FPG Transplants Petrochemical Model to Steel Production in Vietnam

The success behind the 59-year-old Formosa Plastic Group (FPG), Taiwan's No.1 petrochemical conglomerate by revenue, is due partly to the scaling up of production as much as possible in order to cut costs. Now the group is applying this model to the steel industry, which it entered in 2008 with a huge project in Vietnam.

Its 2,000-hectare integrated steel mill in Ha Tinh is costing the group around US$15.5 billion to build and will be able to turn out 30 million metric tons of crude steel a year when its phase II construction is competed. This capacity is nearly three times that of Taiwan's China Steel Corp. and the same as that of the Shanghai Baosteel Group Corp. of mainland China or the Pohang Iron and Steel Co. of South Korea.

FPG is currently constructing the plant's phase I facilities, which call for US$8 billion in investment and will be able to churn out 7.5 million metric tons of billets and 6.82 billion metric tons of steel materials a year.

FPG decided to go offshore to build its steel mill because Southeast Asia has become the world's most vigorous steel market in terms of growth rate, and because the group failed to pass Taiwan's stringent environmental-impact assessment.

With massive blast furnaces and converter furnaces, which currently do not exist in Southeast Asia, the FPG steel mill will initially supply Southeast Asian steel manufacturers with crude steel and other materials. Located in Vietnam, the mill will be able to ship its products from Vietnam to other countries belonging to the Association of Southeast Asian Nations (ASEAN) free-trade area.

The mill's first blast furnace is scheduled to start running in May, 2015.

In mainland China, FPG will spend another US$1 billion to double the planned output at its stainless-steel manufacturing site in Fujian Province to 1.8 million metric tons a year. The expansion is expected to boost the mill into the ranks of China's top three stainless-steel producers when it is completed in two to three years.

According to FPG executives, the Fujian Provincial Government is even more anxious than the group itself to see the expansion construction completed soon, and hopes that a de-bottlenecking project being carried out at phase I of the plant can go on line together with the expansion project.

To fund these overseas expansion projects, FPG's four flagship enterprises—Formosa Plastics Corp., Nan Ya Plastics Corp., Formosa Chemical & Fiber Corp., and Formosa Petrochemicals Corp.—will raise at least NT$58.6 billion (US$1.9 billion at NT$30:US$1) through the sale of shares sometime in the second quarter this year.

Industry insiders predict that the four companies will seek bank loans for the rest of the capital needed for the expansion projects, since the proceeds of the stock sale will not be enough to cover the total amount.

Climbing into the Top 10

Industry observers believe that these bold investments in the steel industry will likely catapult FPG into the ranks of the world's top 10 steel makers some day, an ambition pursued by the group's late co-founder, C.Y. Wang.

Wang, who passed away in 2008, had been planning to invest in the steel industry since 2003 in response to the increasing involvement of crude-oil producers in ethylene production and oil refining, which have long been FPG's bread and butter. The group estimates that Middle Eastern nations will produce the raw material for making plastic products at only one-third of FPG's cost, thanks to their unmatched position as crude oil producers.

FPG's sixth naphtha cracking complex in Taiwan cost NT$574.4 billion (US$19 billion) to build and helped boost the group's earnings to NT$320 billion (US$10.6 billion) in 2007, up from NT$90 billion (US$3 billion) five years earlier. Now, however, the increased output of petrochemical products in the Middle East has led to global overcapacity, prompting foreign institutional investors to unload their FPG stocks.

In the beginning, Wang planned to open mills in mainland China and carried out inspections in Zhangzhou, Fujian Province; Ninbo, Zhejiang Province; Qingdao, Shandong Province; and Henan Province. However, then-President Lee Teng-hui imposed his “No Haste, Be Patient” policy on Taiwanese investment in the mainland; and this, plus the mainland's policy of macroeconomic controls, prompted Wang to cancel his mainland investment plans.

The Taiwan government approved FPG's steel-mill investment plan in Taiwan in 2005, and the group originally planned to initiate the project after six months. The project, however, failed to pass the island's environmental-impact assessment.

Industry sources believe that the group would have been able to ride the projected 10-year uptrend in the global steel industry had the investment project been carried out as scheduled in 2005.

With prospects for its steel-mill investment in both Taiwan and the mainland looking dim, FPG decided to put its steel mill in Vietnam, where it has also built a petrochemical-manufacturing complex. The petrochemical complex, whose phase I construction has cost US$750 million, is the biggest single petrochemical investment in the ASEAN area.

Stimulating Downstream Businesses

According to industry insiders, FPG's steel and petrochemical complexes in Vietnam will generate combined revenues estimated at NT$2.5 trillion (US$83.3 billion) a year after they go into full operation. They are expected to stimulate revenues at least three times that amount in the midstream and downstream sectors in Southeast Asia.

The insiders feel that the three-year delay in implementing the steel-mill project has caused huge losses for FPG, including an additional NT$100 billion (US$3.3 billion) in spending on infrastructure investment and losses associated with missing the peak cycle in the global steel market.

Regardless of its late entry into the field, FPG executives are confident that they can achieve outstanding business results in the steel industry just as they have in petrochemicals, thanks to their “Wang-style” cost management. In Taiwan, the late Wang is praised as the “God of Management” for his success in leading FPG to the position of Taiwan's biggest manufacturing conglomerate by revenue with his style of cost-efficiency management. (The Hon Hai Group is now the No.1.)

This management philosophy has been explained by W.L. Shi, founder of the Chi Mei Corp., the world's No.1 producer of ABS (acrylonitrile butadiene styrene): “If Chi Mei and FPG were sausage producers, Chi Mei would produce its sausages with outsourced pork. But Wang would produce his sausages by making everything in-house, including the pork feed. So, his production is absolutely less expansive.”