literature on vietnam metal market

Al Billet Aluminium Billet Comex Commodity exchange EU Europe Union GDP Gross Domestic Product ISO International Standards Organization JIS Japanese International Standards LC Letter of

Furthermore, I want to give my sincere thanks to Finance department andImport-Export Department of Oristar (Oristar Im-Export Co., Ltd) for giving

me permission to commence this assignment in the first instance, to do thenecessary research work and to use departmental data, especially Mr PhamQuoc Hung, Ms Lan Huong, Ms Hai Quy and Ms Thanh Nga for theirvaluable resource offer to complete the assignment of this kind

Last but not least, I would like to express my warm thanks to my familyand my friends who are always beside and support me during my writing thisgraduation assignment

LIST OF FIGURES

Figure 1 Total revenue between 2003 and 2006 (billion VND) 10 Figure 2 Total revenue of three quarters 2007 (billion VND) 11 Figure 3 Total revenue of first three quarters 2007 (billion VND) 14 Figure 4 Total quantity on turnover of Al Billet from 2004 to 2006 (metric

ton) 18

Figure 5 Quantity of Billet Oristar sold to customers through years (metric

ton) 19

Al Billet Aluminium Billet

Comex Commodity exchange

EU Europe Union

GDP Gross Domestic Product

ISO International Standards Organization

JIS Japanese International Standards

LC Letter of Credit

LME London Metal Exchange

MT Metric Ton

SC Sale Contract

CONTENTS

As being one of the expert agents in Vietnam metal market, Oristar hasachieved remarkable success even though they are just five years in thisindustry This is not too strange for us to imagine how it really is but it stillmakes us curious about what they are doing and how every thing is running inevery day working in the company Why a newcomer in a very sensitivemarket like metal market can be survived and gain a lot of success whichmight take decades for many existing companies to do that In this report, wewill have the answers for all the above questions

Because metal market is a special market which is operated in differentregulations to consuming market’s and influenced by many sensitive factors,

so before going to analyzing Oristar’s business performance, we had bettergive an overview on metal market in Vietnam That might help viewers tofollow easily Analysis on Oristar’s business activities should remark itsachievements and also remains that will be discussed in the last chapter ofrecommendations Hence, there will be three major chapters in thisassignment

Chapter I: Literature on Vietnam metal market

Chapter II: Oristar’s business activities and its economic performance

on Vietnam Aluminium Billet

Chapter III: Solutions to rev up Oristar’s business activities in Vietnam

Aluminium market

The report may be limited in scope of study in a way that just focuses onone major branch of Oristar’s business activities that is Aluminium Billet

Therefore, there are still many problems needed to be discussed in furtherresearches

CHAPTER I LITERATURE ON VIETNAM METAL MARKET

1.1 Background of import and export activity

1.1.1 Definition of international trade and import-export activity

International trade is the exchange of goods and services across

international boundaries or territories

Nowadays, International trade is playing a more and more importantrole in world economy and taking a higher contribution to GDP of eachcountry International trade has been a major driver of global growth andprosperity over the last fifty years Barriers to trade have fallen significantlyover the last half-century thank to a lot of agreements on free trade around theworld Hence, International transactions have been increasing dramatically inrecent day

Importation is the activity or process of bringing things into a country

from abroad in order to sell them Import is any good or commodity, broughtinto one country from another country in a legitimate fashion, typically foruse in trade Import goods or services are provided to domestic consumers byforeign producers

Exportation is the activity or process of selling goods to othercountries Export is any good or commodity, transported from one country toanother country in a legitimate fashion, typically for use in trade

Import-Export activity is a key part of international trade in whichgoods are transferred between countries This is a complex process, whichrequired a lot of other supporting activities such as settling balance, shippingcargo, and buying insurance policy

Payment is one of the most vital elements of any sale contract because

it is related to the primary aim of deals That is benefit Therefore, whetherdoing business domestically or internationally, buyers and sellers have certainbasic objectives when they settle upon a mutually acceptable method ofpayment:

