JFE discontinues plan for steelworks in Vietnam

In  a press release made on its website, JFE has officially announced its decision to quit involvement in the Guang Lian Steel project located in Dung Quat Economic Zone, Quang Ngai province, leaving E-United Group alone with the project.

The press release did not reveal the reasons for JFE Steel’s discontinuing the participation in the project; however, insiders tend to link this leaving decision to the fact of unapproved investment incentives and the fierce competitions from giant steel mills under construction in Vietnam and in the region.  The situation raises the questions over whether E-United Group would go on with the project and how it would arrange the finance to feed this big steelwork.

Source from Dungquat Economic Zone Authority was quoted as saying that if the investor wants to move on, it has to pledge to follow a clear construction road map otherwise the province would consider revoke the investment certificate, recover the allocated land, and pay back to the investor what it has spent legitimately.

In a report by local authority addressed to the government late 2012, the disbursed investment capital of the project was said to be valued at around $ 50 million then as declared by the investor.

While the 9.9 billion Formosa steel project is on its good progress in north central Ha Tinh province, it’s not clear to outsiders which path  the Guang Lian project is heading to.

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Guang Lian Steel Project in Dung Quat: in the balancing art of "give-and-take"

SCIC told to invest in Thai Nguyen steel project

Source: Saigon Times

Friday,  Aug 29,2014,22:51 (GMT+7)

HANOI – The Government has asked the State Capital Investment Corporation (SCIC) to pour capital in Thai Nguyen steel expansion project’s second phase, and urged banks to restructure debts to ease difficulties for the project owner.

According to the Prime Minister’s instructions, the project invested by Thai Nguyen Iron and Steel Corporation (TISCO) and still remaining uncompleted after seven years will continue to be implemented as proposed by the Ministry of Industry and Trade.

SCIC will have to draw up a capital contribution plan to pour at least VND1 trillion on behalf of the State. Capital contributed will be sourced from the Enterprise Reform Support Fund.

Over the past few years, apart from existing State stakes at some steel enterprises that were previously State-owned enterprises, the State has no longer poured capital in the industry. Vietnam Steel Corporation, the parent company of TISCO, has lagged behind due to the harsh competition in the steel industry from private and foreign-invested enterprises.

The aforementioned project has not been put into operation seven years after its commencement. The project’s investments were initially approved at VND3.84 trillion but have been revised up to VND8.1 trillion.

Some VND4.330 trillion has been disbursed, according to TISCO’s first-half report, but the project has ground to a halt since late last year as banks have stopped lending. This is also the second time in the past seven years the project has deadlocked due to a capital shortage.

As of June 30, 2014, TISCO owed VND7.541 trillion while its equity is only VND1.717 trillion. Due to a lack of capital, the second phase had to be suspended while pending instructions from the Ministry of Industry and Trade and the Government.

While deciding to inject capital so that the investor can finish its project, the Government still requires the industry ministry and the steel corporation to be responsible for the cost-effectiveness of the project and appraise the feasibility of the borrowing plan.

The Thai Nguyen steel expansion plan’s second phase was approved in 2005 to have a capacity of 500,000 tons of steel billet and 500,000 tons of rolled steel, and is one of the projects of Group A to receive preferential loans of the Government.

However, at this moment when the project has fallen far behind schedule, the production capacity of the industry has doubled the demand and many steel plants have to run at less than 50% capacity to avoid inventories.

As a result, the industry ministry has asked the investor to invest in facilities to produce iron and steel billet first. With such an adjustment, only one-fourth of the project is finished while its investments have doubled.

Vung Ro - the third refinery project in Vietnam kicks off

Vietnam has begun construction of Vung Ro oil refinery and petrochemical project in Phu Yen province in the Southern Central Coast of Vietnam. The project, which has an investment of nearly $3.2 billion, is designed to have a capacity of refining 8 million tons of crude per year, and cover an area of 538 hectares, including the area to develop a supporting seaport, according to the Vietnam News Agency.

Groundbreaking Ceremony of Vung Ro Refinery & Petrochemical Project in the south central coast province Phu Yen.

