Steel Industry's Twin Giants Struggle Despite Stock Market Rebound

[Asia Economy Reporter Koh Hyung-kwang] The stock prices of POSCO and Hyundai Steel, leading steel companies in Korea, have fallen behind the recovery speed of the KOSPI index. Analysts attribute this to a sharp decline in demand due to the impact of the novel coronavirus disease (COVID-19) and rising raw material prices, which are weighing down the stock prices. There are concerns that it will be difficult to expect a stock price rebound in the second quarter of this year due to poor earnings.

According to the Korea Exchange on the 15th, POSCO closed at 168,000 won on the previous day in the KOSPI market, down 2.8% from the previous trading day. Compared to 236,500 won at the beginning of this year, it dropped 28.9%. Hyundai Steel's stock price, which was 31,450 won at the beginning of the year, also fell 37.0% to 19,800 won on the previous day. Compared to the KOSPI index, which fell 12.4% from 2,197.67 at the beginning of January to 1,924.96 on the previous day, the decline was more than twice as large.

The recovery speed of the two companies' stock prices is also slow. While the KOSPI index rose 32% from 1,457.64 on March 19 to 1,924.96 on the previous day, POSCO only increased by 16.9%. Hyundai Steel rebounded more than 40% during this period, but since the decline from the beginning of the year to March 19 was as large as 57.7%, there is still a long way to go.

The biggest cause is deteriorating earnings. POSCO's operating profit in the first quarter was halved compared to the previous year, and Hyundai Steel recorded losses for two consecutive quarters, including the fourth quarter of last year and the first quarter of this year. The slump in major industries such as automobiles and shipbuilding had a negative impact. The automobile industry is the largest consumer, accounting for 30% of total steel production. Due to the COVID-19 outbreak, the automobile industry has suffered from shutdowns and weak demand, delivering a direct blow to the steel companies' earnings. To make matters worse, the reduction in cargo volume also caused a sharp decline in demand for shipbuilding steel plates.

Raw material prices are also burdening earnings. Iron ore is trading at $84 per ton this month, which is $10 to $20 higher than usual. While most raw material prices have fallen, including a 70% plunge in international oil prices since February, iron ore prices have remained steady.

As the impact of COVID-19 is expected to continue for some time, the outlook for steel stocks is not very bright. Lee Jae-kwang, a researcher at Mirae Asset Daewoo, said, "Due to the global spread of COVID-19, steel companies are finding it difficult to raise planned selling prices, and the decline in product prices is greater than the decline in raw material prices, raising concerns about worsening profitability. Earnings recovery may be possible after the third quarter, but the pace will be gradual."

Byun Jong-man, a researcher at NH Investment & Securities, predicted, "Steel companies will be most affected by COVID-19 in the second quarter. In the case of Hyundai Steel, a temporary production halt at Hyundai Motor and Kia Motors and a decrease in sales volume due to the contraction of global steel demand are inevitable."

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