[Special series - part I] Hard times for S. Korean steel makers

Posted on : 2014-09-05 21:40 KST Modified on : 2019-10-19 20:29 KST
Steel giants plagued by excess supply from cheaper Chinese competitors and slipping global demand
 South Jeolla Province
South Jeolla Province

By Kim Jeong-pil, staff reporter

The years that followed the 1997 Asian financial crisis were a blessed time, at least for those companies that managed to weather the crisis. These firms received a triple boon: the vast economic vistas opened up by a series of free trade agreements, numerous corporate tax cuts, and low interest rates. The weak value of the South Korean won also bolstered export firms. As a result, corporate earnings skyrocketed.
But recently, these companies’ performances have been worsening. Companies in the electronics and automotive sectors are enjoying some stability, but those in most other business sectors are going downhill, and the slope is steep. The Hankyoreh will diagnose the precarious position of six key industries that are casting a shadow on the future of the Korean economy.
 Feb. 2014. (Provided by Gwangyang factory)
Feb. 2014. (Provided by Gwangyang factory)

Dongbu Steel, the second largest company in the South Korean color steel sector, posted around 3.3 trillion won (US$3.21 billion) in revenue in 2013, but it had just 21.4 billion won (US$20.84 million) in operating profits. This wasn’t enough to cover even one tenth of the company’s financial expenses, which total 237.4 billion won.

In the end, Dongbu posted a net loss of 141.8 billion won for the year. The company was also in the red in 2011, when it lost 225.3 billion won, and in 2012, when it was down 48.8 billion won. Finding itself unable to repay corporate bonds that matured recently, Dongbu finally had to reach a voluntary agreement with its creditors to receive assistance.

The performance at South Korea’s largest steel companies sharply declined in 2011 and 2012. POSCO and Hyundai Steel, the two biggest companies in the sector, are no exception. POSCO’s operating income was slashed in half between 2011 and 2013, falling from 4.33 trillion won to 2.22 trillion won. The company’s operating margin ratio dropped from 11.1% to 7.8%.

POSCO’s revenues and operating income in the first half of 2014 were also down year on year. And Hyundai Steel has seen its operating profits fall from 1.31 trillion won in 2011 to 716.6 billion won in 2013.

Things could be worse at POSCO and Hyundai Steel. Since they produce several kinds of steel, they are able to diversify and limit risk. Dongkuk Steel, which relies on the production of thick plate - used for building ships - was blindsided by the downturn in the shipbuilding industry. The company made 209 billion won in operating profits in 2011, but since 2012 it has been posting huge losses.

One of the major causes of the recession in the South Korean steel industry is a vicious cycle in the global market involving oversupply of steel just as demand is falling. And as the prices of the raw materials drop, product prices are falling along with them.

The slump in domestic industries such as construction and shipbuilding that ordinarily require large amounts of steel is making the downturn even worse. Plus, there is a profusion of cheap and even fake products from China, the final of the three tribulations that the steel industry is enduring.

But the biggest headache of all is the oversupply that originates in China. According to figures provided by the World Steel Association (WSA), the global demand for steel was 1.11 billion tons in 2012, but there was 1.55 billion tons of supply. In other words, supply outstripped demand by more than 400 million tons - and about 200 tons of this oversupply was from China.

Meanwhile, demand for steel is at a standstill. The WSA predicts that demand for steel this year will only increase by 3.1% year on year. This is about half of the 6% average yearly growth rate before the global financial crisis. One major factor affecting this is the decrease in demand resulting from the slowing growth rate in China. China accounts for 50% of global demand for steel.

The lingering recession in construction and shipbuilding, industries with high demand for steel, has also played a part. Some in the industry are complaining that holding on to product is almost better than selling it.

“We will be stuck in a low-growth, low-margin situation for the indefinite future. Since there is no recovery in demand for steel, the market will not follow even if we invest. We are barely making an operating profit as we sell our product, and there won’t be a light at the end of the tunnel until 2015 at the earliest,” one industry source said.

China’s steel exports, which are low-priced and cut corner, are making things even more difficult for the South Korean steel industry. Not only does Chinese steel distort distribution prices at home when it is imported in South Korea, but South Korean steel exporters must also compete with low-cost Chinese steel in major export markets such as Southeast Asia.

There was even a South Korean company that was reported to the prosecutors for selling imported Chinese rebars that were made to look as if they had been manufactured in South Korea. Then there were some Chinese H sections - used to make buildings - that weighed less than their specifications claimed. In 2013, around 300,000 tons of Chinese rebars were imported to South Korea; in the first half of 2014 alone (through June), imports exceeded 260,000 tons.

Steel companies are cutting investment in facilities. In 2014, 36 steel companies -including POSCO, Hyundai Steel, and Dongkuk Steel - are planning to invest 4.57 trillion won in facilities, 24.8% less than the previous year. While these companies had previously expanded their size, focusing on outward growth, for the time being, they are in a situation where they have no choice but to concentrate on improving profitability as a survival strategy. However, construction and shipbuilding firms are clamoring for product prices to be cut since raw materials have become cheaper, and the steel companies are loathe to ignore the requests of these important clients.

“It appears that the global supply and demand for steel will enter a period of absorbing the surplus 500 million tons that has been piling up,” said Lee Jae-gwang, researcher with Eugene Investment and Securities, when asked about the outlook for the metal and steel industry.

“The key question here is rectification of supply and demand, but the timeframe may very depending on the results of restructuring in the Chinese steel industry and the speed of increase in demand for steel. I expect this will take at least two to three years,” Lee said.

 

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