Steel enterprises absorb "blows"

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Supply exceeded demand, which forced businesses to lower selling prices to sell goods while input materials increased sharply. Photo: N.H.

Plummeted profits

The third-quarter financial report fromHoa Phat Group Joint Stock Company recorded that revenue increased by only 6 percent compared to the same period in 2018, but the cost of goods sold increased by 13 percent, so gross profit decreased by 17 percent, reaching only VND 12,385 billion. Gross profit margin decreased from 23 percent in the third quarter of 2018 to 18 percentthis quarter. Meanwhile, the cost of sales of the team increased 20percent; the cost of business management (DN) is 3 times higher than the same period last year. As a result, Hoa Phat's net profit is only VND 1,794 billion, down 25 percent compared to the third quarter of 2019. In the first 9 months of 2019, net profit decreased by 17 percent over the same period last year, reaching only VND 5,655 billion.

The revenue of Hoa Sen Group Joint Stock Company also decreased by 26 percent,reaching VND 6,349 billion, but thanks to the sharp decrease in expenses, the after-tax profit reached VND 84 billion, more positive than the loss in the same period last year. However, in the cumulative year (from October 1, 2018 to October 1, 2019), the after-tax profit still decreased by 12 percent, reaching only VND 361 billion. Similarly, some other businesses saw a drop in profit, like Nam Kim Steel with a profit of VND 40 billion in 9 months while last year’s profit was nearly VND 231 billion. Thai Nguyen iron and steel dropped by 12 percent, reaching VND 40 billion.

At Pomina Steel Joint Stock Company, the situation waseven worse when revenue dropped by nearly 15 percent, while rising costs caused the company to post a loss of VND 119 billion in the third quarter of 2019. In 9 months, Pomina's EAT is negative VND 252 billion. According to the notes to Pomina's consolidated financial statements, sales fellin both domestic and export markets. In particular, the domestic market decreased by 10 percent and the export market decreased by 30 percent. Similarly, Tien Len Steel posted a loss of VND 8.6 billion in the third quarter of 2019, while in the third quarter of 2018, the company made a profit of VND 32 billion. This result has reduced the company's profit after tax in the first 9 months of 2019 to only VND 31 billion, down 82 percent compared to the same period last year.

Vietnam - Italy Steel also continued to sink in losses when net revenue in the third quarter of 2019 was only a third compared to the same period in 2018, reaching VND 1,086 billion. Meanwhile, the cost price is up to VND 1,127 billion, so gross profit in the period is VND 41 billion. After deducting expenses, Vietnam - Italy Steel posted a loss of VND 75 billion in the third quarter of 2019 and a loss of VND 141 billion in nine months of 2019, this loss increased by 17 percent and 8 percent compared to the same period in 2018. Thus, Vietnam-Italy Steel has suffered consecutive losses since the second quarter of 2018.

Continue disadvantages

The increase in raw material prices and the difficulties in output are the causes that companies give to explain the loss in business results. Specifically, according to the explanation of Hoa Phat's management, in the third quarter of 2019, sold construction steel and steel pipes decreased by 10 percent and 6 percent respectively, while input material prices increased. Iron ore increased by 37percent and the cost of goods sold increased 13 percent compared to the same period last year.

Explaining the cause of the loss, Pomina management said that the company is deploying two projects including the furnace project in the second quarter of 2020 and the new corrugated iron project, so interest expense increased by 79 percent compared the same period last year. In addition, one of the company's factories had to stop production due to equipment failures resulting in reduced output. The problem has now been fixed and the factory started manufacturing again in early October.

As of September 30, Pomina has VND 1,467 billion of long-term debt. Of which, VND 694 billion is borrowed to build a blast furnace project of a steel billet factory with a capacity of 1 million tons / year in Phu My 1 Industrial Park (Ba Ria - Vung Tau) and VND 687 billion is borrowed for the factory project. Pomina's interest expense in the third quarter of 2019 was VND 98 billion, up 92 percent compared to the third quarter of 2018.

According to Mr. Satoshi Sugino, Deputy General Director of Vietnam Italy Steel, the price of ingot inputs in the market dropped sharply, so the demand in the market was weak while the company remained consistent with the direction of using eco-friendly technology. Therefore, the company's billet products find ithard to compete with products manufactured from the medium frequency furnace technology. As a result, the embryo factory is always in a state of moderate operation. Production output in the third quarter of 2019 was half compared to the same period in 2018. This is the cause of losses due to fixed costs.

Another reason affecting Vietnam Italy's production and business results, according to Mr. Satoshi Sugino, is the oversupply and the increasing volatility of prices of raw materials, input materials and electricity prices while selling prices could not increased. Accordingly, the impact of the US-China conflict and worries about demand and inventories caused the company to reduce the selling price of products in the third quarter of 2019.

According to the Vietnam Steel Association, in the first 9 months of 2019, the industry's sales volume reached more than 17 million tons, up more than 8 percent over the same period last year while in the same period last year growth reached nearly 24 percent. Thus, this year's growth is one-third of the same period last year. The cause of this slowdown is largely derived from the slowdown of the real estate market and public investment still clogged at the stage of capital disbursement.

Experts also said that since 2018, domestic steel enterprises have stepped up the steel production capacity and scale. This has both increased supply to exceed demand while increasing costs for businesses investing through loans. The oversupply situation also led to fierce competition, forcing businesses to lower the selling price while input materials increased sharply. Meanwhile, export activities also face difficulties due to global trade in a period of instability. Tariff barriers in the US market also cause great difficulties for businesses.

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In the future, it is forecasted that the real estate market will be more exciting in 2021 and disbursement of public investment will have changes with many major projects under consideration such as North-South expressway and LongThanh airport. However, it should be noted that the deadline for anti-dumping duties will expire on March 22, 2020, leading to the risk of cheap Chinese steel coming into Vietnam market.

Currently, Vietnam imports up to 10 percent of China's steel exports, rankingsecond after South Korea. At the present time when the anti-dumping period has not ended, domestic steel enterprises have been under pressure from a large surplus of steel from China.