[Steel Inventory Abnormal Surge] Steel Companies Declare Emergency Management... Growing Concerns Over Second Half Slump

‘Perfect Storm’... Earnings Hit Unavoidable
POSCO Q3 Operating Profit Expected Down 47% YoY
Hyundai Steel and Dongkuk Steel Also Forecasted to Drop 33%, 48%

Editor's NoteInventories of steel products, known as the "rice of industry," are piling up. Due to concerns over an economic downturn, demand from upstream industries has sharply declined, causing steel products to remain unsold and leaving inventory burdens squarely on steel companies. This phenomenon coincides with the reversal and decline of iron ore prices, which had been on the rise due to the Russia-Ukraine war, raising the risk of poor performance for steel companies in the second half of the year. Steel companies are responding by adjusting production volumes or lowering product prices, but there is growing tension that if demand does not revive fundamentally, it could lead to a recession. This article examines the causes of the abnormal inventory surge in the steel industry and the countermeasures being taken.

[Asia Economy Reporter Choi Seoyoon] Steelmakers, who have enjoyed a supercycle for over a year, have begun to activate emergency management systems one after another in the second half of the year. This is due to increasing performance pressure amid the global economic crisis triggered by the "decline in raw material prices" and "shrinkage in demand from upstream industries." They are busy preparing countermeasures such as securing cash through the sale of investment stakes and establishing crisis management response teams.

According to the industry on the 16th, Dongkuk Steel decided to liquidate its blast furnace business, a long-cherished project spanning three generations. On the 12th, the board of directors decided to sell its entire 30% stake in the Brazilian CSP steel mill to ArcelorMittal, the world's second-largest steelmaker. The sale price is 841.6 billion KRW.

The Brazilian CSP steel mill is the result of fulfilling the dream of the late founder Jang Kyungho and the late second-generation chairman Jang Sangtae to own an independent blast furnace steel mill, realized by the third-generation chairman Jang Seju and vice chairman Jang Sewook. The decision to sell this blast furnace steel mill, which holds special significance for Dongkuk Steel, reflects the serious judgment of the internal and external crisis situation. Vice Chairman Jang Sewook of Dongkuk Steel said about the sale, "It is a preemptive response to prepare for the global complex crisis," adding, "We have laid the foundation to enhance corporate credit by minimizing potential risks."

POSCO, which co-invested with Dongkuk Steel (20%), will also sell its entire stake to ArcelorMittal. POSCO is expected to secure about 560 billion KRW in cash from this sale.

POSCO Group, which declared emergency management, is tightening its grip on liquidity. At the group management meeting on the 21st of last month, Chairman Choi Jeong-woo ordered, "Strengthen cash-centered management to ensure that cash flow and funding situations do not become problematic." POSCO recently issued overseas bonds worth 1 billion USD (approximately 1.3 trillion KRW) to secure additional cash. A company-wide integrated crisis response team was also established, centered on the management strategy team.

A panoramic view of the Brazilian CSP steel plant, whose entire 30% stake was decided to be sold by Dongkuk Steel on the 12th through a board meeting. The other shareholders, including POSCO and Vale, will also sell all their shares in the Brazilian CSP steel plant to the global steel company ArcelorMittal. The total sale amount is $2.154 billion (approximately 2.83 trillion KRW). Photo by Dongkuk Steel

Hyundai Steel is facing a crisis of steel product demand stagnation compounded by severe labor-management conflicts. The Hyundai Steel labor union has been occupying the president's office at the Dangjin steelworks without permission for over 100 days, demanding special incentives similar to other affiliates. Wage collective bargaining negotiations were also canceled due to the company's absence, and the union has even threatened "guerrilla strikes."

In this situation, Hyundai Steel plans to focus all efforts on resolving labor-management conflicts while strengthening high value-added products and pursuing cost reduction through innovation in the manufacturing sector to overcome the sluggish market conditions.

According to financial information firm FnGuide, securities companies estimate that POSCO's operating profit in the third quarter will decrease by 47% compared to the previous year. Hyundai Steel and Dongkuk Steel are also expected to decline by 33% and 48%, respectively, during the same period. This is the exact opposite of the situation at the beginning of the year. Due to reduced exports from China, rising steel prices caused by trade friction, pent-up demand, and increased fiscal spending on social overhead capital (SOC) investments, the operating profits of all three companies roughly doubled year-on-year in the first quarter.

The positive atmosphere began to wane after the second quarter. In the third quarter, demand decline, price drops, and psychological purchase reductions became more pronounced. An industry insider said, "Although raw material prices are on a downward curve, the decline in product prices due to demand contraction is expected to be faster," adding, "Steelmakers will find it difficult to secure sufficient margins and cannot avoid performance hits."

External variables remain numerous. Another industry insider said, "If the Bank of Korea follows the U.S. with a big step (a 0.05 percentage point base rate hike) due to inflationary pressure from interest rate hikes, the economy will definitely enter a recession," adding, "The continuation of the Russia-Ukraine war, U.S.-China friction, and resulting supply chain instability are factors that could trigger a 'perfect storm' (a massive complex crisis), so no one can be complacent."

The steel industry operates on a structure where "raw material prices" form the basic cost floor, and profits are generated based on the "demand from upstream industries" pulling on top of that. It is sandwiched in the middle, taking the margin as profit. Therefore, it is heavily influenced by global economic changes, raw material market conditions, and upstream industries. It is directly hit by investment and consumption reductions caused by economic recessions.

However, some expect demand to gradually recover in the fourth quarter. Um Ki-chun, head of POSCO's Marketing Strategy Office, recently said in a conference call, "With the Party Congress confirming President Xi Jinping's third term, the Chinese government's willingness to stimulate the economy is high," predicting, "If additional stimulus measures are introduced, demand will increase steadily compared to the first half."