Demand Plummets↓ Iron Ore Prices Soar↑ …Steel Industry Faces a 'Season of Trials'

[Image source=Yonhap News]

[Asia Economy Reporter So-yeon Park] The steel industry is facing a difficult situation with a demand cliff caused by the aftermath of the novel coronavirus disease (COVID-19) and the continuous rise in raw material prices.

Steelmakers insist that the increased cost of raw materials must be reflected in product prices, but since major demand sectors are also struggling due to the COVID-19 crisis, price negotiations between both sides are not easy.

According to the steel industry on the 4th, the price of iron ore last month recorded $102.9 per ton. Compared to the price in February (86.5 dollars per ton), it rose nearly 20% in five months.

Iron ore prices, which remained in the $60-70 range in 2018, showed an upward trend last year, reaching the $80-90 range. In July of that year, it soared to $120, the highest level in the past five years.

Since then, it has fluctuated but rarely dropped below $80, and last month it finally exceeded $100.

The increase in iron ore prices is due to natural disasters occurring in major iron ore production areas such as Brazil and Australia since last year, causing supply disruptions, compounded by the COVID-19 situation this year, which has slowed market recovery.

In Brazil, over 200 people died in a mine dam collapse accident, and in Australia, iron ore production decreased due to typhoons and large fires.

While supply was unstable, demand in China, the largest purchaser of iron ore, surged sharply. This is interpreted as a result of the COVID-19 spread slowing in the second quarter, leading to various economic stimulus measures and the normalization of infrastructure construction and manufacturing.

The supply-demand imbalance became a factor in the rise of iron ore prices, which is leading to a deterioration in the profitability of domestic steelmakers.

In the securities industry, POSCO's operating profit (consolidated basis) for the second quarter of this year is expected to have decreased by more than 70% compared to the same period last year. Some even predict a shift to losses.

Hyundai Steel, which posted losses for two consecutive quarters starting from the fourth quarter of last year, is also expected to report losses in the second quarter.

Steelmakers have been negotiating with major demand sectors such as automobiles, shipbuilding, and construction on the basis of price increases to secure profitability.

Aside from large demand sectors requiring separate negotiations, prices for distribution channels passing through distributors have already been raised. POSCO raised the price by 30,000 won per ton for orders placed after May, and Hyundai Steel also increased the hot-rolled coil price by 30,000 won per ton starting this month.

There is a sense that the economy is gradually recovering, with steel prices rising in major regions such as China, Japan, and the United States.

However, domestically, since all major demand industries are sluggish, it is difficult to predict how much the steel industry's demands will be reflected. It is reported that there is a strong trend toward price freezes in negotiations on steel sheet prices with the automobile industry.

The shipbuilding industry also secured a large order for LNG ships from Qatar, but this has not easily led to price increases.

A steel industry official said, "Due to rising costs, profit margins have decreased, so prices need to be adjusted realistically," adding, "There is high expectation that major demand industries will recover in the second half of the year, so discussions on price increases will continue."