NOVEMBER/DECEMBER 2007
Exponential growth in EAF steel production is spurring scrap demand in Vietnam. But even if the country’s buyers can compete with China, import regulations, infrastructure weaknesses, and corruption create high hurdles for trade.
BY ADAM MINTER
On the last day of a two-week journey in search of Vietnam’s scrap industry, I arrive at the ninth-floor offices of the Vietnamese Steel Association in Hanoi in search of answers. I had just spent 14 days traveling the length of Vietnam in search of ferrous scrap imports. I journeyed up and down the entire country, and aside from two large, rusty piles of ferrous, I had seen nothing that suggested the makings of a vibrant import market.
Dinh Huy Tam, secretary general of the association, greets me with a firm handshake and leads me into a large conference room lined with industry reports and windows that look out on the overgrown village that is Hanoi.
Tam, who is 63 but looks about 20 years younger, smiles when I explain how my search revealed almost no significant scrap import industry. Then he pulls out a sheet of paper and patiently and methodically writes out a list of Vietnam’s major steel producers, their current production volumes, and the capacity under construction or planned. As he writes, he slowly reads each entry aloud: “Phu My Steel. Five. Hundred. Thousand. Tons. Of billets. Four. Hundred. Thousand. Tons. Of. Bar. And Wire. Rod.”
This continues for several minutes. Most of the list consists of the various subsidiaries of the state-owned Vietnam Steel Corp. and the privately held company Thep Viet. Tam’s staccato delivery of industry facts goes on. “Vietnam. Has. EAF capacity. Of. Two million. Metric tons,” he tells me, “excluding induction furnaces and small mills.” I stop him. I had visited two of those small mills, I say, and I’m curious to know just how much of Vietnam’s secondary steel they produce.
“We know,” Tam says, “but we don’t say.”
Vietnam Steel officials were less reticent. They say induction mills and other small mills bring Vietnam’s total capacity to 4 million mt. All told, Vietnam produced 6.1 million mt of steel products in 2006 and will have imported an estimated 800,000 to 1 million mt of ferrous scrap this year. By contrast, China produced 400 million mt of steel products in 2006 and most likely will import more than 10 million mt of ferrous scrap this year. As one U.S. scrap processor put it, compared with China, Vietnam is “a postage stamp.”
Vietnamese steel industry leaders recognize their country is at least 10 to 15 years behind China in steel production. But Tam, an unabashed booster of his industry, advises me to focus on Vietnam’s robust and rapid economic growth and the concomitant growth of the steel industry. In 2006, Vietnam’s GDP grew more than 8 percent, and 2007 growth should be even better. Capital expenditures reached an impressive 40 percent of GDP last year, which undoubtedly supported the more than 10 percent growth in the construction and steel industries.
The steel industry probably experienced even greater growth this year, which has led to equally rapid expansion in EAF capacity. Tam estimates that Vietnam will need to double its ferrous scrap imports from 2007 to 2008, bringing them to 2 million mt. That’s more than 12 times as much as the 164,000 mt the country imported in 2004, just four years earlier. Though the Vietnamese steel industry’s desire for scrap imports is palpable, significant barriers could prevent it from procuring the volume it needs.
The Developing Import Demand
The thriving heart of Vietnam’s steel industry emerges from the fields bordering the Phu My port, 75 km southeast of Ho Chi Minh City near the southern end of the country. The 3.7-square-mile Phu My 1 Industrial Park’s major tenants include five private and state-owned steel firms that generate a significant proportion of the flat and finished products entering the Vietnamese market.
Near the waterfront, a large, dark pile of rusty scrap rises on the horizon, surrounded by buildings in various stages of construction that belong to Thep Viet, Vietnam’s largest private steel company. Founded as a trading company in 1975, Thep Viet only began manufacturing steel in 1995. Today it operates three plants focused on providing construction steel to Vietnam’s thriving builders. Its largest facility, the Pomina Steel Mill, produces 600,000 mt of wire rod and rebar annually, most of it from imported billets.