• Buyers want to receive the goods they order

• Sellers want to be paid the agreed upon price in a timely manner

Transportation is also an essential part of international trade It is the

movement of goods from one place to another However, it is just happened

to physical sale contracts, which state that goods must be transferred from onecountry to another It is not a long time ago when international transactionscould not reach between the dealers at far distances However, a long with thedevelopment of world trade, transportation services has had breakthroughjumps Today, nearly all human’s innovation in transport has been applied tocargo transportation among countries and it seems that there is no where inthe world that could not be reached by transporter That is really a big support

to boosting international trade

In summary, basic definitions of international trade especially im-exportactivity and other supporting services have been covered briefly Hopefullythe background will be helpful for later analysis

1.1.2 Definition and importance of Agent

Agent is an individual or firm authorized to act on behalf of another

(called the principle), such as by executing a transaction or selling andservicing an insurance policy The agent does not assume any financial risk inthe transaction, as a dealer would

According to the above definition, there is an important point that anagent acts on behalf of another and take no risk for any financial problem withthe activity Because an agent does not take title to the good, he won’t have tobear financial risks but can not benefit the differences in price of goods.However, an agent is paid a commission for the service he offered to theprinciple The commission is usually a percentage of the value of goods orservices These are some key points of an agent on theory

Recently, the international trade has been expanding aggressively thank

to free trade policies of countries, which also facilitates oversea agent activity.Basically, the appearance of agent is to help trade flow smoothly and easily.Particularly, an agent provides a service of representing another on doingcertain actions following his principle’s instructions Agent’s activities notonly cut down cost and time in case of two-side deals but also help the sellerupdate the market information

1.2 Overview of metal market

1.2.1 World metal market

Metal market has its own rules which are very different from others.One of the reasons is that metals are special goods, which follows onlymarket supply and demand There are many factors affecting to metal price.The fluctuation in price of one metal will have widespread influence on thematerials, semi-products, and finished products used the metal as well Themovement in metal price is presented on metal exchanges such as LME(London Metal Exchanges), Comex (Commodity Exchange) 2These marketsare the guide line for all suppliers to make their own price because price ofmetals, which are inputs for their production, are reflected on such metalexchange markets Hence, if there is a small change in price of one metal in

LME, for example, it will lead to a succession of changes in price of allmaterials and products made from the metal

Because metal market is very highly organized and operated on marketsupply and demand through 24-hour transactions, it has been attracting moreand more buyers and sellers to make deals in the market The more deals themetal exchanges carry out, the more exact it reflects on the price of metalsregarding to market supply and demand Studying the relation of the twogiants in the world metal market, LME and Comex might explain clearer

Today, LME and Comex are the two world biggest metal exchanges.Each one covers a large part of the world For example, LME covers EU,Middle East and some part of Asia and Africa while Comex covers allAmerica, Australia and some where else Even though it seems that the twometal exchanges are fiercely competing to each other, they actually aresupporting each other It is because there is difference in time-belt betweenNew York and London, so working time of each market is different, whichenable suppliers and manufacturers around the world to expand theopportunities on booking price by using both prices of the two markets Inparticular, they might decide to use LME price during the working day ofLME but once LME close, they turn to use Comex price until this marketclose Hence, the quotation period 3will be expanded and it appears moreopportunities for dealers in choosing price

LME has been the world biggest metal exchange since it wasestablished 130 years ago at the centre of London It is the world’s premiernon-ferrous metals market offering futures and options contracts foraluminium, copper, nickel, tin, zinc and lead plus two regional aluminiumalloy contracts The Exchange provides a transparent forum for all tradingactivities and as a result helps to ‘discover’ what the price of material will be

months and years ahead This helps the physical industry to plan forward in aworld subject to often severe and rapid price movements.

In 2006 LME achieved volumes of 87 million lots, equivalent to $8,100billion annually and between $35-45 billion on an average business day.Despite its location in London, the LME is a global market with aninternational membership and with more than 95% of its business comingfrom overseas4

In summary, metal market is a high standardized and liquid marketwhich is directed by Exchanges such as LME and Comex However, the LMEhas been keeping the position of a world leader thank to its long history andhigh prestige The two most important roles of LME are providing prices due

to the current supply/demand situation and building quality standard control

1.2.2 Metal market in Vietnam

As a part of world metal market, Vietnam market has operated on thesame regulations of the world metal market That means Vietnameseindustries depend on LME or Comex prices to decide domestic prices.Nevertheless, supply and demand in Vietnam might not go with the trends inthe LME or Comex because factors influenced on domestic prices aredifferent to the world market’s

One of the remarkable characteristics of Vietnam market is the isolationamong manufacturers in the same industry Until now, there hasn’t had anofficial organization in Vietnam which gathers all manufacturers in the sameindustry and operates on the purpose of protecting domestic industry That’swhy market trends in Vietnam usually move adversely for both themanufacturers and the industry It is caused by the price wars amongmanufacturers, which makes metal prices go down much while the world

prices still remain or just suffer a small reduction Such tough and endlesscompetitions have led not only to the failure of manufacturer individually butalso the whole domestic industry.

