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South Korea Metals Report Q1 2011
Business Monitor International, Jan 2011, Pages: 50
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.
Concerns will mount over whether steel mills can 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.
In 2010, South Korea’s crude steel output was up 20.9% year-on-year (y-o-y) to 58.8mn tonnes. This was far lower than the 65.35mn tonnes forecast by the Korea Iron and Steel Association (KOSA) – that said, data from the World Steel Association did not support the organisation’s forecasts and suggested far lower growth levels. Output growth was assisted by a massive increase in crude steel production capacity in 2010 as Hyundai Steel started two new furnaces at Dangjin, each with a capacity of 4mn tonnes per annum (tpa) and with operations scheduled to commence in April and November 2011. Hyundai Steel's new steel works will also produce high quality automotive steel plates. The company planned to complete the development of its automotive steel facilities and begin mass production in 2011. Hyundai Steel closely cooperates with its affiliates in the Hyundai Kia Automotive Group, and specialises in crude steel production and HRC manufacturing, while Hyundai Hysco’s specialty is CRC. Both are suppliers to automakers Hyundai and Kia.
BMI forecasts a further 13.2% growth in crude steel output to 66.5mn tonnes in 2011, the first time annual Korean steel output has risen above 60mn tonnes. Extra output should be absorbed by growth in a broad range of steel consuming sectors, although the construction sector will remain a poor performer.
The situation on the domestic market is likely to come under pressure going into 2011 with the Bank of Korea raising its policy rate from a record low 2.0% to 2.25%, amid concerns that inflation would exceed the central bank’s medium-term inflation target of 3% from Q410. This would undermine demand growth for consumer durables, which represent a significant proportion of Korean metals consumption.
Over 2011, the impact of a slowdown in growth will largely be felt by imports, with domestic producers likely to shore up output due to the relatively low value of the won – although the exchange rate will do nothing to ameliorate the problem of rising iron ore costs. Growth in domestic manufacturing should help sustain domestic steel consumption, and BMI forecasts growth in finished steel consumption of 9.3% to 54.1mn tonnes in 2011. Meanwhile, imports will decline 12.6% to 23.8mn tonnes due to an increase in local supply as a result of capacity expansion.
Exports will rise 15.9% to 25.7mn tonnes due to rising demand in emerging markets such as India. However, despite rising raw materials costs in Q410, POSCO decided to keep domestic steel prices unchanged for Q111, signalling stagnation – due in large part to slowing demand from China. At the same time, Hyundai Steel’s expansion has led to a temporary situation of domestic over-capacity, although this should be resolved by mid-2011. South Korea’s dependence on the Chinese market to soak up its production exposes the industry to significant risks. China’s growth in capacity in 2010 has been accompanied by a sharp downturn in domestic demand due to tightened bank lending conditions and a more restrictive fiscal policy. If sustained, such trends will undermine Asian steel prices and squeeze South Korea’s exports. On the upside, the efficiency of the country’s highly integrated steel industry should ensure competitiveness and profit margins over the medium 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.
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