Electricity Prices Surge, Steel Industry Profits May Decline

Electricity Prices Surge, Steel Industry Profits May Decline

Steel NewsDate: 29-11-2023 by: Nhu Quynh

2023 has proven to be a challenging year for the steel industry as many steel companies continue to struggle with losses, further exacerbated by the recent electricity price hikes. Estimates suggest a 4.5% increase in electricity costs, resulting in additional cost of goods sold, potentially leading to a 23% decline in the industry's profit before tax.

The steel industry is experiencing consecutive periods of suffered losses

Several steel enterprises in Vietnam have been consistently operating at a loss in 2023. Recently, SMC Trading Investment Corporation reported its business results for the third quarter of 2023, with a revenue of 3,141 billion VND and a net loss of 164 billion VND. Cumulatively for the first nine months of the year, the revenue reached 10,574 billion VND, marking a 44% decrease compared to the same period last year and a loss of 549 billion VND.

One of the pioneering steel enterprises in the Vietnam steel industry, Vietnam Steel Corporation (VNSteel), recently released its consolidated financial report for the third quarter of 2023, achieving a net revenue of 7,947 billion VND with a loss after tax of 172 billion VND. Accumulated over the first nine months of the year, VNSteel's net revenue reached 23.027 billion VND, a 24% decrease compared to the same period last year. The loss before tax was recorded at over 431 billion VND, whereas in the corresponding period last year, it was nearly 383 billion VND.

Thai Nguyen Iron and Steel Joint Stock Corporation (TISCO) recently released its business results for the third quarter of 2023, reporting a revenue of 2,414 billion VND, a 25% increase compared to the second quarter of 2023. However, due to high production costs, the company still incurred a profit before tax of 57 billion VND. Overall, during the first nine months of the year, the enterprise achieved revenue of nearly 6,790 billion VND but recorded a loss before tax of 193 billion VND.

In general, except for major players, most steel mills in the Vietnam steel industry have reported losses. The primary reason behind this is the weakened purchasing power due to the sluggish real estate and construction markets.

An electricity price hike could potentially reduce steel industry profits

The Vietnam Electricity Group recently raised the average retail electricity price to 2,006.79 VND/kWh (excluding VAT), marking a 4.5% increase from the previous rate of 1,920.3732, or an additional 86.41 VND/kWh effective November 9, 2023. With two price hikes this year, Vietnam Electricity Group has collectively increased the price by 142.35 VND/kWh. This increase in the cost of production inputs, such as electricity, could significantly impact the steel industry. Elevated electricity prices translate to heightened production costs, exerting substantial pressure on the profit margins of steel companies.

Typically, electricity costs represent around 9-10% of the cost of goods sold for steel manufacturing companies. With a projected 4.5% increase in electricity costs leading to a rise in product costs, the overall profit before tax of the steel industry could potentially decrease by 23%. This significant decline in profits due to the additional electricity expenses noticeably affects the operational efficiency of businesses. However, if companies manage to offset the increased electricity costs by raising prices for consumers, it could potentially mitigate the impact of the rising input costs.

Looking at the bigger picture, Vietnam Electricity Group's increase in retail electricity prices will lead to higher production costs for steel manufacturing enterprises, thereby reducing their profits. This might have a certain impact on the operational activities of these individual enterprises as well as the steel industry as a whole.