[Steel Inventory Surge] Raw Material Boom Ends... Steelmakers Lower Prices

Steel Product Distribution Prices Fall Up to 26%
Concerns Over Interest Rate Hikes and Global Economic Slowdown
Steel Prices Decline... Iron Ore Also Drops 32% in 4 Months
Steelmakers Benefiting from Raw Materials See Earnings Estimates Down

[Editor's Note] Steel products, often called the "rice of industry," are accumulating in inventory. Due to concerns over an economic downturn, demand from upstream industries has sharply declined, causing steel products to remain unsold. This inventory buildup is directly translating into a management burden for steel companies. This phenomenon coincides with the reversal of the previously rising iron ore prices, which surged during the Russia-Ukraine war, raising concerns about poor performance for steel companies in the second half of the year. Major companies are responding by adjusting production volumes or lowering product prices, but there is growing tension that if demand does not fundamentally recover, it could lead to a recession. We take a look at the causes and countermeasures of the abnormal surge in steel industry inventory.

Just three months ago, steel prices were as valuable as gold. Steelmakers even benefited from the sharp rise in raw material prices such as iron ore and coking coal, as these factors justified price increases. However, within just one quarter, concerns over a global economic slowdown have swept over the industry, reversing the situation. Immediate worries about shrinking steel demand have led to inventory accumulation, and steelmakers are consecutively lowering prices of distributed products.

According to the steel industry on the 16th, as of this month, the domestic distribution price of hot-rolled steel sheets stood at 1.02 million KRW per ton. Just three months ago in May, it was around 1.38 million KRW per ton, marking a price drop of approximately 26.1%. Hot-rolled steel sheets are made by heating and pressing rectangular slabs of molten steel to thin them out. They serve as basic steel materials widely used in automobiles, home appliances, construction materials, and steel pipes.

Prices of rebar (steel bars), widely used in construction, and H-beams are also falling. The price of rebar (based on 10mm) has steadily dropped from about 1.11 million KRW per ton in May to around 925,000 KRW this month, a 16.7% decrease over three months. The distribution price of H-beams also fell from 1.4 million KRW per ton in May to 1.23 million KRW in August, a 12.1% decline over three months.

Concerns over a global economic recession are pulling steel prices down. Last year, economic activities and demand, suppressed by COVID-19, surged significantly. Industries that heavily use steel, such as automobiles, shipbuilding, and home appliances, experienced a boom. However, this year, with interest rate hikes and tightening policies by various countries in full swing, steel demand is shrinking.

Products that could not be shipped are piled up outside the steel mill factory. The photo is not directly related to the article. [Image source=Yonhap News]

Signs of steel market contraction are being detected worldwide. Chinese steel mills, which account for nearly half of global steel production, are expected to further reduce production in the second half of the year. Following the Chinese government's production restriction policies, they achieved their annual production cut targets in the first half of this year. The world's largest mining company, Vale, also lowered its iron ore production forecast for this year from 320-335 million tons to 310-320 million tons this month.

Iron ore prices, which had driven steel prices up, have also fallen. According to the Ministry of Trade, Industry and Energy's raw material price information, the price of iron ore in Northern China (CFR) dropped from $160.2 per ton (about 211,820 KRW) in April this year to $108.85 per ton (about 142,811 KRW) as of the 12th of this month, a 32% decrease in four months. The steel industry, which had been on a performance rally since last year, now faces concerns of a "peak-out" (passing the peak and entering a decline) in the second half of this year.

Additionally, inflation has led the United States to raise interest rates, increasing fears of a global economic recession. Major countries, including the US and the European Union (EU), are raising interest rates, leading to forecasts of reduced investment and economic activity overall. While product prices cannot be raised amid weakening demand, the high exchange rate trend continues, increasing the cost burden of imported raw materials such as iron ore and coking coal.

The economic downturn is expected to result in poor performance for major steel companies in the second half of this year. Financial information firm FnGuide forecasts that POSCO Holdings' operating profit (consolidated basis) for the third and fourth quarters will decrease by 47.1% and 28%, respectively, compared to the same periods last year. Hyundai Steel is also expected to see operating profits fall by 33.4% and 25.9% during the same periods.

Accordingly, steelmakers are unlikely to concede in price negotiations for automotive steel sheets in the second half of the year. POSCO and Hyundai Steel plan to raise prices for automotive steel sheets in the latter half of the year. POSCO stated in its Q2 conference call, "We will raise prices for domestic automakers in the second half," and Hyundai Steel also said, "We will conduct price increase negotiations for automotive steel sheets reflecting raw material price hikes in the first half." Price increases for automotive steel sheets have been smaller compared to other steel products. Automotive steel sheet prices rose by 50,000 KRW, 120,000 KRW, and 150,000 KRW per ton in the first half of last year, the second half of last year, and the first half of this year, respectively. However, during the same periods, prices for shipbuilding steel plates increased by 100,000 KRW, 400,000 KRW, and 100,000 KRW per ton, respectively.