Is the Raw Material Benefit Over? Profit Damage 'Dark Clouds' Hang Over Steel and Petrochemicals (Comprehensive)

Raw Material Prices Falling
Demand Decreases Due to Economic Downturn
Steel Product Prices Cut One After Another
Cost Burden Amid High Exchange Rate Trend

[Asia Economy Reporter Jeong Dong-hoon] 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 high temperatures above 800 degrees) and imported substitute hot-rolled steel by 50,000 KRW per ton starting from this month's order volume. 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 recent continuous decline in raw material prices, which are the raw materials for steel. 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 from industries such as construction and home appliances is decreasing due to economic downturn." In fact, raw material prices, which surged sharply since last year, have recently shown some stabilization. According to the Ministry of Trade, Industry and Energy, as of the 13th of this month, the price of iron ore (based on spot prices at Qingdao Port, China) was $109.4 per ton, down 10.98% from the beginning of the year. On the same date, the price of coking coal for steelmaking (based on spot prices at Dong Australia ports) was $243.5 per ton, down 32.28% from the beginning of the year. It is analyzed that raw material prices have entered a stabilization phase as concerns over economic recession are reflected due to interest rate hikes in major countries such as the United States.

While product prices cannot be raised, the cost burden of imported raw materials such as iron ore and coking coal continues to grow due to the sustained high exchange rate trend.

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) indicating the profitability of naphtha cracking facilities (NCC) companies is around $261 per ton (approximately 343,188 KRW). This is the lowest figure in 26 months since April 2020, when COVID-19 was spreading worldwide, recording $215 (approximately 282,703 KRW). The spread, which was as high as $344 per ton (approximately 452,325 KRW) in February this year, continues to plunge.

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 expectations 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, "Petrochemical products are widely used in consumer goods, automobiles, construction, textiles, etc., so product demand tends to move in line with global economic growth. A global economic recession can reduce demand for fundamental industrial products such as steel and petrochemical products, and the recession may spread 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 condition BSI (95) and sales BSI (97) for the third quarter fell compared to the second quarter, expanding negative outlooks. In particular, the sales outlook BSI for steel and petrochemical sectors showed a significant decline. The BSI is based on 100; the closer to 200, the more companies expect economic improvement compared to the previous quarter, while the closer to 0, the more companies expect economic deterioration.

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