materials classified by HS code, such imports are duty free. For motorbikeFor construction 7209.16 7209.17 7209. ・・ 7209.15 72 ・・ ・・ (example) Conventional one High grade one for motorbike Subject to “USDFS” Duty Free Taxatio n

28. 28 USDFS as a proven scheme in several countries ► USDFS will strike a balance between the promotion of competitiveness of FDI manufacturers and the protection of steel sheet producers ► USDFS and similar policies are/will be installed by Mexican, Malaysian, Indonesian governments

29. 29 6 FDI Attraction as a Policy for Industrialization Blast furnace and basic oxygen furnace of Nippon Steel Kimitsu Steelworks. From Company Pamphlet

30. 30 Possible projects in flat sector ► Large scale galvanizing factory for high grade sheets ► Large scale cold rolling mill for high grade sheets ► Compact hot strip mill next to PFS ► Large scale hot strip mill ► ISW

31. 31 Necessity of FDI in flat sector ► VSC cannot work on a big project in flat sector by itself ► Unlike the advanced ASEAN countries, there is no private big business group in Vietnam ↓ ► FDI attraction is necessary  FDI cannot be attracted by laissez-faire regime

32. 32 Conditions for FDI attraction(1) ► Consistency among market size, product mix, technology, feature of FDI companies Market size of specific segment Ex. 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

33. 33 Conditions for FDI attraction(2) ► Ex. Production of high-grade steel sheet  Vietnam has to wait some years until market expansion  State of the art technology for integrated production is necessary  Candidate list of FDI producers is short one ► OK: Integrated producers in advanced countries (including South Korea) ► Questionable: Integrated producers in Taiwan and BRICs ► Impossible: Producers with no experience in high grade steel

34. 34 Role of government in attracting FDI ► Giving a welcome to majority ownership of FDI produces ► Capacity of review and approval is necessary at MPI and MOI ► Reliability as a partner is critical for joint ventures  VSC should prove its managerial capacity as a reliable partner in Vietnam ► In case of ISW, strong commitment to provision of infrastructure is necessary

35. 35 7 Conclusion Hot strip mill and continuous descaling and cold rolling mill of Nippon Steel Kimitsu Steelworks From Company Pamphlet

36. 36 The time of policy change in Vietnamese steel industry ► 1st stage  Market underdevelopment  Absence of modern players  Central role of governmental plan and SOEs  Construction of model factories ► Beginning: Drafting of Master Plan ► End: Building completion of PFS and Phu My Steelworks ► 2nd stage  Effective market competition  Global pressure to liberalization  Growing importance of private sector and FDI sector  Changing role of government ► Abolishment of privilege of SOEs ► Amendment of market failure at some point ► Commitment to FDI attraction ► Commitment to provision of infrastructure

37. 37 Reference ► Kawabata, Nozomu(2005), Higashi Ajia Tekko-gyo no Kouzou to Dainamizumu (Structure and Dynamism of the Iron and Steel Industry in East Asia), Kyoto: Minerva Publishing (Japanese). ► Kawabata, Nozomu(2001), “ The Current Vietnamese Steel Industry and Its Challenges, ” in Study on the Economic Development Policy in The Transition toward a Market-Oriented Economy in The Socialist Republic of Vietnam (Phase 3) Final Report Vol. 2, MPI and JICA. http://www.econ.tohoku.ac.jp/~kawabata/VietnameseSteelEnglish.pdf ► 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 ► 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/VDFrep ort.pdf

38. 38 Thank you for your kind attention!