Steel Market to Remain Sluggish through Next Year
The author is an analyst of KB Securities. She can be reached at hyejung.jung@kbfg.com. -- Ed.
3Q22P OP at KRW373.0bn (-54.9% YoY)
— Hyundai Steel reported 3Q22P revenue of KRW7.0tn (+19.4% YoY, -5.2% QoQ), OP of KRW373.0bn (-54.9% YoY, -54.6% QoQ), and NP (attributable to controlling interests) of KRW274.6bn (-53.0% YoY, -49.9% QoQ), with OP missing consensus by 10.5%. On a standalone basis, revenue came in at KRW6.0tn (+17.1% YoY, -7.9% QoQ), OP at KRW343.1bn (-56.0% YoY, -57.3% QoQ), and NP at KRW275.7bn (-51.4% YoY, -51.4% QoQ).
Some impact from market slowdown and typhoon damages reflected
— The sharp decline in 3Q22 OP is attributable to: (1) blast furnace maintenance and lower electric furnace production volume due to typhoon damages at the Pohang plant; (2) a decline in ASP on weaker steel demand amid an economic slowdown; and (3) one-off expenses related to typhoon damage repairs.
— 3Q22 steel product ASP came in at KRW1.331mn/mt (+17.3% YoY, -1.0% QoQ). Blast furnace ASP rose 18.8% YoY, but declined 0.36% QoQ. This is likely due to price hikes following successful price negotiations for automotive steel sheets with Hyundai Motor Company and Kia Corp. Electric furnace ASP increased 15.8% YoY, but slid 1.7% QoQ.
— Unit COGS climbed 31.3% YoY, or 6.4% QoQ, to KRW1.199mn/mt. Sales of old inventory with high production costs boosted COGS. Of positive note, however, is that given the three-month lag in input prices, lower iron ore and coking coal prices, which began trending down in 3Q22, should be reflected from 4Q22. That said, this should be partially offset by higher electric furnace costs due to sharp electricity rate hikes from 4Q22.
— While Hyundai Steel did not suffer significant damages from the typhoon that hit the Pohang area in early September, the company incurred KRW30.0bn in one-off expenses for repairing and restoring some of its facilities.
— 3Q22 steel product spread is estimated to have plummeted 40.4% YoY, or 39.3% QoQ, to KRW131,000/mt. Steel product sales volume also decreased 0.2% YoY, or 7.0% QoQ, to 4.528mn tonnes, depressing earnings.
Steel market to remain sluggish through next year; Defending margins to be key
— The global steel market is on a downward path due to continued interest rate hikes and tightening policies by major economies. In particular, the slump in the domestic real estate market, the downstream market for long products, should pose a risk. Prolongation of sporadic strikes would weigh on sales volume and depress earnings in 4Q22 as well. However, success in defending margins (e.g., passing through rising electricity rates to prices of long products, favorable price negotiations for shipbuilding steel plates) should be key.