My guide today is Binh Tran, managing director of Vietnam International Trading & Consulting. Tran grew up in Switzerland, where his family arrived as “boat people” in the 1970s. He returned to Vietnam three years ago while working for a European supplier of equipment to steel mills. There he learned that Thep Viet would soon need more than 300,000 mt of imported steel scrap annually for the EAF mill it was constructing in Phu My.
Thep Viet is designing its US$70 million facility at Phu My to produce 500,000 mt of billet when it becomes operational this fall, meeting most of Pomina’s needs and becoming Vietnam’s largest single EAF. A planned second stage, which should come online in 2009, will add another 500,000 mt of production capacity. With that capacity, Thep Viet will no longer need to import billets; it will need to import scrap.
Tran and I step out of our SUV into the sweltering humidity of South Vietnam. We quickly enter the two-story, air-conditioned Thep Viet offices. Upstairs, Do Xuan Chieu, the company’s founder and chairman, sits at a neatly arranged desk at one end of a long conference table. He rises to greet us just as his daughter, Do Dieu Huyen, a manager in the company’s planning department, arrives to translate. Chieu is a warm man, eager both to answer questions and to ask them, especially when he learns that I write about China’s scrap metal trade. I eventually turn the conversation to Vietnam’s domestic scrap industry.
“It is small,” Chieu says, “with mostly small traders who pick up and sell to the larger buyers until the material eventually makes its way up the ladder to a mill like mine.” Chieu estimates Vietnam’s total domestic scrap supply is 500,000 mt per year—and he is now committed to buying roughly 20 percent of it.
Later, as Tran and I walk across an empty field toward the large pile of domestically generated scrap we saw when we arrived, he explains that even if the country could meet its own scrap needs in terms of volume, there’s another problem: The concept of grading ferrous scrap is mostly foreign to Vietnam. “This idea of No. 1 [HMS], No. 2 [HMS] doesn’t exist here,” he says. “It’s just ferrous scrap.”
I see what he means: The pile is a rusty mountain of old sheet metal, barrels, chains, flaking paint, and occasional garbage that stretches for hundreds of feet in all directions. In the middle of this mess, a grapple crane unloads a truckload of sheet metal; at the end closest to the delivery road, a truck arrives with a neatly stacked pile of old machinery. On our way back to the Thep Viet offices, we pass another pile of ferrous scrap, this one spread across the floor of the nearly complete building housing the EAF. The company planned to begin test runs within weeks of my June visit.
Back in his office, Chieu acknowledges the domestic scrap quality issue. Despite the problems, however, he is unwilling to give up on it—the domestic price tends to be just 70 percent of the import price, Chieu and others say, and it is much easier to procure. But that makes it critical, he says, for the company to pursue imported, higher-quality scrap steel. “We’ll mix No. 1 [HMS] with the domestic scrap,” he tells me. “And that should give us good chemistry.”
“I am building a blast furnace, too,” he tells me. “Just in case we need it.” It’s not his preferred source material, but ore resources are abundant in Vietnam, and Thep Viet is prepared to tap them to make pig iron if it can’t secure a stable and suitable scrap supply.
Two Italian engineers—part of the team installing the new furnace—pass us on their way to the work site. Behind them, several small, wiry Vietnamese workers in hard hats chat amicably as they return to work. Thep Viet’s plant will employ roughly 200 workers when fully operational, a number comparable to similar-sized mills in Europe and North America. But the cost is not: Vietnam’s minimum wage is 450,000 dong—roughly US$28—a month. By law, companies with foreign investors must pay a higher minimum wage, but even if they pay double the local wage that’s less than half what they would pay in China.
Employers also must pay a 15 percent social insurance payroll tax and a 2 percent health insurance payroll tax. Legally, employees are responsible for paying 6 percent of their wages in taxes, but employers generally pay the employee share, too, raising their overall tax burden to 23 percent. Yet those wages—including benefits—are among the cheapest in Asia, which is one reason the country’s economy is beginning to attract the attention of foreign investors interested in establishing export businesses.