For example, the situation of aluminium billet market in Vietnam.Recently, world aluminium price has been increasing each day from about

$2346 to $2567/MT 5within first three weeks of October, 07 However,domestic aluminium price has been continuously rising in the period Thereason is that Vietnamese aluminium manufacturers are stuck in a marsh ofprice wars, so the domestic price trend goes in a contrast way with the worldtrend The roof of the problem might come from the individual behavior ofmanufacturers which distorted the real supply and demand on the market andled to the unbalances in price between Vietnamese aluminium billet marketand the world market Hence, it appears an urgent demand of establishing anorganization which is responsible for directing and orienting the market andpreventing such continual price wars as it is being this time in Vietnam

Besides, another reason is that in Vietnam there are hardly any giant inaluminium industry who may have a big influence on the whole market orcontrol the market It is a fact that almost all big aluminium manufacturers inVietnam have had similar performance and equal impact to the market That’swhy the competition in the market has become so tough.Some big aluminiummanufacturers in Vietnam are Do Thanh, Dong Anh, Song Hong, Scancom,Quang Binh, Nam Hai, and Dien Bien There are 60 % of these companieswhich have ever made deals with Oristar6 on aluminium billet

CHAPTER II ORISTAR’S BUSINESS ACTIVITIES AND ITS ECONOMIC PERFORMANCE ON VIETNAM ALUMINIUM BILLET2.1 Company profile

2.1.1 Foundation and organization

Oriental star Import-Export Co., Ltd (shortened form as Oristar.Co.Ltd) was established in 2002 by Mr Pham Quoc Hung Oristar has twooffices in North and South of Vietnam Head office is located at No.2, TranThanh Tong, Hanoi and another branch at 51/60 Cao Thang, 3 ward, HCMcity The number of employees has increased from 30 to 50 people within 2years from 2005 to 2007

Oristar has two Business departments at the two offices, one Im-Exportdepartment, and one finance department at the head office in Hanoi only.Main business activities of Oristar are carried out in the close coordination ofthese departments that will be focused later

2.1.2 Introduction to Oristar’s main business activities

Oristar is a trading company special in non-ferrous materials and

semi-products There are two main business activities carried out by Oristar First,

it imports and resells semi-products such as copper Bus Bar, tube, aluminiumplate and sheet, anodized aluminium coils and metal ceilings to domestic

market Second, Oristar performs as exclusive sales agent for many suppliers

of non-ferrous metals in Vietnam such as Formosa (Malaysia) for AluminiumBillet, Hydro (Norway) for Primary aluminium ingot, MAA (Australia) forAluminium alloy ingot, Sterlite (India) for Copper Cathode Even though

importing and reselling activity takes more time and affords, it is the activity

of being sale representative that brings more money to the company Thecommodities sold on behalf of suppliers almost are materials formanufacturing industries For example, Aluminium billet is input forextrusion industry, Copper Cathodes is used popularly as input for cable andelectronic industry Oristar obtains a commission based on the quantity of thematerials it sold and on the agreement between Oristar and its suppliers.Among all materials Oristar sells on behalf of foreign suppliers in Vietnam,Aluminium Billet is the most strategic one with highest annual revenue In thenext part, we will focus more on Aluminium Billet in analyzing Oristar’sbusiness activities

2.1.3 Oristar’s market share and position in the market

Through five years running business, Oristar has created a goodprestige in Vietnamese metal market especially for Aluminium Billet andCopper Cathodes Today, there are about 30 % of extruding companies inVietnam which have imported aluminium billets through Oristar For othermaterials such as copper cathodes, primary aluminium alloy ingot andsecondary aluminium ingot, Oristar has also built rather stable networksamong oversea suppliers and domestic companies, which gives it a position inthe market

