Steel Industry Faces Domino Effect Due to Car Factory Shutdown

POSCO's Q1 Operating Profit of 1 Trillion Won Uncertain
Hyundai Steel, with High Hyundai-Kia Car Share, Faces Inevitable Earnings Decline

[Asia Economy Reporter Hwang Yoon-joo] 'Chunrae Bulsachun (春來不似春)'.

Contrary to the fully blossoming spring weather this month, blast furnace steelmakers are falling into an endless downward trend. Following a decline in performance due to last year's industry slump, the outbreak of the novel coronavirus disease (COVID-19) in the first quarter of this year has further worsened profitability beyond expectations.

According to FnGuide, a securities information provider, POSCO's average operating profit consensus for the first quarter of this year is 788.4 billion KRW, down 34.5% compared to the same period last year. If this forecast holds, POSCO will record operating profits below 1 trillion KRW for two consecutive quarters following the fourth quarter of last year.

POSCO succeeded in defending its performance last year by maintaining an operating profit margin in the 6% range while global steelmakers saw sharp declines. However, the sense of crisis is growing in the first quarter of this year. The rapid spread of COVID-19 in China caused a sudden drop in steel demand and a simultaneous surge in inventory. A sharp increase in inventory within China, which leads global steel supply, also affects domestic steel distribution prices.

Park Sung-bong, a researcher at Hana Financial Investment, said, "Korean steel distribution prices have been maintained recently due to aggressive price hikes to offset the sharp profitability deterioration in the fourth quarter of last year, but due to China's export price cuts, domestic prices in Korea will face downward pressure for some time." He added, "In POSCO's case, with the scheduled maintenance of Blast Furnace 3 and rationalization of Hot Rolling Mill 4 in Gwangyang in the first quarter, the spread of COVID-19 is expected to cause some disruption to exports to China."

The earnings outlook for Hyundai Steel, which has a large proportion of automotive steel sheets, is even bleaker. The consensus operating profit for the first quarter of this year is 50.8 billion KRW, a sharp drop of 76.1% compared to the same period last year. Net profit is also expected to turn to a loss of 3.8 billion KRW. This is a direct result of losses in the automotive industry caused by production disruptions due to parts shortages following COVID-19.

According to Hyundai Steel's audit report, about 40% of the company's total product sales come from related parties such as Hyundai Kia Motors and Hyundai Engineering & Construction. For automotive steel sheets, 5 million tons, or 83% of the 6 million tons produced, are supplied to Hyundai Kia Motors. Hyundai Kia Motors has experienced difficulties in parts supply due to the COVID-19 situation in China, leading to reduced factory operating rates. Fortunately, production in China entered a stabilization phase at the end of last month, but the rapid increase in COVID-19 cases domestically is causing further disruptions.

Steel industry and market experts expect uncertainty in demand and market conditions due to the spread of COVID-19 to continue at least through the first half of this year. Jung Ha-neul, a researcher at Korea Investment & Securities, said, "The problem is not only production volume but also the lack of steel consumption, which is a bigger issue." He added, "The key is the recovery speed of steel production in China; inventory burdens will ease only if China's annual average blast furnace operating rate falls below 74.6%."

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