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Gradually Heating up
Gradual rise in demand expected, but normalization of market conditions will take time
Gradually Heating up
  • By matthew
  • January 15, 2010, 11:39
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Steel demand is expected to pick up following ameliorating conditions in the economy and a knee-jerk reaction to the devastating sell-off in demand in 2009, even though realization of the rosy outlook is dependent on how fast the private sector would be recovered, and the degree of monetary policy from the ‘exit strategy’ of major countries.

By the way, because the quick recuperation of the steel demand since the second quarter of 2009 is mainly based on the expansionary fiscal policy of most countries, recent sign of pickup needs autonomic improvement of the demand from the private sector in order for the steel industry to keep the ascending tendency.

It will be, however, inevitable that contradictory monetary policy, so-called ‘exit strategy’ is to be eventually placed instead of continuous injection of the stimulus package by governments to the market, if the market begins to show the sign of spontaneous revival, because of the risk of inflation. This is the reason why the elevating speed and volume of the invigorating steel demand are expected to be dependent. In order for the steel industry to be significantly normalized, therefore, more time will be expected to be taken until it does no longer in need.

Meanwhile, the huge investment on upper level of manufacturing process of steel, which mainly produces melting metal and thin metal, is successfully placed or on its smooth way in the basis of the distinctive contexture of Korean steel industry that hot rolling process of the manufacturing procedure is preferred to the cold rolling one, which has been caused by the imbalanced supply and demand between the upper level of manufacturing process and the lower one that mainly supply completed steel products to outer industries such as automobile and electronics. Due to this investment, the production capability of hot rolled steel is expected to be significantly hoisted in 2010 and the supply and demand between the upper and lower manufacturing processes will be in equilibrium as a result.

The entire structure of profit sharing between the suppliers and the buyers of the hot rolled steel now sees remarkably high possibility of being eventually fissured in the form of decreasing surplus profit for the suppliers and normalization of roll margin of the buyers, as the imbalanced relations of supply and demand are stabilized by virtue of the investment on the facilities of the upper level process.

POSCO, the substantial monopoly supplier of the hot rolling steel, and the new suppliers, Hyundai Steel and Dongbu Steel, meanwhile, will barely achieve the surplus profit including intangible one that POSCO had exclusively taken for long time before.

In the long term, however, if commercial production from the blast furnace unit 1 of Hyundai Steel and the electric furnace of Dongbu Steel are uninterruptedly operated, the entire steel industry will be able to take advantage of the tranquilization in spite of the instability of profit margin for some companies in the short term.

China, by the way, as the largest blister steel producing country as well as the largest iron steel consuming country, and the change in the relations of supply and demand in the steel industry of the country are one of the most recent and determinative factors to impact over the global landscape of supply and demand relationship including domestic one. If oversupply occurs in China, the surplus production would urge of increasing volume of export, and it will be additionally exogenous to the market condition of Korea as the most contiguous country to China.

Chinese government has been under huge stimulus fiscal policy since 2008 recession in order to sustain the critical point for economic growth, and investment on fixed assets resulted from the bulky liquidity freed from the policy execution is supposed to have 18.8% increase in nominal consumption of steel production, which is significantly higher than expected GDP growth, 8.5% in 2009.

If the market conditions with contracting rate of demand increase in China keep dampening the controllable production of the blister steel and steel materials, the surplus production would be on the verge of forced export, and Korean steel market would scantily welcome the exogenous shock in consequent.