Outlook Still Murky for Flat Products
The author is an analyst of Shinhan Investment Corp. He can be reached at hyunwook.kim@shinhan.com. -- Ed.
Solid long products vs. great uncertainty for flat products
We expect to see decent prices for long products in the mid/long-term, as demand for rebar should remain solid in China (economic stimulus measures) and Korea (relatively stronger demand from construction vs. other downstream industries). Hyundai Steel is the market leader in long products and should be able to defend prices through output cuts.
The outlook is still murky for flat products. Hyundai Steel generates a high share of flat product sales from automakers. Shipments of hot-rolled coils are likely to rebound from 2H20 with captive clients resuming production in May, but uncertainty remains over the degree of recovery and price negotiations. Steel plates supplied to shipbuilders are also projected to fall.
2020 forecasts: Sales KRW18.1tr (-12% YoY), OP KRW65.9bn (-80% YoY)
Hyundai Steel is expected to remain in the red through 2Q before turning to profit in 2H20. It should continue to reduce losses in the second quarter. Long and flat products are forecast to show different price trends. There are rising concerns that the COVID-19-triggered disruption in iron ore production in Brazil may increase feedstock price volatility. The company should find it difficult to raise flat product prices in the near term after the recent shutdowns at auto plants. Long product prices, on the other hand, will be favorable due to output cuts by steelmakers, solid domestic demand, and sharp declines in China’s rebar inventories. Roll margins of long products will likely improve for the full year.
Initiate coverage with HOLD
We initiate our coverage of Hyundai Steel with HOLD. The company is leading the domestic market for long products, but its heavy dependence on captive clients for sales of hot-rolled coils has created great uncertainty. The clients may not be willing to accept price hikes in the wake of production shutdowns. Margin spreads should fall with feedstock price hikes expected in the near term. Moreover, the company’s special steel business continues to incur losses. Upward revision of our rating will hinge on increases in shipments to captive clients and ASP.