The refinery configuration allows producing fuel products of high quality (LPG, Gasoline RON 92/95, Jet Fuel, Diesel, Fuel Oil) and petrochemical products (Benzene, Toluene, Mixed Xylene, Polypropylene). The products are said to satisfy both current Vietnam specifications and international standards.

Product Slates	VRP Blend (Yield, TPA)	Arabian Light (Yield, TPA)
LPG	388,293	236,307
Gasoline RON 92/95	2,168,403	2,011,559
Jet Fuel	665,546	528,828
Diesel	2,633,036	2,398,811
Fuel Oil	0	867,500
Benzene	73,217	44,069
Toluene	182,869	169,336
Mixed Xylenes	349,082	311,953
Polypropylene	564,222	390,375
Sulfur	7,981	94,037
Total	7,032,649	7,052,775

Source: VRP website

Upon completion, the refinery is expected to create around 1,300 jobs, not to mentioned around 15,000 headcounts shall involve in the construction period and around US$ 110 million of various taxes shall be paid per annum.

General layout of Vung Ro Refinery & Petrochemical Complex. Source: VRP

This is the third refinery project launched in Vietnam, after the Dungquat refinery operating since 2009 and the Nghi Son refinery being now under construction. The latest news from Binh Dinh Province Authority on 11^th Sept 2014also revealed that detailed ffeasibilitystudy for the US$ 22 billion refinery project of 400,000 bpd has been submitted to Vietnam Ministry of  Industry and Trade for consideration. This project is invested by Thailand-based PTT Group and Saudi Aramco Group and is expected to be joined by other partners.

Under the circumstances of several refineries to come on stream in the next few years, including the fact that the current Dung Quat refinery is working on upgrade and expansion plan, experts foresee the situation of fuel supply exceeding domestic demand; then there’s a high possibility that Vietnam would become a petroleum exporter in the future. 

Guang Lian Steel Project in Dung Quat: in the balancing art of "give-and-take"

Various news sources recently reported that authorities allowed corporate income tax rate of 10% to be applicable for only 15 years, instead of for the project's whole lifetime (nearly 69 years) as petitioned by by JFE Steel Corporation (Japan) regarding their tentative investment in the current Guang Lian steel mill project located in Dungquat Economic Zone in Quang Ngai province. This is one of petitioned-but-rejected incentive proposals made by the investor who is found to be in the dilemma of whether to going ahead with the project.

A rescuing hand for a steel mill in stagnancy?

Licensed in 2006, the sole investor for that giant project had been initially Tycoons Group (Taiwan), later joined another Taiwanese investor - E-United who became the majority stakeholder then, resulting in the increase of registered capital to $3 billion and changing the project name into Guang Lian Steel Mill. A commencement ceremony was organized in October 2007, followed by the construction of some civil works and ground piping, then all execution started to suspend since 2010 end until now. After 7 years of commencement, the project remains in a stagnant situation which has been raising much debates among related parties.

Early 2012, JFE expressed its intention to participating in the project, in the form of purchasing controlling stakes in the owners-fluctuating project to become the majority stakeholder (or the real owner), then raising the mill's capacity, changing the configurations to manufacture other types of steel products, and raising the project capital to $4.5 billion. According to its initial plan, the final decision on investment would be made in early 2013, to be followed by application for investment certificate amendment and construction kick-off in July 2013. However, this plan has not been materialized. A new plan was proposed for July 2014, and seems to be missed again.

Give-and-take dilemma

The JFE's participation is expected by local authorities to be the rescuing hand for the long stagnant steel mill project which is now leaving hundreds hectares of land in waste in dim hope. That's what JFE really means to the local community. However, the investor as normal is also keen on benefiting something from the local investment environment. "If, by the end of this year [2012], the study reaches a favorable conclusion, including the feasibility of developing required infrastructure and the availability of incentives, JFE Steel expects to partner with the E United Group to launch a steel-production operation in Vietnam", read a press release announced by JFE Steel in March 2012. 

After great efforts to make a pre-feasibility study available, in 2013, JFE wrote to the authorities to ask for additional incentives such as the allocation of 210 hectares of land and waters to increase the total project area to more than 700 hectares. The Japanese investor also insisted to ensure adequate water supply of 200,000 m3 per day, connecting  its electricity system to the national power grid, and especially the very preferential enterprise income tax for the entire project ..., stated by various reports by local government.

