S. Korean mills’ Q4 results likely to fall short, but rebound expected, Samsung Securities says
South Korean mills are likely to post worse-than-expected results for the fourth quarter of 2012, but they can also look forward to a healthy rebound in fortunes this year, Samsung Securities says.
Paragraph entered by Atlantic migration, in order for SteelFirst articles to display correctly on Metal Bulletin.
It expects Hyundai Steel to post 3.2 trillion Won ($3 billion) in sales, which will be 5.3% lower quarter-on-quarter and down 17% year-on-year, and a sluggish operating profit of 151.8 billion Won, down 34.1% quarter-on-quarter and down 48.3% year-on-year – the latter missing market expectations by 42.4%.
Hyundai Hysco is expected to report consolidated sales of 2.1 trillion Won (up 2.6% quarter-on-quarter and down 3% year-on-year) and an operating profit of 55.7 billion Won (down 40.9% quarter-on-quarter and 44.1%year-on-year), the latter missing the consensus forecast by 54.5%.
Posco, meanwhile, is projected to post parent-based sales of amounting to 8.114 trillion Won (down 19.4% year-on-year and 8.9% quarter-on-quarter) and an operating profit of 405.6 billion Won (down 41.4% year-on-year and 50.5% quarter-on-quarter), the latter 32.6% short of market consensus.
Samsung Securities notes that Korean steelmakers were hit by big drops in their average selling prices, which could not be offset by falling raw material prices.
In the case of Hyundai Steel, for example, the former dropped by 60,000 Won per tonne while the latter fell by just 30,000 Won per tonne.
Mills were also negatively affected by declines in shipments of all products except hot rolled coil amid sluggish regional demand.
But looking ahead, the brokerage expects full-blown earnings growth in 2013, when a steel-price rebound improves margins and shipments normalise.
Demand for auto-sheet in particular is expected to be strong, while global supply should remain tight this year, Samsung Securities said, noting that annual Chinese demand for auto sheet will likely reach 12 million tonnes this year and 14.8 million tonnes by 2015 – an increase of 23.3% over three years. Imports make up some 20% of Chinese demand for the material.
China’s local production is unlikely to meet the growth, due to a lack of the requisite technology and experience.
Consequently, the brokerage believes supply shortages there will keep Korean auto-sheet export prices strong and margins higher than those of their domestic operations.
As a result, it expects operating profit at Hyundai Hysco to jump 108% year-on-year to 115.9 billion Won in the first quarter of 2013 on an expansion of product spreads thanks to a rebound in export prices.
It expects the company’s auto-use sheet shipments to increase 12.7% to 4 million tonnes in 2013.
Meanwhile, Hyundai Steel’s proportion of auto-use sheet shipments should this year rise to 41%, from 30% in 2011, now that its third furnace is up and running, while stable shipments to the Hyundai Motor Group should ensure solid top-line growth and earnings visibility.
The company will also benefit from increased demand in the first half of 2013, when Hyundai Hysco starts operating a new 1.5m-tonne cold rolled coil plant, while cheap HRC imports from Japan should decline now that Nippon Steel and Sumitomo Metal Industries have merged.
In the case of Posco, Samsung Securities expects a 74.9% quarter-on-quarter increase in operating profit this quarter, driven by a 35,000 Won per tonne drop in the cost of molten ore coupled with a recovery in export prices from February.
Plunging international steel prices in the second half of 2012 and concerns over further cuts in the first half of this year had suggested gloomy earnings prospects for Posco. However, China’s steel inventory cycle now has a stable outlook, which improves the firm’s earnings visibility for 1H13.
In December, China’s National Development and Reform Commission unveiled a plan for social infrastructure investments that include urban rail construction, while Baosteel has said it will raise shipment prices for February – the fourth consecutive monthly increase.
As a result, Samsung Securities says it foresees more inventory restocking and steel-price hikes in China, even after the Chinese New Year holiday.
However, it also warned that while auto-sheet supply was to stay tight, rising construction-steel imports will hurt the long-product market.
Long-product exports from China are set to grow rapidly, given the country’s plans to expand steel capacity. It estimates that China’s net rebar exports will jump to 12 million tonnes by 2015 from 5 million in 2011.
Another negative point Samsung Securities highlighted is the recent flood of Chinese boron-added long products that is threatening the Korean market, with no sign of any domestic countermeasures.