Steel Stocks Fail to Smile Despite 'Qatar Jackpot'

[Image source=Yonhap News]

[Asia Economy Reporter Koh Hyung-kwang] Steel stocks have started to rebound belatedly this month. This is due to revived investment sentiment following the '23 trillion won jackpot' from Qatar by major domestic shipbuilders. However, considering the global economic downturn and the impact of the novel coronavirus disease (COVID-19), which have pushed the steel industry into a contract cliff and even forced production cuts, some argue that it is too early to celebrate.

According to the Korea Exchange on the 9th, Dongkuk Steel was traded at 7,150 won on the KOSPI market as of 10 a.m., up 1.4% from the previous trading day. Except for one day (-1.4%) yesterday, it has been on a seven-day consecutive rise this month. On the 3rd, the stock price even hit the daily limit increase (30%), resulting in a total increase of 67.6% during this period. During the same period, Hyundai Steel and POSCO also rose by 16.9% and 11.8%, respectively, showing a simultaneous upward trend.

The rise in steel stocks was driven by large-scale orders from the domestic Big 3 shipbuilders. Korea Shipbuilding & Offshore Engineering, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries, the three major domestic shipbuilders, signed a contract earlier this month with Qatar for the construction of liquefied natural gas (LNG) vessels worth a record 23 trillion won. Expectations were reflected that steelmakers’ plates would be massively used in these large vessels. Plates supplied to shipbuilders are one of the steel industry's main sources of profit, alongside automotive steel sheets.

It is pointed out that it will take at least a year or more for these shipbuilders’ orders to translate into actual orders for the steel industry, and that this movement is somewhat detached from the reality of the steel industry, which has been pushed into a contract cliff due to the COVID-19 impact. The steel industry is planning production cuts due to weak demand in sectors such as automobiles and home appliances. POSCO has not set specific production cut plans but decided to suspend operations of some production facilities starting from the 16th. This is the first time since the 2008 global financial crisis that POSCO has stopped some production facilities due to weak demand.

Profitability is also deteriorating as the price decline of steel products is greater than that of raw materials like iron ore. According to financial information provider FnGuide, POSCO’s operating profit consensus (average estimate by securities firms) for the second quarter of this year is 636.3 billion won, down more than 30% compared to the forecast three months ago (996.8 billion won). Whether performance will improve in the second half of the year is also uncertain. Kim Yoo-hyuk, a researcher at Hanwha Investment & Securities, explained, "Except for LNG carriers, shipbuilding orders continue to be sluggish, and global demand for automobiles has sharply decreased due to COVID-19," adding, "The global market mainstay is China, but steel demand this year is not favorable."

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