Korean mills need to move away from construction steel amid growing Chinese overcapacity

South Korean steel producers need to speed up strategies aimed at reducing their dependence on construction-use steel.

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They need to concentrate more on auto sheet and other high-end products as China looks to shift away from heavy infrastructure spending and focus more on boosting private consumption in the years to come, Samsung Securities has warned.

“If China does what many expect and opts for economic rebalancing – i.e., gradually lowering its fixed asset-investment portion of GDP and raising its private consumption portion – the steel industry as a whole will suffer from increased oversupply,” Chris Kim, the author of the report, noted.

By 2015, China will have added an estimated 320 million tonnes to its current crude-steel production capacity, taking its yearly total to 1.26 billion tonnes and raising annual growth in net exports to 28%.

“While supply-demand conditions for construction-use steel will deteriorate as a result, they should remain tight for auto sheets, which require advanced technology,” Kim pointed out.

He said that Posco, therefore, has steadier earnings prospects than its peers, backed by steady growth in its auto sheet business.

Japanese automakers will likely reshuffle their auto sheet suppliers following the merger between Nippon Steel and Sumitomo Metal Industries, he argued.

Most such firms have until now relied on these two and JFE Steel, generally procuring a maximum of 40% of their needs from one supplier.

But as the merger will force carmakers to rely on a single supplier for more than 60% of their needs, Kim expects them to increasingly turn to Posco next year, especially given the firm’s proven technology, which last year raised sheet shipments to Japanese automakers to 870,000 tonnes.

Japan’s three major carmakers annually consume more than 13 million tonnes of steel sheet, so Posco has the potential for massive growth, he pointed out.

By contrast, Dongkuk Steel is highly vulnerable to the changes in China’s steel dynamics, he said.

Greater capacity combined with slowing fixed-asset investment means that Chinese mills will likely increase their net exports of construction-use steel and thus worsen Korea’s long product supply-demand dynamics.

“This will prevent Dongkuk Steel from seeing much margin improvement as 66% of its shipments go to the construction sector,” he noted.

To make matters worse, Dongkuk Steel is also facing falling margins on its heavy plate shipments amid the slump in regional shipbuilding activity.

Asia’s heavy-plate capacity has increased dramatically over the past three years, with Korean mills boosting capacity by 4 million tonnes and the Chinese, by 20 million tonnes.

This has transformed the landscape into a buyer’s market, he noted.

With domestic output forecast to hit 12 million tonnes this year versus the nominal consumption of a little over 11 million tonnes, Dongkuk Steel is becoming increasingly reliant on exports.

Moreover, further margin declines are likely if consumption falls or imports rise.

“Heavy plate supply-demand dynamics are not expected to improve without a sharp increase in shipbuilding demand or full-blown restructuring by Southeast Asian steel firms,” Kim argued.

As for Hyundai Steel, Kim says that the short term looks bleak for the company as domestic long-product spreads are projected to fall by 14% in 2013 and the company faces weakening hot rolled coil and heavy plate prices.

However, the company is set to benefit in the longer term from its 1.5 million tonne cold rolled coil plant, slated to come into operation in the third quarter of 2013, which will allow it to focus on boosting its portion of auto-use HRC shipments to 73% in 2013 from 62% in 2011.

Still, it is critical that the company secures decent margins for its auto sheet and devises strategies to counter long product imports, he insisted.