Steel firms’ outlook looks brittle

The construction industry is unlikely to come to steel firms’ rescue

Sacombank Securities Company (SBS) analyst Nguyen Khanh Ly said the local steel industry’s prospects in 2011 were not good due to negative impacts of monetary policies, interest rates and capital sourcing restrictions.

“Therefore, we do not expect a strong growth in this industry with the forecasted profit equivalent to 2010,” said Ly.

Currently, there are 17 steel enterprises listed on the stock market, which include 10 on the Ho Chi Minh Stock Exchange (HoSE) such as POM, VIS, DTL and seven on the Hanoi Stock Exchange such as VGS and DNY.

According to Vietnam Steel Association (VSA) predictions, the steel consumption output this year will rise by 8-10 per cent against last year and reached six million tonnes compared with the production capacity of 7.83 million tonnes per year.

Global steel prices have increased $100 per tonne since January 1, 2011 and the local steel price is forecasted to go up in line with the higher  prices of input materials.

However, the prediction of higher steel prices has not affected steel shares.

Many experts said investors had been hesitant with steel shares because of worries about unfavourable impacts from enterprises’ big borrowing capital usage and exchange rate fluctuations.

Do Duy Thai, chairman of Pomina Steel Corporation’s (POM) management board, said 2011 would be a difficult year for heavy industry enterprises, which faced many challenges such as strong exchange rate fluctuations and higher interest rates.

“Currently, local materials to produce steel have met 30 per cent of demand. With the current exchange rate fluctuations, it will be difficult for enterprises which have to import materials to produce steel,” said Thai.

Last year, POM reached the output of 850,000 tonnes and after-tax profit of VND650 billion ($31.4 million). This year, POM plans to raise its profit by 10 per cent against 2010 despite the previous years’ growth target of 20 per cent.

Dai Thien Loc Corporation (DTL) is also facing difficulties because its materials are mainly based on importing. However, with speeding up exports to decrease exchange rate risks, it is one of few companies which set a high growth target in 2011.

DTL chairman Nguyen Thanh Nghia said the growth in revenue and profit planned this year was 30 per cent higher than 2010, with the total planned revenue of VND2,500 billion ($121 million) and the after-tax profit of $12 million.

Meanwhile, VSA chairman Pham Chi Cuong said most steel enterprises had to borrow from banks with interest rates of more than 19 per cent.

“The high lending interest rates created many difficulties for enterprises. Therefore, banks should decrease interest rates to support steel companies to borrow money for production,” Cuong added.

“In addition to exchange and interest rate difficulties, steel enterprises are likely to face a lack of electricity in 2011,” said Tran Van Thanh, management board chairman of Vietnam-Italy Steel Joint Stock Company.

Meanwhile, according to a SBS recent report, despite many difficulties the steel industry has potential to grow in 2011 thanks to the big demand for steel.

“Moreover, if enterprises can reduce production costs by improving technology, strengthening management efficiency, they will still reach a satisfactory business result in 2011,” said the report.