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South Korea Metals Report Q2 2010
Business Monitor International, April 2010, Pages: 53
South Korea Metals Report provides industry professionals and strategists, corporate analysts, metals associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on South Korea's metals industry.
Although South Korea’s steel industry was supported by exports to China in 2009 due to the depreciation of the won, BMI’s latest South Korea Metals Report forecasts production to be more domestically oriented from 2010 as consumption rises and the won gains ground.
South Korean crude steel output increased modestly in 2009, although there was some downward adjustment in the final two months of the year. In 2009, crude output was down 9.6% year-on-year (y-oy) to 48.6mn tonnes, but in Q409 was up 8.9% y-o-y and 4.7% quarter-on-quarter (q-o-q) to 13.27mn tonnes. Output levels in South Korea were far better than elsewhere in East Asia, helped by the weak value of the Korean won, especially compared with the strength of the Japanese yen, which supported exports.
In the steel industry, the Korea Iron and Steel Association (KISA) expects capacity to rise 5-6mn tpa to up to 68mn tpa in 2010, assisted by POSCO’s planned new facilities at its Kwangyang works with heavy plate production of 1.5-2.0mn tonnes-per-annum (tpa). Output is set to be stimulated from 2010, with the development of the Dangjin integrated steel complex – with annual steel production capacity of 8mn tonnes, including 6.5mn tpa of hot-rolled band and 1.5mn tpa of plate. Completion of the first blast furnace is due in 2010 with a second due in 2011.
South Korea’s POSCO benefited more than most East Asian steelmakers from the Chinese government’s stimulus package. However, there is a consensus that China’s steel market is headed for a period of lower rates of growth as it adjusts from the imbalance between production and demand, oversupply and bounded export, as well as government policies aimed at economic structural adjustment. With 700mn tpa of capacity, China had an estimated surplus capacity of 130mn tpa in 2009 when the industry was operating at just over 80% capacity. This is likely to be ramped up in coming months, despite Chinese efforts to curb excessive capacities. According to our forecasts, Chinese crude steel output will outstrip domestic finished steel use only until 2012, but China’s steel imports will accelerate from then on. This will have knock-on effects on South Korean manufacturing, with pressure on exports over the short-term. With China being the destination for approximately 25% of South Korea’s exports, a Chinese slowdown could be a significant drag on Korea’s economic activity. Meanwhile, concerns will also amount over whether steel mills will be able to pass on higher raw materials costs to customers. The situation could be ameliorated by the expected modest appreciation of the won over the short term, which would bring down the cost of raw material imports.
KISA expects mill capacity to rise 5-6mn tpa to 68mn tpa in 2010. It is estimated that the steel mills’ equipment investment will drop 32% to 6.9mn tonnes in 2010. However, POSCO said that it will increase investment to a record high of KRW9.2trn in 2010, more than double from KRW4.9trn in 2009. The steelmaker set its 2010 revenue and output targets at KRW 29.5trn and 34.4mn tonnes, up by 9.3% y-o-y and 16.6% y-o-y, respectively. In 2010, POSCO plans to refurbish the No 4 blast furnace in Pohang, complete a steel plate mill in Gwangyang, seek merger and acquisition opportunities in the local market and accelerate procedures to build steel plants in India and Indonesia.
BMI expects domestic demand growth to at least offset part of the moderation in Chinese demand growth. KISA forecasts steel demand rising 12.2% in 2010, but BMI is more bullish, predicting 13.2% growth in domestic finished steel demand to just under 50mn tonnes in 2010 and a return to trend growth in the following years, driven by the automotive and construction industries. As incomes continue to push higher, we believe that South Koreans will increasingly choose to consume due to a substantial increase in their disposable income. On the other hand, we expect net exports to be less central to the South Korean growth story. We expect South Korea’s rate of export growth to moderate in the face of wider competition from industrialising Asian countries, such as China, while South Koreans’ burgeoning incomes will spur import growth. This could be detrimental to Korean producers, particularly in the context of a strengthening won.
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