Source: Korea Times
POSCO, Hyundai Steel and other domestic steelmakers will not likely see any meaningful rebound in the first half of this year, as the spread of coronavirus will heavily dampen demand, according to industry officials, Monday.
In the wake of potential stimulus measures by the Chinese government, many expect a V-shaped earnings recovery as downstream industries in China are anticipated to come back on track.
The price of hot rolled steel in China declined by nearly five percent in the second week of this month from a week earlier. The prices of thick plate, steel bar and other steel products also showed wider-than-expected decline ranging between 1 and 2 percent, said market research firms and industry officials.
Increased inventory of steel products in China account for the drop following weakening demand from construction, shipbuilding, automobile and other manufacturing industries due to the prolonged spreading of the virus.
“The Chinese market has been under a protracted oversupply since October last year, as Chinese steelmakers keep their furnace operation rate at a high level,” an industry official familiar with the matter said wishing to remain unidentified.
“This has been a major downward pressure for domestic steelmakers, which resulted in disappointing earnings in the fourth quarter of last year.”
In the fourth quarter of last year, POSCO posted 557.6 billion won in operating profit, down 56 percent from a year earlier. Hyundai Steel swung to an operating loss of 147.9 billion won.
To address this, the steelmakers said on their respective conference calls that they will try to increase pricing in upcoming negotiations with their clients and they expected the increased prices will be reflected in their earnings in the first half of the year.
“Initial outlook was that POSCO will show recoveries in the first half as the steel product spread (the margin between raw material and finished product) will be improved and the U.S.-China trade dispute will also be soothed,” Yuanta Securities analyst Yi Hyun-soo said.
“However, the impact of the virus appears to be more serious than initial expectation, which will slow down the price, demand and the recovery of POSCO.”
Any attempts to boost production of steel-oriented products in China would provide a fresh impetus for South Korean steel manufacturers for “noticeable recovery” in the latter half of this year, analysts added.
“Clients set up their yearly production plan,” another industry official said. “If there is an output decline in the first half of a year, they ramp up production in the second half to meet the yearly target. Though it depends on the progress of the COVID-19 situation, steelmakers expect the demand will likely show a sharp recovery in the second half.”
A silver lining for POSCO and Hyundai Steel could be the Chinese government’s potential stimulus policy to revitalize the country’s economy.
“The chance is very high that the Chinese government will implement any type of measures for the recovery of its economy in the near future, and industries using steel will be at the center of those measures,” Yi said. “Though it is hard to expect the timeframe of the measures, there is a great chance of rebound in the steel industry.”
China’s Ministry of Transport was planning to spend up to 1.8 trillion yuan ($257 billion) on roads and waterways throughout this year, and it will actively push effective investment to achieve its target.