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South Korea Metals Report Q4 2010
Business Monitor International, Oct 2010, Pages: 48
The 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.
BMI’s latest South Korea Metals Reports anticipates a more challenging environment for Korean steelmakers from H210 into 2011 due to a slowdown in domestic demand and export growth.
In the first seven months of 2010, South Korea’s crude steel output was up 26.1% y-o-y to 33.06mn tonnes, although June and July saw output decline 7.5% and 0.4% m-o-m respectively. Output growth was assisted by a massive increase in crude steel production capacity, which was expected to rise 25% in 2010 as Hyundai Steel starts new plants. The Korea Iron & Steel Association said that total capacity may rise by 16mn tpa to 80.2mn tpa in 2009. Capacity for hot rolled sheets, used in cars, may rise to 38.8mn tpa that heavy plate capacity will be 11.4mn tpa. In April 2010, Hyundai Steel began commercial operation of its first blast furnace, with 4mn tpa capacity. The company, spending KRW6.2trn on the expansion, plans to complete a second plant of the same size later in the year.
The POSCO Research Institute forecast 13% growth in domestic steel demand to 51.3mn tonnes in 2010, but expected a sharp decline to 4% in H210 from 24-25% in H110. This is a more optimistic assessment than the 11.1% growth to 50.4mn tonnes BMI is forecasting. We believe that the second half of the year will be a more challenging environment due to a slowdown in both domestic and export markets coupled with a supply overhang and rising raw material costs which will lead to stagnation of the industry, despite the progress on expansion. Nevertheless, BMI maintains forecasts for crude output to rise 14.5% y-o-y to a record 55.64mn tonnes in 2010 and a further 11.1% y-o-y to 61.80mn tonnes in 2011, although output growth will slow significantly from 2012 as Chinese over-capacity hits home and the Korean industry reaches its full operational capacity. By 2014, crude output should total around 68mn tonnes.
There are signs that the weakening of the Chinese market was forcing some producers to turn to the domestic market. BMI believes that by 2011, a slowdown in mainland China will have tipped the balance to the downside, putting pressure on exports. In July it was reported that Korean HRC mills were seeking to boost domestic sales with the Korea Iron and Steel Association stating that their sales reached 824,000 tonnes in June 2010, the highest level since December 2007. However, BMI believes that the level will go down over H210 due to reduced export demand and high domestic inventories as well as declines in domestic markets for flat steel end-products; the Korea Automotive Research Institute predicted a 5.6% y-o-y fall in domestic automobile sales in H210 to 760,000 units, pulling down the output of five South Korean automakers by 3.2% y-o-y to some 1.92mn units. Yet, the long steel market could see greater stability with analysts denying the prospect of a Japan-style housing crash, although there was little likelihood of a rally in the near future.
ag 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 also mount regarding whether or not 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.
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