Steelmakers Likely to See Better Earnings from 3Q20
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
China’s BaoSteel has pushed up its domestic flat product distribution prices for July. While distribution inventories and local steelmakers’ steel inventories are depleting, we believe that the iron ore price (which has started to climb as of late) will be the key determinant of Korean steelmakers’ earnings going forward.
Baosteel makes sharp increases to Chinese plate prices on rising costs
On Jun 10, China’s BaoSteel pushed up its domestic flat product distribution prices for July, boosting its HR and CR prices by RMB280/ton and its plate price by RMB150/ton. The HR and CR price rises were the largest witnessed since Apr 2019 (RMB300/ton increase for both HR and CR). We believe that these hefty product price hikes were undertaken to reflect higher costs due to a recent surge in the iron ore price. Also in play are steady inventory depletions. BaoSteel is saying that climbing utilization rates at downstream industries and China’s ongoing economic recovery are not yet being factored into Chinese steel price hikes.
On Jun 8, the price of imported iron ore in China was US$104.3/ton, exceeding the US$100/ton mark for the first time since Aug 4, 2019. We see three reasons for the recent uptrend in the iron ore price: 1) China’s crude steel production level remains stable; 2) there are concerns over a China-Australia trade dispute; and 3) disruptions to Brazilian iron ore production are being experienced due to a heavy Covid-19 outbreak in Brazil. Meanwhile, steel inventories are steadily depleting. Inventory levels at Chinese steelmakers fell 30.5% as of mid-May versus early Mar 2020. And, inventory at distributors declined for a 12th consecutive week from Mar 20 into mid-May. That said, a rapid increase in Chinese steel prices appears unlikely, given that inventory levels at steelmakers and distributors were up 17.3% and 36.4% y-y, respectively, as of Jun 10.
Keys to margin recovery at Korean steelmakers: 1) product price hikes in reflection of increased iron ore prices; and 2) achieving higher sales volume
On Apr 8, China’s domestic HR price rose 11.3% versus its YTD low of RMB3,427/ton. Also versus their YTD lows, CR, plate, and rebar prices climbed 8.3%, 5.5%, and 7.3%, respectively. Meanwhile, China’s HR export price has upped 7.8% from US$400/ton on May 6 to US$431/ton as of Jun 4. The rise in domestic and export prices (HR) in China is expected to encourage a rebound in Korea’s domestic HR distribution price (which dropped to W630,000/ton as of Jun 8).
However, with the iron ore prices having risen from US$80.4/ton on Apr 1 to US$104.3/ton on Jun 8, it is difficult to expect improvement in Korean steelmakers’ margins for now. Of note, POSCO has delayed the refurbishment of its Gwangyang #3 blast furnace (which had been scheduled to start operations in late May) for about a month, and Hyundai Steel has decided to discontinue its production of electric hot rolled sheets (1mn tons pa). And, decreases in sales volume are to sap earnings. But, with 2Q20 earnings likely to be bearing the greatest brunt of Covid-19 crisis effects, large domestic steelmakers should see better earnings from 3Q20. That said, we believe that the key to profitability improvement at Korean steelmakers lies in iron ore price stabilization and recovery in iron ore production.