Despite Slumps in Downstream Industries
The Korean steel industry is expected to post solid earnings in the second half of this year amid a slump in downstream industries such as automobiles and shipbuilding. This is because demand inflated as China's economy, the world's largest producer and exporter, was showing signs of recovery, while supply declined due to restructurings of the local steel industry and mines in China.
According to FN Guide, a financial information provider, on October 10, POSCO is expected to post 1.111 trillion won (US$990 million) in operating profit in the third quarter of this year and 1.204 trillion won (US$1.08 billion) in the fourth quarter. Hyundai Steel is expected to post operating profit of 365.9 billion won (US$329 million) which is lower than initially expected due to the weaker-than-expected profitability of steel rods in the third quarter. However, the steelmaker is expected to enjoy a big improvement in business performances by chalking up 412.1 billion won (US$370 million) in operating profit in the fourth quarter.
Anticipation for earnings improvements of both companies is on the rise due to restructurings of the steel and mining industries in China. The Chinese government began to curb production of low-quality steel and coal (coking coal) due to basic trends such as tougher environmental regulations in China. This structure led to the resolution of global gluts and a rise in steel product prices, bringing good news to steelmakers. Already, steelmakers raised prices of cold- and hot-rolled steel sheets in August, and are showing a clearer sign of hikes in prices of long steel bars and heavy plates.
"We should pay attention to steel production cuts by China's Jing-jin-ji (Beijing, Hebei and Tianjin) in winter," said Choi Moon-sun, a researcher at Korea Investment & Securities. "It is expected that 30 million tons of steel production will be reduced during the period,"
On the contrary, demand is on a steady rise. China's steel demand last month reached 68.99 million tons, up 18.49 million tons compared to 50 million tons of last year. An economic recovery is taking shape such as the expansion of infrastructure investment and private-public cooperation including China's "One Belt, One Road" Project.
The reduction in China's steel production and a spike in demand for steel in China also provided other reflective benefits to Korean steelmakers. As China's steel exports shrank, Korean steelmakers' exports surged. The strengthening of protectionism around the world strengthened regulations on Chinese steel products, which contributed to the increase in Korean steelmakers’ exports.
According to the Korea Iron & Steel Association, Korea's steel product exports from January through August of this year swelled by 5.3% to 21.46 million tons. It is well above 2017 tons of 2014 which set the highest ever record. Observing exports by item, steel pipe exports totaled 2,180,000 tons, up 72.2% from the same period of last year. In the same period, steel rod exports grew 33.7% to 340,000 tons, thick plate exports 22.5% to 2,180,000 tons, of color steel plates 12.2% to 860,000 tons, galvanized steel plates 9.8% to 3.2 million tons and cold-rolled plates 6.5% to 3,640,000 tons, respectively.