Hyundai Steel Moves to Improve Profitability... The Issue Is the 'Market Conditions'

[Asia Economy Reporter Hyunseok Yoo] Hyundai Steel has embarked on structural improvements, including splitting its forging business, to address declining profitability. Although sales and other external indicators have grown, profit margins have remained stagnant for several years, leading to this decision. It is expected that Hyundai Steel will continue to improve profitability through business rationalization and product price increases. However, uncertain market conditions are likely to exert pressure.

◆Sales increased but operating profit remains 'stagnant'= On a standalone basis, Hyundai Steel's sales increased from around 10 trillion KRW in 2010 to about 18 trillion KRW in 2019. During this period, Hyundai Steel entered the blast furnace business and merged with Hyundai Hysco to complete an integrated steel mill covering cold rolling. Additionally, it expanded its business scope by incorporating overseas automotive steel service centers (SSC) as subsidiaries, thereby increasing sales.

Profitability stagnated. Operating profit on a standalone basis was 1 trillion KRW in 2010, 1.2776 trillion KRW in 2016, 1.2333 trillion KRW in 2017, and 933.4 billion KRW in 2018, showing little fluctuation. In fact, due to a loss in the fourth quarter, operating profit in 2019 dropped to 278 billion KRW. Hyundai Steel explained that despite iron ore prices soaring to 120 USD per ton at one point last year, reflecting price increases on key products such as automotive steel sheets and shipbuilding plates was difficult, resulting in a decline in operating profit compared to the previous year.

Operating profit margin also declined, falling from 8.9% in 2016 to 7.3% in 2017, 5.0% in 2018, and 1.5% in 2019. Yu-hyuk Kim, a researcher at Hanwha Investment & Securities, said, "Hyundai Steel has achieved rapid external growth through large-scale blast furnace investments and mergers and acquisitions. However, its profit-generating capacity has decreased in recent years, making management efficiency improvements absolutely necessary."

◆All-in on profitability improvement... market conditions remain uncertain= Hyundai Steel has begun full-scale efforts to improve profitability this year. On the 25th of last month, Hyundai Steel announced it would spin off its forging business division to establish a new company tentatively named 'Hyundai IFC Co., Ltd.' The forging business division recorded sales of 229.3 billion KRW last year. The new company's assets and liabilities are 521.8 billion KRW and 247.8 billion KRW, respectively. The impact of this spin-off on Hyundai Steel is expected to be minimal, as the new company's sales last year accounted for only 1.3% of Hyundai Steel's standalone sales.

However, starting with this spin-off, Hyundai Steel is expected to accelerate profitability improvement activities. In particular, following the forging business spin-off, the company is reportedly considering selling its pipe business division, which has experienced sluggish performance in recent years. The pipe business division's production volume was 1.638 million tons in 2017, 1.624 million tons in 2018, and 1.071 million tons as of the third quarter last year. The pipe division's sales last year were 876 billion KRW, accounting for 4.8% of total standalone sales. Dong-il Ahn, CEO of Hyundai Steel, stated at the '2020 Steel Industry New Year Meeting' held at the POSCO Center on January 10, "We are reviewing the sale of the pipe business division from the perspective of improving profitability."

In addition to restructuring the business portfolio, Hyundai Steel plans to strengthen its high value-added market strategy by expanding sales of high-performance products. First, it aims to increase automotive steel sheet sales from 739,000 tons last year to 1 million tons this year by expanding its global customer base. Also, the high-performance construction steel brand 'H CORE,' launched in 2017, will actively respond to customer demand by diversifying H-beam specifications for building structures. The goal is to sell a total of 9.18 million tons of global premium products, an increase of 270,000 tons compared to the previous year. Furthermore, Hyundai Steel plans to improve profitability through product price increases.

External factors remain concerning. Korea Ratings expects global steel demand to reach 1.806 billion tons this year, an increase of 30 million tons (1.7%) compared to the previous year. Last year's growth rate was 3.8%. It anticipates that China's slowing growth, reduced construction investment, and trade disputes between countries will have an impact. In particular, the novel coronavirus disease (COVID-19) poses a burden. According to Hana Financial Investment, as of the end of last month, steel inventory in circulation within China reached 23.74 million tons, the highest since 2006.

Hyunsoo Lee, a researcher at Yuanta Securities, said, "If COVID-19 enters a stabilization phase, the Chinese government may stimulate the economy through fiscal policies, etc. However, it is difficult to predict when this will happen, making it hard to be optimistic about the improvement of domestic steel demand in China."

This content was produced with the assistance of AI translation services.