News Room - Steel Industry

Posted on 25 Jun 2008

POSCO falls as Vietnam firm drops steel joint venture

Vietnam's state-run shipbuilder Vinashin has cancelled plans to invest US$1 billion in a US$5 billion steel venture with South Korea's POSCO, sending shares in the world's fourth-largest steel maker down 3%. 

The decision, part of Vietnamese government efforts to cut spending to reduce inflation running at 25%, is an additional blow to POSCO, which has seen a US$12 billion plan to build steel mill in India delayed by frequent protests.

A POSCO spokesman told Reuters the company would proceed with the steel mill plan on its own.

Shares in POSCO dropped 2.4% to close at 539,000 won after falling to 533,000 won, lagging a 0.9% drop in the broader market.

In January, Vietnam approved POSCO's proposal to build the steel mill in Van Phong Bay, near the south-central resort town of Nha Trang, raising environmental concerns in one of Vietnam's most beautiful bays.

POSCO said earlier this year it aimed to start construction of the plant, which will have annual output of 4 million tonnes, next April.

The South Korean group is one of many global steel firms, including India's Tata Steel and Taiwan's Formosa, looking to Vietnam for expansion and as a gateway to the Southeast Asian market.

POSCO has already started building a separate US$1.13 billion facility in the southern coastal province of Ba Ria-Vung Tau that will produce 1.2 million tonnes of hot-rolled steel products annually from next year.

But the group has seen its overseas expansion drive hitting a snag on weakening global economic growth and local protests.

Last week, one man was killed and two others injured in clashes over POSCO's planned plant in an east Indian village, as tensions mounted between residents looking forward to jobs and economic development and those angry at having to give up land.

Spending cut

Vinashin Chair Pham Thanh Binh said in a statement that in addition to the POSCO venture, it would also delay or suspend 40 other projects with a total investment of 6.5 trillion dong (US$395 million) to refocus on the group's core shipbuilding businesses.

Prime minister Nguyen Tan Dung, who is visiting the United States this week to promote trade and investment, last month ordered a reduction in recurrent expenses by about 10% and public investment drawn from the state budget.

The government, grappling with seven consecutive months of double-digit inflation and a tripling trade deficit that have hit investor confidence in the high-growth economy, ordered state-run businesses to change their business plans.

Too many have diversified into non-core areas such as banking and property and needed to focus on their speciality, economists and the government said.

Borrowing for the increased spending on big state-run projects has been cited by economists and monetary authorities as one of the causes of inflation. Credit growth was 54% last year and record amounts of foreign direct investment poured into Vietnam.

The International Monetary Fund recommended that in addition to tightening monetary polices to curb inflation Vietnam should send "a clear signal that the expenditure and borrowing by state-owned enterprises, especially the larger conglomerates, is being reined in, their investment projects prioritised, and their operations limited to their core business."