Why Joint Venture Projects With China “Planned Losses” $25.3 Million But The Actual Loss Of $500 Million?

Quy Xa iron ore mining and quarrying and Lao Cai iron and steel plant (VTM) are allowed to lose $25.3 million in the first two years of operation but at the end of 2016, the accumulated loss was $500 million.

Inspection results of the Lao Cai Iron and Steel Plant Project and the Quy Xa Ore Mine Project of the Viet Trung Mineral and Metallurgical Company Limited (VTM) have been revealed the reasons for loss of investment up to $273 million in 2 consecutive years after putting into operation.

Specifically, up to December 31^st, 2016, the accumulated loss is $500 million. Meanwhile, as planned, in the first two years when the Iron and Steel Factory was put into operation, VTM was allowed to lose $25.3 million.

According to the report, the main reason for the loss-making business results from the sharp fall in selling prices of steel products in the domestic market and in the world. At the time of project preparation and approval, ingot steel price in Vietnam was 561 / ton. However, the actual price of VTM billet sold in 2015 is $360 / ton, in 2016 is $350 / ton.

The actual cost of the project was twice the original plan cost

In addition to the above reasons, the project also suffered due to some reasons such as high-interest rate during the investment period, the interest rate of 20.5% compared to the calculation in the investment project is 10.5%. USD exchange rate increases during construction EPC package also increases investment costs.

On the other hand, the investment structure of the project mainly uses commercial loans leading to high financial costs of VTM, financial expenses accounted for 11% of the cost.

In addition, due to the prolonged investment preparation period, when the project coincides with the time of domestic and regional impact of the “price storm”, raw material prices increase sharply, while the labor price locally-driven adjustment leads to an increase in construction costs.

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The report also said that when deploying the project in Tang Loong Industrial Park, Bao Thang and Lao Cai districts are not clean, VTM has to spend more time to carry out site clearance and construction work with a cost of $18.7 million.

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Meanwhile, the price of iron ore on the market fell sharply, the exploitation for production and consumption did not reach the output reduces the effectiveness of the project. Coke prices account for up to 40% of the price fluctuations due to policy cuts in coal production and tightening of China’s transport capacity, which has led to high product prices.

Subjective reasons were also pointed out that due to the fact that the new factory was put into operation, the management and operation level of the staff was limited and did not meet the requirements of mastering technology and production business management.

In addition, prolonged project progress, the delay in completion of the project and the plant’s inability to bring the product to market, the time of high prices of steel billet and steel, lost the ability to collect Return capital to create profit in production and business.

The final cause is indicated by the production line is not closed to the last stage of steel products should not save maximum energy and investment infrastructure.

In conclusion, Lao Cai Provincial People’s Committee also pointed out many shortcomings in this project and introduced a series of remedies as well as proposed the review of the shortcomings and disadvantages mentioned for the rolling Ministry of VTM and Vietnam Steel Corporation (VNSTEEL).

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