"Power Equipment: No Real Alternatives Despite Additional U.S. Tariffs" [Click e-Stock]

Tariff Costs Passed on to Prices
as Supply Shortage Persists

Recently, the inclusion of power equipment items in the United States' additional tariff measures led to a decline in the stock prices of related companies, but analysts say the impact will be limited. This is because, given the current shortage in power equipment supply, companies can pass on the tariff costs directly to prices.

On the 25th, Shinhan Investment Corp. maintained its "overweight" rating on the power equipment sector, citing this background.

On August 18, the U.S. Department of Commerce added 407 items to the list of steel and aluminum imports subject to increased tariffs, raising them from 25% to 50%. The list included products such as wind turbines, cranes, bulldozers, railway vehicles, and transformers. This was a measure to protect U.S. materials and industrial goods.

For power equipment, the tariffs cover transformers, aluminum wires and cables, certain components of circuit breakers and switches, as well as metal parts related to electric motors and compressors. For transformers and related parts, this includes transformer cores, electrical steel sheets for transformers, and some transformer accessories.

Currently, the largest source of revenue for the three major power equipment companies is North America. For HD Hyundai Electric, the U.S. accounted for 35% of its second-quarter sales this year, and 42% of new orders. In terms of order backlog, about 60% is from North America, and this share continues to grow.

For Hyosung Heavy Industries' power division, the U.S. accounted for 23% of second-quarter sales, and 53% and 44% of new orders and order backlog, respectively, indicating an increase in North American orders. LS Electric also saw its U.S. sales ratio reach 31% in the first half of the year.

In the second quarter, regarding reciprocal tariffs, HD Hyundai Electric set aside 20 billion won in provisions based on a 10% tariff rate. The company also indicated the possibility of partial reversal depending on negotiations with clients. LS Electric reflected 10 billion won in tariff costs and negotiated with customers to pass on these costs for 30-40% of exposed projects. Hyosung Heavy Industries did not disclose detailed tariff costs but is also negotiating to pass on these costs to customers.

Although companies may set aside additional provisions for tariffs in the third quarter, analysts believe the impact on their bargaining power will be limited in the medium term. This is because, although the U.S. aims to localize the production of key materials such as transformers, electrical steel, and cores, expanding domestic production will take considerable time and require significant investment. It is estimated that U.S. domestic transformer production accounts for only about 20% of total supply.

Meanwhile, demand for power infrastructure and data centers in the U.S. continues to grow, creating a structure in which tariff costs are directly reflected in higher power equipment prices. Lee Dongheon, a research fellow at Shinhan Investment Corp., said, "Due to reshoring and data center investments, demand for power equipment in the U.S. will continue to increase at least until 2030," adding, "In addition, demand for post-war reconstruction and expanded transmission network investment after the European blackout have also begun, so the power equipment supply shortage is expected to persist."