Tran and I leave Thep Viet and drive toward the port, passing the gates of Southern Steel Corp., a subsidiary of Vietnam Steel and the home of the country’s largest operating EAF. Because SSC is state-owned, we were not able to arrange a visit. Still, from the road, I see a pile of imported ferrous scrap behind the building—a pile that looks larger than the one at Thep Viet. According to Tran, news reports, and Vietnam Steel itself, the US$135 million facility has the capacity to produce 500,000 mt of billet a year—but it hasn’t done so.
Import barriers
Judging by Vietnam’s existing and planned EAF capacity and the quality and quantity of domestic scrap, it’s no wonder the steelmakers are hungry for ferrous imports, but today’s prices might give them pause. When he began sourcing European scrap for Vietnamese mills, Tran says, he found plenty available for export, but very little at the price he was seeking. This is a concern at the Vietnamese Steel Association, too. When I asked Dinh Huy Tam whether the Vietnamese government would subsidize scrap purchases for state-owned steel companies, he smiled and shook his head. “Once you are born, you have to survive on your own. The government will not subsidize the price.”
In this respect, the falling U.S. dollar might be good news for the Vietnamese. According to VSA, in 2006, the United States provided 9 percent of Vietnam’s ferrous scrap; in the first half of 2007, the U.S. share increased to 21 percent, making it Vietnam’s largest single ferrous scrap supplier. The United States surpassed Japan, which fell from 30 percent to 16 percent, and the Philippines, which supplied 13 percent of the ferrous scrap in 2006. The countries of Africa supplied another 22 percent, and the rest of the world—including Europe—supplied 21 percent.
Price might be a small problem, though, compared with the fact that Vietnam lacks the financial, regulatory, and port infrastructure a country needs to facilitate the large-scale trade that drives the scrap industry in places like China. Only seconds down the road from Thep Viet, we reach the Phu My port, with its gates wide open. Inside, Nguyen Nhu Chi, a port official, speaks with Tran while I peek out the front door. Chutes, grapples, and bins belonging to Thep Viet are neatly parked in a staging area, awaiting the arrival of Tran’s first boatload of German ferrous scrap. By the standards of China or other major Asian scrap importers, a 30,000-mt shipment is nothing special. But in Vietnam’s rapidly evolving history of scrap imports, it’s a landmark: It’s most likely the largest single shipment of European scrap, and one of the biggest scrap shipments from any source, the country has ever received.
Tran, Chi, and I walk around the building to a staging area near the port’s single dock, where workers are unloading a bulk vessel full of coal. Most ferrous scrap will enter Vietnam in bulk shipments, Tran and VSA predict. “Cost-wise, it just doesn’t make sense to containerize a 5,000-ton shipment, to use 100 [or] 200 containers,” Tran says. But Vietnam lacks the port facilities to handle large bulk shipments, which is why SSC decided to build its own scrap steel unloading dock beside its Phu My facility. Tran and I can clearly see the facility in the distance while standing at the Phu My docks.
Regulation creates another impediment. Only companies with actual storage, processing, or consumption facilities can import scrap, according to Vietnamese law, Tran says. “So if you are a casual trader like me, you have to be attached to a company,” he explains. “And that can cause problems unless your relationships are good.”
On the highway leading back to Ho Chi Minh City, I see rebar piled beside a small shack along the roadside. A petite woman is standing in front of it, calculator and clipboard in hand. Tran tells his driver to stop, and we park beyond the rebar. The woman in the yard is company owner Pham Ti Ly. With Tran’s translation, she tells me that she started two years ago as a mobile peddler. “I get most of the scrap from the industrial zone and construction sites,” she says. “Maybe 5 tons per month on average, but sometimes more.” As we talk, her two sons race barefoot around the operation, despite the sharp-edged metal scrap all around them.
She turns to watch a shirtless male employee weigh a bag of rusty iron on an old scale and apologizes that she doesn’t have a better inventory to exhibit. The day before, she says, she sold 4 tons of ferrous to a local trader. “I cannot sell directly to the mills because of the laws,” she says—the same laws that require Tran to partner with a processor like Thep Viet instead of setting up an independent import business. As the two compare notes, I ask if I can take a look at her inventory, and she nods her head in the direction of the shack. Inside, the twisted pile of rebar reaches the ceiling. Toward the back is a large accumulation of plastic jugs and corrugated. Scattered across the floor are fragments of various metals and, on a worktable, hand tools.
