Steel pulls out of slump, but cannot shake stigma

For the first nine months of 2016, the Vietnamese steel industry has shown signs of recovery from the ongoing price slump that plagues steel companies worldwide.

According to Dang Tran Hai Dang, deputy head of VietinBank Securities’ Research Centre, Vietnamese steel stocks have performed better than the main gauge VN-Index this year, with an appealing price-to-earnings ratio (PER).

“Vietnamese steel firms have adjusted their inventory level to match with the sluggish market, and the profit margin has improved since the first quarter of 2016. For the second quarter, improved steel prices and new safeguard duties on imported products have greatly benefited domestic companies,” said Dang.

Steel stocks traded at 6.38 times earnings in the second quarter of the year, while the VN-Index averaged a PER of 16. Leading companies like Hoa Phat Group and Hoa Sen Group achieved a 32% and 24% rise in gross profit margins.

Meanwhile, SMC Investment and Trading JSC reached a staggering 481% increase in after-tax profits, as it recorded VND288.5 billion (US$12.9 million) of profits for the first nine months of 2016, compared to a VND200 billion (US$8.9 million) loss in 2015.

“Last year, SMC made the mistake of piling up inventory to await a price hike, resulting in a huge loss. This year we’ve capped our inventory of 120,000 tons for all steel products and improved our efficiency,” noted Nguyen Ngoc Anh, chairman of SMC.

Earlier this year, SMC scrapped its foreign ownership limit and offered a 15% private placement for Hanwa, a strategic investor with the company that has long held 5% of its stakes.

Prospects for the steel industry look bright, as statistics from the Vietnam Steel Association (VSA) predict that steel consumption in Vietnam will climb from 18.25 million tons in 2015 to 20.5 million tons this year.

Due to high demands for infrastructure and housing projects, Vietnam has become the world’s sixth largest importer of this commodity.

“To reduce the amount of imported steel and improve their competitiveness, Vietnamese firms must manufacture nine million tons of hot rolled coil steel and enhance the domestic steel supply chain,” said Nguyen Van Sua, deputy head of VSA.

However, most investors remain concerned about the environmental effects of steel projects in Vietnam. In June, the Taiwanese steel firm Formosa was fined US$500 million for dumping toxic waste in central Vietnam, creating a nationwide backlash against the steel industry.

Later on, the Vietnamese giant Hoa Sen Group also made headlines for planning a US$10.6 million manufacturing plant in the central province of Ninh Thuan. Although the new complex is promised to transform the local economy and create 45,000 new jobs, it still sparked controversy due to concerns over environmental protection and industrial waste treatment.

“We’re awaiting more information from Hoa Sen Group on this project’s sustainability. As an investor, we’re supposed to approve a project if it brings profits to the company. However, environmental protection is of utmost importance and we won’t voice our support for Hoa Sen Group until the firm has shown its commitment to preserving the local environment. This is the same as we do for projects from other companies,” said Nguyen Hoai Thu, managing director of VinaCapital, at the fund’s recent investor conference.

VinaCapital currently holds 0.5% of shares in Hoa Sen Group via its open-ended fund Forum One-VCG Partners Vietnam.

It also formerly held board positions in Hoa Phat Group, another domestic leading steel company.