Low-priced Japanese Steel Exported to Korea
The author is an analyst of NH Investment & Securities. He can be reached at will.byun@nhqv.com. -- Ed.
Compared to the recent growth in Chinese steel prices, the rise in domestic steel prices looks weak. Although Chinese steel prices have expanded, the link between China’s steel prices and steel share prices has eroded. In addition, product price hikes towards major downstream industries are proving difficult, and the inflow of low-priced Japanese steel into the Korean market is weighing upon domestic steel prices.
Connection between Chinese and Korean steel prices has weakened
In China’s steel market, the distribution price of HR (national average) rose 19.6% from the bottom of RMB3,427/ton on Apr 8 to RMB4,098/ton on Sep 2. China’s HR export price rebounded from a low of US$400/ton on May 6 to US$502/ton on Aug 26, an uptick of 25.5%. Driven up by greater demand from real estate and infrastructure development, as well as iron ore price growth, China’s steel prices continue to rocket upwards.
In contrast, Korea’s HR distribution price climbed only 6.3% from the bottom of W630,000/ton on Jun 8 to W670,000/ton on Aug 31. Even if taking into account the typical time lag between Chinese and domestic steel price movements, domestic steel price expansion looks relatively weak. Demand is expected to recover as downstream production activities resume following the onset of Covid-19. However, improvements in steel company ASPs will likely be limited, as: 1) there is significant resistance to price hikes from major downstream industries (eg, auto and shipbuilding); and 2) Japanese steel products are flowing into Korea at low prices.
In Covid-19 era, it is worth paying attention to import price of Japanese steel products
In the past, the share price cycle of domestic steel companies followed a path of ‘Chinese steel price increase → domestic steel price expansion → steel company share price growth driven by improved profitability’. However, while China’s steel prices since the outbreak of Covid-19 have steadily risen from April’s bottom, domestic steel companies’ share price growth has been limited. In China, as well, the shares of major steelmakers have performed sluggishly compared to the expansion in steel prices. Against this backdrop, it appears that the correlation between steel prices and steel company share prices has weakened in the Covid-19 era. Of note, with confidence in the global economic recovery still shaky, China’s steel price uptrend is mainly attributable to the government’s stimulus and raw material price growth.
In the domestic steel market, it is worth paying attention to the price trend of Japanese steel imports. On a January~July basis, the Japanese portion out of steel product imports increased from 30.6% in 2019 to 37.5% in 2020. In the case of HR, the portion widened from 44.5% to 53.9%. In July, the import price of HR from Japan was US$490/ton (lower than the average of US$628/ton for global HR imports), having upped just US$9/ton from May’s US$481/ton, the lowest point this year. In 1H20, with steel consumption in Japan falling 14.4% y-y, Japanese steel companies responded with low-cost exports to the nearby Korean market.