On the way back to Ho Chi Minh City, we pass several more small-scale enterprises like Ly’s, stopping at two of them. One dealer has some nonferrous: a half-dozen transformers and three motors scattered among a large inventory of steel scrap and used rebar.
Small scale, big money
Two days later I am seated on the back of a motorcycle, holding tightly to the waist of Tien Nguyen, a weathered, 40-year-old Vietnamese scrap trader with 20 years’ experience in the sweaty, cramped scrap markets of Ho Chi Minh City. All around us, other motorcycles bob and weave along the packed boulevards of the bustling city, somehow never colliding. Tien turns down alleys, emerges onto new boulevards, warns me to hold my nose as we approach a drainage ditch, and then emerges into a muddy, unpaved industrial zone lined by small-scale manufacturers and countless little sheds containing scales and piles of scrap metal, paper, and plastic. Traffic thins, but not the hazards: Pond-sized puddles fill the mud streets, and Tien either drives directly through them or skirts the edges.
Despite Vietnam’s abundance of labor that’s cheap even by Asian standards, Chinese-style large-scale scrap processing has not yet taken hold. Ferrous and nonferrous scrap processing in Ho Chi Minh City is decentralized, small-scale, and “dirty, but big, big money,” Tien says. The traders have a nearly insatiable demand for high volumes of material. In fact, one reason Tien agreed to take me on this death-defying ride is that he hopes the resulting publicity will lead to overseas partnerships for his company. He assures me repeatedly that he easily could sell 1,000 mt of ferrous scrap daily into this chaotic market. “If I have a scrap sample, all I need to do is make one phone call and all the people come running,” he says.
Tien stops the motorcycle in front of the open doorway of a small recycling operation that appears to be named Anh Nguyen. Near the door, a small, cage-like room serves as an office. Tien steps inside, announces his presence to nobody in particular, and then waves me forward. I take a few steps into the dark building and stumble over two female workers busy untangling a vicious, dirty mass of copper wire. As I move deeper into the facility I pass piles of communication cable, transformers, and a crumbling brick edifice that might be a furnace—I really can’t tell.
A dirty smudge of light falls from a crack in the ceiling that runs parallel to rows of fluorescent lights, few of which are lit. Surrounding me are spools of new copper wire, bound and ready for shipment, manufactured in the next room by workers who spend their days working in puddles and dirt. Tien tells me he has sold hundreds of tons of communication cable here. “They can do 100 tons per day.”
I look around the cramped room, incredulous. One hundred tons?
Tien nods with a solemn smile. As we leave, I notice maybe 10 Vietnamese traders arguing with a hard-jawed, middle-aged woman holding a clipboard and adjusting the balance on a beat-up scale. Unfortunately, when I take a picture, the flash on my camera attracts the woman’s fierce and angry attentions. Tien quickly shuttles me out of the building and back on the motorcycle.
A few minutes later, Tien stops in front of two adjacent storefronts shaded by awnings that read THEO’ Co. We enter the space—Tien’s home and office—and he asks me to have a seat while he prepares tea and checks his e-mail on an aging computer. He has several messages from his Florida-based partner, Theodore Adensam, who lived for several years in this unassuming neighborhood. The two are involved in several manufacturing businesses, and they are quite keen to expand their import scrap businesses. They believe they can leverage Tien’s knowledge of the local market and buyers into strong prices for U.S. scrap. “We have a deal now for maybe 1,000 tons of steel scrap,” Tien tells me. “But we could do more.”
To give me a better sense of the potential market, Tien drives me to a nearby ferrous scrapyard and remelting furnace owned by Vo Van Quay, a balding, 50-year-old man who says he has spent his whole life in scrap. Past a cast iron door, we find a nearly 5-acre yard dominated by piles of broken machinery being hammered and sorted by a powerful-looking laborer. Beyond the scrap, perhaps 20 workers are digging a foundation and laying equipment for two new furnaces that will supplement the 20-year-old facility’s existing furnace, which is currently undergoing maintenance. “The market is good,” Quay says, “so we can expand.” On average, he tells me, he buys 2 tons of ferrous a day. When the new furnaces are complete, he will be capable of manufacturing 10,000 mt of secondary products per month, he says. The only potential bottleneck is scrap supply.
