Short-term fix may harm steel producers

Short-term fix may harm steel producers

In the draft decree amending Decree No.57/2020/ND-CP, submitted to the government on July 13, the Ministry of Finance (MoF) suggested increasing the export tax for steel billets to 5 per cent while reducing preferential import tax for some construction-related steel products. These suggestions are made to stabilise the supply of billets for domestic production and limit exports, thereby also stabilising prices in the market.

However, analysts are concerned that the adjustment could lead to changes in the market, and have raised concerns about inflation. Steel makers are negatively affected by the pandemic – a time which seems unsuitable for sustainable development goals in the long term.

Imposing new tariffs on the steel sector could affect state budget revenues, an important factor that the MoF acknowledged in its presentation of the draft amendment.

Meanwhile, many public investment projects are dealing with the pandemic and rising steel prices. For instance, Trung Chinh TC Co., Ltd. was forced to change its financial plan for the phase-2 Vinh Tuy Bridge project in Hanoi because steel prices hiked by about 40 per cent to up to $830 per tonne. In its original plan for the bridge, the company estimated an average price of $480 per tonne.

Steel prices have seen a long bullish streak since the beginning of the year. Based in the northern province of Thai Nguyen, TISCO JSC, which holds about 10 per cent of the domestic steel market, is one of the few steel producers whose profits have increased thanks to partial autonomy in raw materials. Total revenues of TISCO in the first five months of 2021 increased by 35 per cent on-year.

As steel prices increased, many contractors have been pushed into losses. Vu Xuan Tuyen, director of Viet Thai JSC in Thai Nguyen, said that all of its six projects signed in 2020 are behind schedule, and two of these had to be suspended.

Data from the Vietnam Steel Association (VSA) showed that the picture began greying for the steel industry when the current COVID-19 wave started at the end of April.

In June, steel production decreased by more than 12 per cent compared to May. Consumption also declined across the country as many localities implemented social distancing. Compared to a month earlier, steel consumption in June decreased by more than 15 per cent, of which steel exports of all kinds decreased by almost 1.5 per cent.

The VSA’s view is the government must issue consistent policies to protect the domestic manufacturing industry. This also includes “no increase export tax on steel billets”, as stated in a document sent to the MoF at the end of July by the chairman of the VSA, Nghiem Xuan Da.

The association also recommends that policymakers should not reduce import taxes on finished steel products as protectionism is increasing worldwide, even in developed markets. In that context, the adjustment and reduction of import tax on domestic steel products will increase the amount of steel pouring in from outside, threatening production activities of domestic enterprises.

The MoF proposed to adjust taxes while pressures on Vietnam’s 4-per-cent inflation target still exist. According to the VSA, prices of steel products for construction have cooled down slightly after a series of consecutive increases. However, the rainy season sees the lowest demand, and since the end of the year commonly represents the peak season, these prices are expected to spike soon.

Vietnam ranks first in Southeast Asia in steel production and consumption, but most of the input materials have to be imported, including iron ore, scrap steel, graphite electrodes, and coal. The sudden increase in the price of steel materials in the global market, along with the prolonged delivery times due to the pandemic, became the main reason for the high prices of finished steel products.

According to the Ministry of Industry and Trade (MoIT), these prices are expected to remain high, directly affecting Vietnam’s market. In 2021, it is forecast to import a variety of materials for steel production, including about 18 million tonnes of iron ore for blast furnaces, about 6.5 million tonnes of scrap for electric furnaces, and tonnes of coking coal and graphite electrodes.

Ngo Tri Long, former director of the Price Market Research Institute of the MoF, said that the government has remained consistent in price management. The problem is that new tax policies for steel products need to be based on actual data to ensure a stable price management, market stabilisation, and inflation control.

“The MoF will coordinate with the MoIT to clarify the current supply and demand, and re-evaluate the business and export situation of steel manufacturers. Some manufacturers reported large profits due to their efficient operations and benefits from policies. However, fluctuations in global iron and steel prices will affect the Vietnamese market in 2021 and 2022,” Long elaborated.

The consumer price index (CPI) in July increased by 0.62 per cent. For the rest of the year, with an average growth rate of the first six months at 1.47 per cent, it seems feasible to control the average CPI for the whole year at about 4 per cent. However, there are still many potential risks to inflation, which could be influenced by global prices for raw materials and steel products.

Moreover, the General Administration of Taxation of China has made two adjustments to its tax policies for many imported and exported iron and steel products in early May and late July. Among the products for which export tax refunds had been ceased, there are some imported by Vietnam. The MoIT’s Asia-Africa Market Department confirmed that China decided to temporarily void the tax on some imported steel materials from May 1, and also increase export tax for some steel products.

Analysts are concerned that if steel prices remain at the current high level, there will be a significant impact on many businesses, while rendering it difficult to control inflation below 4 per cent.

“The risk of inflation is not too high, but the government should soon have a scenario to respond to the next stage. When control over the pandemic improves, the domestic economy will recover faster,” said Assoc. Prof. Dr. Dinh Trong Thinh from the Academy of Finance. “The government continues to maintain macroeconomic stability and control inflation, while ensuring a foundation for recovery and the sustainable development of the economy.”