Most of the requirements on infrastructure seemed to get nod from the local government (Dung Quat Economic Zone Authority and Quang Ngai Provincial People's Committee). Quang Ngai Authorities was said to agree in principle to allocate additional 185 hectares of land, adjusting the master plan of Dungquat port complex No. 1 to arrange water area for extra terminals serving the steel mill, coordinating with water and power suppliers (both private and state-owned) to secure the utilities for this power-consuming project. 

Balancing art needs the balance.

However, the financial incentives prospects have been reportedly cashed dim light over the fate of the project. The investor petitioned to enjoy the preferable corporate income tax (CIT) rate of 10% applicable for the whole project lifetime (including for the expanded capacity when raising the investment capital from $3 billion to $ 4.5 billion); however, CIT rate of 10% was tentatively  approved to be applied for only the first 15 years for the expanded capacity, VOV quoted a representative from Quang Ngai authority as saying in July 2014. The source also revealed that the proposals of state budget covering the expenses of additional land compensation and port channel dredging was also turned down by the government, that means, the investor would have to handle these works at their own cost, if he wished to proceed with.

Which or what way to go?

Under such circumstances, it's not difficult to imagine how JFE is in the dilema of "give-and-take" when setting up their presence in Vietnam. At the end of 2012, Eiji Hayashida, president of JFE Steel was quoted as saying about JFE's plan for pouring capital to steel mill project in Dung Quat, “Things won’t go smoothly until we make sure that we’ll beat the competition as many projects are being lined up to build new mills in southern China and Vietnam.”, and “We initially said a conclusion will be reached by the end of this year [2012], but we’ll need a bit more time,” said in an interview 05 Dec 2012 at the company’s Tokyo headquarters. And it seems to outsiders that it's now late 2014 and even more time shall be needed.

Vietnam ranks 68th, up two, in global competitiveness report 2014-2015

While the region of Asia and Pacific is home to three of the 10 most competitive economies in the world: Singapore, Japan, and Hong Kong SAR and a further three economies are featured in the top 20; Vietnam advances 2 places to the rank of 68th out of 144 in the list, according to the Global Competitiveness Report 2014-2015 released by World Economic Forum. Vietnam is among the five largest Southeast Asian economies (ASEAN-5) featuring in the top half of the rankings, and making strides in the edition for 2014-2015. 

Steady improvement in the macro economy, public institution and labor market 

At the rank of 68th, Vietnam’s performance remained almost unchanged from the past 2 years (70/144 for the 2012-2013 and 2013-2014). Following an experience of high inflation in 2011, the country’s macroeconomic situation continues to improve (75th, up 12 positions), as inflation declined to 6.6 percent. Institutions pillar also receive a better assessment (92th, up six), on the basis of better property rights protection and improved efficiency. 

Comparison of the 12 GCI Pillars between Vietnam and Emerging & Development Asia. Source: World Economic Forum

According to WEF’s definition, the institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate wealth. The importance of a sound and fair institutional environment has become all the more apparent during the recent economic and financial crisis and is especially crucial for further solidifying the fragile recovery, given the increasing role played by the state at the international level and for the economies of many countries. 

In a region where many countries have poorly functioning labor markets, Vietnam ranks a satisfactory 49th, its best showing among the 12 pillars combined to determine the competitiveness index, especially thanks to the “pay and productivity” aspect ranking 23rd. The highest ranking pillar for Vietnam is the market size (34th). The quality of transport and energy infrastructures also improves slightly. 

Much concerns over access to financing and low readiness for technology 

Vietnam’s financial sector and its banks remain vulnerable. Technological readiness remains low (99th, up three). The country’s businesses are especially slow in adopting the latest technologies (with technology readiness ranking 99th) thus forfeiting significant productivity gains through technological transfer. The degree of business sophistication is low (106th, down eight), with companies typically operating toward the bottom of the value chain (nature of competitive advantage and value chain breadth rank extremely low at 128th, 112th respectively). 

Vietnam's GCI for 2014-2015. Source: World Economic Forum

The report also lists the most problematic factors for doing business in Vietnam, based on the opinions of respondents. Of major concerns are the factors of, among others, access to financing, inadequate educated workforce and policy instability.