A few blocks away, Tien opens yet another cast iron door and introduces me to “Chinh,” the gregarious, shirtless owner of a mid-sized rerolling mill. Pausing only momentarily for a handshake, Chinh leads us through piles of rebar to the extreme heat of his furnace. As Chinh and Tien talk business, I wander through the maze of twisted scrap rebar to get closer—but not too close—to the open furnace. A worker stands before it, in a dirty puddle that rises above his rubber boots. Beside him, another worker feeds the scrap rebar into the top of the furnace. The first worker pulls red-hot metal out of the furnace and feeds it into a rerolling machine that spits out the metal as long, thin strips. The mill produces roughly 300 mt of rerolled strips a month, primarily for the region’s thriving construction industry. Chinh, who is delighted by this reporter’s visit, assures me that he is growing and that he can use more feed—especially imports from Tien.
Several days later, during my visit with Dinh Huy Tam at the Vietnamese Steel Association, I describe the conditions of the various mills I visited in Ho Chi Minh City. Dinh interrupts me as I tell him about the rerolling mill. Based on my description, he can identify it and its owner, Chinh. “He is one of our members,” he sighs. “We are hoping that he and the others like him will clean up. They are not the future.”
The challenge of corruption
On the last day of a busy week in Ho Chi Minh City, my translator and I drive into a sprawling, maze-like industrial area on the city’s outskirts. We drive in circles, we stop for directions, and eventually we find our way into the parking lot of a large restaurant and nightclub complex owned by one of South Vietnam’s largest nonferrous scrap traders.
As we park, he greets us. He asks that I not identify his name or business but merely refer to him as Mr. N. He is a short, stocky man with a charming smile and the slow, loping walk of someone completely at ease with his place in the world—or, at least, his place in Ho Chi Minh City. We enter an airy reception area just off the main dining room where he sits across from me, cross-legged, on a carved wooden couch. Despite his caution, Mr. N is eager to talk, telling me that he has spent a significant amount of time in China over the last several years.
“It’s a different time in Vietnam’s scrap business because of China,” he says. “What China touches, the price goes up.”
Now in his 40s, Mr. N says he has been involved in the scrap business for two decades. His business has grown only in the last two years, he says, primarily because he received a contract to provide metal to a government trading company. “It is very, very difficult to do business here without relationships,” he explains, but with such relationships, the world’s markets open wide. This year, the government trading company has authorized Mr. N to purchase more than US$6 million of scrap from around the world, including up to 500 mt a month of aluminum and significant quantities of copper (he imported 10,000 mt in 2006, he says) and ferrous.
Mr. N then speaks frankly about a less attractive side of the Vietnamese scrap business. He reminds me that importing scrap into Vietnam requires a permit, and only those with actual processing operations and/or storage facilities can get such permits, as he has. To cut through other regulatory barriers, he says, a prospective importer needs connections—and cash. Despite the size of Mr. N’s company and its connections, not even he can avoid paying bribes.
“It doesn’t matter who you are or who you know,” he says. “If you don’t pay, you’ll have trouble.” He explains that highly trained civil servants use the bribes to supplement their low salaries—most earn no more than US$50 a month. The price depends upon the type of material and its legality. A container of perfectly legal material arriving for a legitimate importer with all the right paperwork might require a bribe of less than US$100, according to Mr. N and others. A container of e-scrap or other banned substances might require US$2,000. “You cannot always predict” what payoffs might be required, “even with good relationships,” he sighs.
Mr. N concedes that he has a much easier time than most Vietnamese scrap dealers, which is why he can be such a relatively large player in the nonferrous markets. He purchases most of his imported material directly, and his U.S.-procured material is sourced by a U.S.-based Vietnamese government representative. “That’s why you need a state-owned partner,” he explains. “It’s hard to do it otherwise.” Likewise, most of his imports from the United States—primarily copper—go directly to a state-owned copper recycler, a company that he says handles 90 percent of Vietnam’s secondary copper processing.
