Soaring iron ore prices batter Korea's steelmakers

Industry

Published: 28 Sep. 2020, 17:10 Updated: 28 Sep. 2020, 19:45

Soaring iron ore prices batter Korea's steelmakers

Hyundai Steel's cold-rolled steel. [HYUNDAI STEEL]

The price of iron ore, the key ingredient for steelmaking, reached its highest level in more than six years this month, surpassing $130 per ton.

On top of that, the decreased price of products from Japanese competitors has further raised the pressure on domestic steel companies still struggling to overcome sluggish demand amid the Covid-19 pandemic.

According to data from the Ministry of Trade, Industry and Energy and Korea Resources Corporation, the price of iron ore from China’s Qingdao port as of Sept. 14 was $130.17 per ton — the highest in six and a half years. The price had inched down since to $124.26 per ton as of Sept. 25, but the recent price of iron ore is still much higher than the $80 range in February.

The price fluctuation of iron ore tracks China’s economy, which started to bounce back in the second quarter following the disruptions caused by the country's initial coronavirus outbreak.

China, which produces more than half of the world’s iron ore, was also the world's largest importer of the commodity in July, as its construction and manufacturing industries rebounded. China's iron ore imports in that month jumped 10.8 percent from the previous month to a record high.

Market watchers forecast the price of iron ore to remain in the $120 range per ton throughout the year on the increased demand.

Increase in steel product prices

Following the rising price of iron ore, domestic steelmakers including Posco and Hyundai Steel raised the retail price of steel.

Earlier this month, Posco, the world’s fifth largest steelmaker by output, raised the retail price of hot-rolled coil by 50,000 won ($43) per ton, and cold-rolled steel by 20,000 won to 40,000 won per ton, depending on the types of products.

Similarly, Hyundai Steel recently raised its retail price of hot-rolled coil by 50,000 won per ton and cold-rolled steel by 60,000 won. The second largest steelmaker in Korea after Posco, it also raised the price of steel plates by 30,000 won per ton.

Steelmakers have been attempting to reflect the increased price of iron ore to their major suppliers, including automakers Hyundai Motor and Kia Motors.

Hyundai Steel said it hasn’t yet reached an agreement with them.

“We are still negotiating, and nothing has been concluded,” said Lee Jeong-hwa, a spokesperson for Hyundai Steel.

Posco refused to comment on the matter.

Cheaper imports from Japan

Meanwhile, Japanese competitors are driving prices down for local steelmakers with cheaper H-beams, which are commonly used in the construction of buildings, trailers, bridges and others.

According to data from the Korea Iron & Steel Association, Korea’s H-beam imports from January through August totaled 271,871 tons, down 24.2 percent on year.

Imports from Japan rose 55.1 percent on year during the same period to 114,835 tons. They accounted for 42 percent of the total imports to Korea, which is a large jump compared to 2017 through 2019 when Japanese imports only accounted for around 13 to 22 percent.

“The price of Japanese steel products used to be more expensive than that of domestic steelmakers. But due to the difficulties from the Covid-19, Japanese steelmakers exported the products to Korea at a cheaper price. The price was lower than that from domestic steelmakers.” Lee said.

She added that iron ore prices, Japanese competition and the overall sluggish demand for steel products due to reduced production of automobiles and construction projects have all contributed to difficulties for the steel industry.

Outlook

Market watchers believe steelmakers will see higher earnings in the third quarter than in the previous quarter on the recovery of the manufacturing businesses.

In the second quarter, Posco reported its first quarterly operating loss while Hyundai Steel saw its on-year operating profit drop 94 percent.

Analyst Baek Jae-seung from Samsung Securities pointed out that the increased retail price of steel products has likely raised steelmakers’ performance in the third quarter.

“The retail price of steel in China, which has most rapidly recovered from the impact of Covid-19, is rising rapidly, along with that from the United States and Europe, helped by the production control and recovery in demand,” Baek wrote in a report published last week.

But he said it's unclear when inflation will be reflected on steel prices, along with the recovery of the real economy.

“Although China is leading the recovery of the steel industry, that isn’t enough [for steelmakers] to make up for the rise of the iron ore price," Byun Jong-man, an analyst with NH Investment & Securities, said. "The cost burden is projected to grow bigger in the fourth quarter due to the skyrocketing iron ore price,” Byun added.

According to a report from KB Securities, Posco is projected to report 13.78 trillion won in sales, down 13.8 percent on year, and 478.1 billion won in operating profit, down 54 percent on year in the third quarter. Another report from KB Securities showed Hyundai Steel estimated to report 4.36 trillion won in sales, down 13.6 percent on year, and 35 billion won in operating profit, up 2.7 percent on year.

BY JIN MIN-JI [jin.minji@joongang.co.kr]