Raw Material Benefits Hit by 'R' in Steel & Petrochemicals... NCC Margins & Steel Prices Plummet

Raw Material Prices Falling
Steel Product Prices Cut Repeatedly Due to Demand Drop from Economic Downturn
Cost Burden Amid High Exchange Rate Trend

The outlook for steel and petrochemical companies, which had benefited from rising raw material prices, is clouded for the second half of the year. As concerns over a global economic recession grow, raw material prices, which were a factor in price increases, are plummeting, and price cuts are being made to deplete inventory, resulting in actual profit erosion.

According to the industry on the 15th, POSCO decided to lower the price of hot-rolled steel sheets for distribution (steel rolled at temperatures above 800 degrees) and imported countermeasure hot-rolled steel by 50,000 KRW per ton starting with orders this month. Although product prices were raised several times just a year ago, recently the company is struggling to reduce the extent of price cuts. The distribution prices of major steel products are also showing weakness. This is interpreted as being due to the continuous decline in raw material prices, which are the raw materials for steel, recently. A steel industry official said, "As iron ore prices are on a downward trend, the factors for price increases are limited, and it is true that demand in the industrial sector is decreasing due to the economic downturn in construction, home appliances, and other sectors." Although product prices cannot be raised, the ongoing high exchange rate trend is increasing the cost burden of imported raw materials such as iron ore and coking coal.

The profit margins of petrochemical companies have already sharply declined, leading the global economy. The spread (the value obtained by subtracting raw material prices from product prices), which indicates the profitability of naphtha cracking facilities (NCC) companies, is at about $261 per ton (approximately 343,188 KRW). This is the lowest level in 26 months since April 2020, when the COVID-19 pandemic was widespread worldwide, recording $215 per ton (approximately 282,703 KRW). The spread, which was as high as $344 per ton (approximately 452,325 KRW) in February this year, continues to fall sharply.

The recent decrease in NCC margins is mainly attributed to the contraction in demand for petrochemical products. As demand decreases, remaining inventory must be depleted first, leading to forecasts that chemical product purchase orders will decline in the second half of the year. Professor Lee Jeong-hee of the Department of Economics at Chung-Ang University said, "Since petrochemical products are widely used in consumer goods, automobiles, construction, textiles, and more, product demand tends to move in line with global economic growth," adding, "A global economic recession can reduce demand for basic industrial products such as steel and petrochemical products and may lead to a process where the recession spreads to other industries."

In fact, according to the recent ‘Manufacturing Business Survey Index (BSI)’ conducted by the Korea Institute for Industrial Economics and Trade targeting 1,000 domestic manufacturing companies, both the business conditions (95) and sales (97) BSI for the third quarter declined compared to the second quarter, indicating an expansion of negative outlooks. In particular, the sales outlook BSI for steel and petrochemicals showed a significant drop. The BSI is based on 100, where a value closer to 200 means more companies expect economic improvement compared to the previous quarter, while a value closer to 0 means more companies expect economic deterioration.

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