After 45 minutes, Mr. N tires of the conversation and invites me to join him for lunch in the main dining room. It is a wide space, often rented out for weddings, but on this afternoon it is just him, me, and my translator. Mr. N doesn’t have much to say during lunch, but when I step away from the table for a phone call, he quietly tells my translator that he cannot invite me to tour his 200-employee scrapyard because my presence would draw too much attention.
Even those who have been sending material (and not just scrap) to Vietnam for years caution against entering the market with high expectations. “If you have the relationships, you can do it,” says Jeff Dilley of Exsero, a Washington, D.C.-based consultancy with longstanding contacts in scrap and other industries in Vietnam. “Otherwise, forget it.”
The question of China
In June, about 30 steel and scrap industry participants compared the potential of Vietnam to the reality at Metal Bulletin’s Southeast Asian Steel Conference in Hanoi. At least two major U.S. ferrous exporters attended, though neither wanted to comment explicitly on its activities in Vietnam. On the nonferrous side, Randy Goodman of Carolinas Recycling Group (Spartanburg, S.C.) says he hoped to find a market environment much like China’s: diverse and competing brokers with the cash and know-how to handle high-volume imports. What he found instead were “infrastructure issues,” he said via e-mail after the conference. “Vietnam cannot be compared to China,” he concluded.
Several other overseas traders shared Goodman’s impressions, though they would only speak off the record. As one longtime trader with deep connections to China put it, “The only thing that might be bigger than China is the corruption. It’s a real disappointment to all of us.”
Sitting in his office overlooking Hanoi, just a few kilometers from the conference, VSA’s Dinh Huy Tam also uses China as a point of comparison. “Vietnam is maybe 10 years behind China, maybe more,” he tells me. “But we have also learned from China’s mistakes,” most notably the pollution that has devastated China’s environment. “The government will not allow that to happen here,” he says, then he asks, “How do you think Vietnam’s pollution compares to China’s?” I tell him that I see no difference between small facilities in Vietnam and those in China—they’re equally dirty. But the big ones, such as Thep Viet and those owned by Vietnam Steel, look like they could meet North American or European standards. Emissions equipment is up to date, and I saw almost no visible emissions. Tam nods his head in agreement. “Our import standards are also very tight,” he says. “We don’t allow hazardous materials.” This is true: Vietnam’s actual import regulations are strict, and smuggling does not appear to be as prevalent as it is in China.
China, though, remains the question. Can Vietnam compete for scrap, much less for markets in which to sell its finished metal products? Whatever happens in the market, there’s little question that the Vietnamese government’s interest in sustaining economic growth will fuel its steel industry and, eventually, its nonferrous industry. (There’s no nonferrous equivalent to VSA, and Tam estimates that such an association is at least a decade away.) The demand for scrap will grow, but the Vietnamese market will always be marginal compared with China. “Anti-dumping [actions against China] will hopefully control some of that,” Tam says with a smile and a sigh. “And we are building billet capacity now.” At that, he tells me that his time is limited. “I’m sorry, a European steel company is supposed to be here to meet with me in 10 minutes.” He rises and leads me to the elevator. “We have had many international visitors lately.”
U.S. Scrap Exports to Vietnam, 1996-2006 (metric tons)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Aluminum 38 7 4 0 0 33 1 1,747 3,961 3,200 1,842
Copper 428 200 67 0 38 0 36 81 255 504 156
Ferrous 46 297 547 1,226 2,997 4,277 6,844 3,934 5,009 20,222 456,321
Paper 0 0 2 3 8 19 16 28 18 22 38
Tin 0 0 0 0 0 0 0 156 0 284 80
Note: The United States does not export lead, nickel, or zinc scrap to Vietnam.
Source: U.S. International Trade Commission Dataweb
Adam Minter is a journalist based in Shanghai, where he writes about business and culture for U.S. and Chinese publications and maintains a blog, www.shanghaiscrap.com .
Exponential growth in EAF steel production is spurring scrap demand in Vietnam. But even if the country’s buyers can compete with China, import regulations, infrastructure weaknesses, and corruption create high hurdles for trade.