Oristar’s role in the process is like a broker, who connects the buyersand the sellers together However, Oristar has bigger liability to both suppliersand customers Particularly, it has to follow up each sale contract and if there

is any failure, Oristar has to co-ordinate in solving problem with both sides.Sometimes, Oristar ought to compensate for trivial claims from buyers formaintaining good business relationships with its suppliers One of the mostsignificant responsibilities of Oristar as being agent is selling materials as

much as possible to local customers Each year Oristar has to meet targetrevenues set by its suppliers, which is a good way for the suppliers to evaluateperformance of their agent and also adjust commission rate to the agentaccordingly The strength of Oristar here is that it knows very well aboutVietnamese market, where is rather strange to foreign suppliers to approach.For local customers, they can make advantage of Oristar’s expertiseknowledge of metal market, which will support much for their decisionsmaking about where, when and from whom they should import In short,Oristar plays a very importance role in connecting foreign suppliers anddomestic customers and keeping the international transactions between themflow smoothly and easily

In general, company profile has given the key information aboutOristar, its organization, market share and major business activities In thefollowing part, we will go in more detail Oristar’s business performancethrough 2003 to 2006

2.2 Business performance of Oristar from 2003 to 2006

2.2.1 Analysis on revenue during the period of 2003-2006

As mentioned Oristar has been started since 2002, until now it has beenrunning for five years The total revenue through years was increasingdramatically The following is the table of revenue from 2003-2006:

Total revenue between 2003 and 2006 (billion VND)

Source: Data issued by Oristar finance department 2006

The second year after setting up, the revenue increased about 50% incompared with 2003 The revenue broke record in 2005, which was 4 timesbigger than 2004 The increasing trend has still continued in 2006 with aslight rise All in all, Oristar’s revenue has continuously increased through 5years especially in 2005 with nearly 100 billions VND That is a veryimpressive number to a new established company In the total revenue, 40%comes from importing and reselling activity and the rest 60 % is from thecommission of being agent The below will explain more the both two mainbusiness activities

2.2.2 Oristar’s main business activities

Importing and reselling activity focuses on finished and semi-finishedproducts such as copper Bus Bar, tube, aluminium plate and sheet, anodizedaluminium coils, metal ceilings, aluminium sandwich panels Copper Bus Barhas been leading in turn over and being the strategic product of Oristar fromthe beginning For recent years, Copper Bus Bar has reached the revenuearound 12 to16 billions VND Aluminium plate and sheet is the second oneafter copper Bus bar with annual revenue around 7 to 10 billions VND Thisbellow table would describe in detail business activities on these products thisyear

Total revenue of three quarters 2007 (billion VND)

Product Copper bus bar Copper tube Anodized Al Metal

ceilings

Source: Data provided by Oristar finance dept-September, 2007

The latest figures about business results of Oristar’s businessdepartments are still moving in the increasing trend in annual revenues As

mentioned, Copper bus bar has been the leader in revenue since 2003 Thenumber of 9.3 billions VND in three quarters of 2007 turnover has made itbecome an uncompetitive rival to others However, the rest three commoditiesall have kept increasing sales compared with last years.

Business departments (BDs) take responsibility to sell these products todomestic market Basically, BDs have to do market research first and thendecide how much they should import to resell to the local market A reportwill be sent to Import-Export department for importing the estimated quantityand here the responsibility has been passed to Im-Export dept (department) The duty of Im-Export dept is working on documents and choosing thesupplier who can offer the best quality at the best price However, in case theimported items cannot be sold completely in domestic market, it is againImport-Export department who is responsible to return them to the sellerswith 60% lower than import price Finance department is supposed to open

LC or function other terms of payment as TT, D/A, D/P Normally, L/C and

TT are the most popular ones in Oristar’s international payment L/C isusually used for the payment of whole commercial invoice but for partlypayment TT is preferred Therefore, whenever there is an importingrequirement report from Business department, both Im-Export dept andFinance dept must be involved in

Oristar has two business departments in the north and the south ofVietnam and each department covers a separate market accordingly Asspecial in aluminium and copper product, Oristar’s customers are mainly inindustries such as electrical equipment manufacturing, metal fabrication, andautomobile and motorbike production However, one of difficulties to Oristarhere is that most of its potential customers are Japanese companies whichimport materials directly from its mother company in Japan at a very lowprice Therefore, Oristar hardly has any competitiveness in such situations