The Korean steel industry is singing the blues, owing to stiff sales competition, deteriorating profits, and a decline in the won-dollar rate.
According to industry sources on November 5, the exchange rate fell to about 1,060 won to 1 dollar, down more than 60 won from August. Any decrease in the won-dollar rate has a strong influence on the steel industry because of its heavy reliance on international trade.
Steel, which is mainly used as a raw material, is susceptible to price fluctuations. When the won-dollar rate drops, the price of imported raw materials also falls. In that case, major clients of steel companies such as shipbuilders and carmakers will buy cheaper imported materials. Therefore, the reported decrease in the exchange rate is likely to damp down steel firms’ great expectations about their recovery in Q4.
An increase in the exchange rate also affects imports. Even if a product is sold at the same dollar price, sales values are bound to be reduced in won.
Conversely, the won’s rise is favorable when importing raw materials. This phenomenon is due to the fact that the Korean steel industry, which heavily relies on imported raw materials, can lower manufacturing prices through cheaper imports.
However, it will be difficult for the industry to make up for losses using the exchange rate on account of the recent price hikes in raw materials such as scrap metal and iron ore. The price of imported scrap metal jumped from US$306 per ton in June to US$327 in September.
Related to the issue, an official in the Korea Iron and Steel Association pointed out, “A drop in the won-dollar rate is likely to have a negative impact on exporters of cold rolled steel sheets. But POSCO or Hyundai Steel won’t be very affected, since their ratio of export and imports of steel is close to 50:50.”