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Vietnam steelmaker scraps blast furnace plant due to China glut

Hoa Sen's $10bn project had potential to double country's output

A steel plant in Vietnam. The country has been seeking to boost its steel output in order to be less dependent on China, but a global glut has stymied those plans.   © Reuters

HANOI -- Vietnamese steelmaker Hoa Sen Group has walked away from a $10 billion production complex under construction because of a glut of cheap Chinese steel and local protests against the project.

The steel mill, located in southern Ninh Thuan Province, no longer fits in Hoa Sen's growth strategy, the company said in a recent statement. The project, which was to consist of multiple blast furnaces, would have been among the largest steel production centers in Vietnam.

Hoa Sen started construction at the site in 2017 after winning approval from the government. The complex was due to start production last year and eventually be capable of producing 16 million tons of steel a year.

Hoa Sen, listed in Ho Chi Minh City, specializes in making steel sheets and steel pipes for construction, operating around 10 processing facilities. The company wanted to move into the upstream blast furnace business, but a saturated Southeast Asian market frustrated those plans.

Vietnam manufactured 20 million tons of crude steel in 2019, according to the World Steel Association, a 30% gain and 5 times the output of Thailand. Vietnam leads Southeast Asia in both production and consumption of steel.

Taiwan's Formosa Ha Tinh Steel and Vietnam' s Hoa Phat Group, the first and second-largest steelmakers in Vietnam, have constructed new blast furnaces starting in 2017.

What drove the final nail in Hoa Sen's project was pressure from China, which now produces about 60% of the global steel. Chinese steelmakers have shifted to Southeast Asian neighbors to cut overcapacity at home and to dodge the effects of the Sino-U.S. trade war.

It is believed that Chinese companies plan to boost annual steel capacity in Southeast Asia by 40 million to 50 million tons. China's Alliance Steel started up Malaysia's largest steel production complex in 2018.

Due to Chinese activity, the price of hot rolled coiled steel in East Asia has slumped since 2018. Vietnam is especially exposed to those market conditions since the country depends on imports of hot rolled coiled steel, and does not impose a tariff on the products.

Southeast Asia's steel industry shoulders about 20 million tons in excess capacity, estimates Yeoh Wee Jin, secretary-general of the South East Asia Iron and Steel Institute. If steel producers, including Chinese players, make good on their planned output, the gap between supply and demand would reportedly grow to be as large as 88.6 million tons.

Vietnam has relied on imports of hot rolled coiled steel to make machines, appliances and other assortment of products. About 60% of Vietnam's demand is met by imports, most of it coming from China.

Because the two countries are at odds over South China Sea territories, the Vietnamese government has advanced the localization of steel production as a matter of national security.

However, Vietnamese steelmakers have attracted scrutiny for pollution. In 2016, Formosa Ha Tinh Steel caused a massive toxic spill that killed over 100 tons of fish in nearby waters.

The public outcry forced the government to take a more circumspect stance with respect to the steel industry. In 2017, Prime Minister Nguyen Xuan Phuc called on Hoa Sen to reconsider its steel mill plan, citing "highly sensitive concerns."

Hoa Sen Chairman Le Phuoc Vu tried to sway shareholders to support the steel project, stressing the ample earnings to be gained and urging them not to fear a Formosa-like incident. But the sudden market swings in the steel market forced Hoa Sen to abandon the project.

The unfinished steel facility apparently did not receive government support, placing Vietnam's industrial development in the crossroads. The pattern is repeating itself with some petrochemical products as large new plants are being built in China.

Additional reporting by Azusa Kawakami in Tokyo.

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