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Does galloping increase in steel price result from trade remedies?

Since 2012, Vietnam started investigating to apply trade remedies measure. As of 2021, Vietnam has initiated 20 anti-dumping and safeguard investigations. Among them, there are 8 cases of investigation for imported construction steel. The types of steel under investigation include billet and long steel, cold rolled stainless steel, galvanized steel, coated steel, H-shaped steel, color coated steel and cold rolled steel.

Starting from 2013, anti-dumping duty levied on cold rolled stainless steel, galvanized steel, coated steel, H-shaped steel, color coated steel, and cold rolled steel imported from China, Malaysia and Korea have been applied respectively. The anti-dumping duty rate is applied depending on the foreign manufacturer. The highest rate can be up to 38%[i], the low tax rate is only for a few businesses, from over 3% to 10%.

Particularly, safeguard tax applied globally on billet and long steel products, within 4 years from 2016. At the beginning of 2020, this safeguard tax was extended for 3 years more with the tax rate gradually reduced from 15.3%. At the same time, during this same 3-year period, billet and long steel are also subject to anti-circumvention tax, with the tax rate decreasing year by year from 9.4%[ii].

Data on Steel prices

According to Steel Industry Reports, since 2015, steel prices and domestic consumption have both been recorded as increasing every year. In 2015, thanks to the decisions on imposing anti-dumping and safeguard duties of the Ministry of Industry and Trade, most steel enterprises reported sudden profits. In 2018, the steel industry was officially recognized as one of the export items with a turnover of over 1 billion USD. In 2019, steel prices have not shown signs of stopping, and have reached the highest price in the first 4 months of 2021[iii].

According to reported data, in early May 2021, domestic steel prices hit a record level of over 17,000 VND/kg, increasing by 40-50% compared to the fourth quarter of 2020[iv]. On average, steel prices increase by more than 10% per month. Only in the first 4 months of 2021, steel prices increased by 23% over the same period last year[v]. As of May 22, the price of steel aggregated from large steel production enterprises and corporations in the three regions is about 18,000 VND/kg depending on the type[vi]. According to experts, steel prices will continue to rise in the near future.

Since the beginning of the year, construction enterprises and contractors have continuously reported losses[vii]. The increase in steel prices has a great influence on the construction progress because most contractors sign fixed-price contracts. Some businesses even reflected that, just 10 days after signing a contract with a steel supplier, the reported price increased by more than 10 million VND/ton[viii].

Along with the price of steel, the price of other construction materials also increased. The price of water pipes increased by 20%, electricity, sand and other items also escalated[ix]. Investors and people building houses are also in a state of anxiety because they have to postpone the construction plan due to high costs. Real estate businesses said that by the third and fourth quarter of 2021, the above price increase will affect the selling price of real estate products[x].

On the stock market, the group of steel stocks also continuously increased "staggeringly" throughout the first months of 2021. Accordingly, HPG recorded an increase of 31.7%, HSG increased by 36.5%, and TLH increased by 34. %, NKG up 56%, POM (Pomina Steel) up 46%, VGS (Vietnam Duc Steel Pipe VG PIPE) up 69%, SMC (SMC Trading Investment) up 73%, HMC (Ho Chi Minh City Metals) up 36%, etc., and all are at or near all-time highs[xi].

Solutions to stabilize steel prices in 2021

Faced with this situation, the Ministry of Industry and Trade has come up with short-term solutions to stabilize the supply-demand and steel prices in 2021. Specifically, the Ministry of Industry and Trade recommends the Ministry of Finance to have a policy to regulate import taxes on imports of some steel products having large fluctuations in price, direct the General Statistics Office to provide monthly steel production and consumption situation; directing the Ministry of Construction to forecast and supply the economy's demand for construction iron and steel in 2021 to balance the demand for steel supplied to the domestic market and to export steel products of all kinds.

Regarding the long-term solution, for construction steel, the Ministry of Industry and Trade said they will direct relevant authorities to strengthen trade remedies to help domestic manufacturing enterprises develop and meet the domestic demand as well as export. For steels serving the mechanical, processing and manufacturing industries, the Ministry of Industry and Trade recommends the Government to have tax policies and investment incentives to expand and attract hot-rolled steel production projects. At the same time, the Ministry of Industry and Trade also proposed the Ministry of Finance to study and apply export tax on hot rolled billet and construction steel when there is a shortage of domestic supply[xii].

Factors that can affect steel prices

According to economic experts, Vietnamese steel still has to import raw materials. Raw material prices in the world increased in line with market trends as steel demand in all countries increased sharply. During the recent COVID-19 epidemic, steel prices in the US and China are also at record highs, but are still consumed strongly, serving to revive the economies[xiii]. The increase in the price of steel is completely according to the law of supply - demand[xiv].

Iron ore, which is the main raw material for steel production, has recently been reported to increase uncontrollably. Since the beginning of the year, the price of iron ore on the international market has increased by about 40%. In early May 2021, in Singapore market, iron ore price for the first time in history was recorded at USD 226/ton[xv]. Iron ore prices hit record highs on the back of a combination of factors including dwindling supply, surging demand for steel and the prospect of short-term supply disruptions. According to the World Steel Association (WSA), Australia accounts for 53% of global iron ore supply, followed by Brazil with 23% of production. Meanwhile, the demand for iron ore in China is huge because the country needs to produce a huge amount of steel, for infrastructure projects, and to promote the recovery of the economy after the pandemic. According to the latest figures, 70% of iron ore imported by sea is being shipped to China, much of which is Australian iron ore. At the same time, iron ore supply from the two countries is forecast to be interrupted in the short term due to weather factors in Australia and the impact of the Co-vid epidemic in Brazil. Concern about supply causes investors to speculate, which is also the reason why iron ore prices soar[xvi]

In which, we think it would be remiss not to mention the impact of trade remedy measures on the current steel price situation. The overall picture of the steel industry before and after trade remedies has changed markedly. From being threatened and at risk of losing the market, the trade remedy tax has partly helped the domestic steel industry regain the playing field, increase output, and boost consumption. Although domestic steel prices are at historic highs, they still have a market advantage over imported steel prices after anti-dumping and safeguard duties.

The steel industry in Vietnam has been very successful in applying trade remedies. In essence, these measures are seen as going against the WTO's trade liberalization policy. However, these measures are still allowed to use by WTO, through rigorous investigative processes. In order to avoid abuses and adverse effects on the trade balance, WTO also requires parties to consider the interests of third parties, the downstream industry, and the interests of consumers before making decision on applying tax.

In the case of Vietnam's steel industry, the Ministry of Industry and Trade needs to carefully consider whether the current application of anti-dumping and safeguard duties is indirectly causing difficulties for the construction industry and consumers. If the goal of protecting the domestic manufacturing industry has been achieved, the Ministry of Industry and Trade needs to review the application of trade remedy taxes to control the balance of supply and demand of the steel industry, ensuring commitments to the WTO.

(Do Hong Ngoc - Junior Associate)