[Steel Inventory Abnormal Surge] Products Not Selling... Largest Inventory Since COVID-19

Hot-rolled steel inventory at end of June 4.07 million tons
Up 53.2% from same period last year
Concerns over sluggish construction and automobile industries

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, resulting in unsold steel products and inventory burdens falling squarely on steel companies. This phenomenon coincides with the reversal and decline of iron ore prices, which had been on an upward trend 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 industry's countermeasures.

[Asia Economy Reporter Oh Hyung-gil] Inventories of steel products held by major steelmakers such as POSCO, Hyundai Steel, and Dongkuk Steel have surged by more than 90%. Even considering the seasonal off-season in summer, this is an unusual decline in demand for steel products.

The combination of the 'three highs'?high inflation, high oil prices, and high interest rates?along with supply chain crises has rapidly frozen the economic conditions of upstream demand industries, leading to unsold steel products.

According to the Korea Iron & Steel Association on the 16th, inventories of hot-rolled steel stood at 4.076 million tons at the end of June, a 53.2% increase compared to 2.66 million tons in the same period last year.

Hot-rolled steel inventories have been continuously increasing since the spread of COVID-19, heading toward 'overproduction.'

From 2.952 million tons at the end of 2020, inventories rose to 3.523 million tons at the end of last year, and the upward trend has continued this year. Although production was reduced by 3.8% to 33.834 million tons this year compared to 35.198 million tons in the same period last year, it did not prevent inventory growth.

Except for steel pipes (0.3%), inventories of most product categories have increased significantly.

Inventories of hot-rolled steel sheets reached 1.728 million tons, a 92% increase compared to the same period last year. Despite producing 18.66 million tons in the first half of the year, down from 19.09 million tons the previous year, domestic sales and exports decreased by 2.7% and 15.2% respectively to 4.94 million tons and 2.84 million tons, causing inventories to rise sharply.

Inventories of cold-rolled steel sheets also increased by 29.2% year-on-year to 6.9 million tons. Wire rods and galvanized steel sheets have inventories of approximately 5.74 million tons and 6.1 million tons, up 76.6% and 66.2% respectively compared to the same period last year.

Additionally, rebar inventories have surged nearly 60% to 5.08 million tons, while inventories of structural steel are at 4.83 million tons (up 3.8% year-on-year), heavy plates at 4.28 million tons (up 12.2%), and steel bars at 3.83 million tons (up 35.3%).

[Image source=Yonhap News]

The sluggishness of key upstream industries such as automotive, construction, and shipbuilding is a major factor. Despite steel companies reducing production volumes in anticipation of decreased orders during the first half of the year, inventories have accumulated more than expected.

A representative example is rebar, mainly used in apartment and housing construction. Compared to 2018 and 2019 before the COVID-19 outbreak, rebar inventories have nearly doubled. With raw material price surges pushing up rebar prices and rising financial costs due to interest rate hikes, the construction industry is delaying major projects, causing rebar sales to decline rapidly.

The decline in demand, coupled with the influx of cheaper imported rebar, has led to a sharp drop in rebar prices. Rebar prices, which rose to 1.19 million KRW per ton in the first week of May, fell to 980,000 KRW per ton in the first week of this month.

In the automotive industry, production disruptions continue due to semiconductor supply shortages, and in shipbuilding, new ship orders in the first half of the year totaled 21.48 million CGT (Compensated Gross Tonnage), down 29.8% compared to the same period last year. Steel companies are concerned that the poor performance of key demand industries will accelerate the deterioration of steel industry results in the second half of the year.

Furthermore, the global steel market, centered on China, is also contracting. In April, the World Steel Association forecasted global steel demand for this year at 1.84 billion tons, a 0.4% increase from the previous year, revising down from the earlier forecast of a 2.2% increase. This is due to uncertainties in raw materials caused by the Russia-Ukraine war and the impact on manufacturing from the Chinese real estate market downturn.

At the end of last month, prices for hot-rolled steel sheets in China fell below $600 per ton, marking the lowest level in 20 months, and inventories of steel products at Chinese steel mills rose 30% year-on-year to 20.52 million tons at the end of June.

Due to the crisis in the Chinese real estate market, demand for construction raw materials is expected to decline significantly, leading to a drop in iron ore prices. Goldman Sachs recently lowered its iron ore price targets for three and six months ahead from $90 and $110 per ton to $70 and $85 per ton, respectively.

Jang Bong-hee, head of the Korea Iron & Steel Association's Research and Analysis Office, warned, "Since the second half of last year, the slowdown in the real estate market and the Evergrande Group's debt crisis have dampened investment sentiment in China's real estate sector, causing a sharp drop in related demand," adding, "The recent resurgence of COVID-19 could also act as another variable."