Risks growing for steel industry


The steel market across the world recorded a slowdown as trade tensions between the US and China remain unresolved, and all major global economies showed a negative growth rate, with substantial decrease in production activities and a slowdown in demand for steel as well.

Illustrative photo: LONG THANH

Illustrative photo: LONG THANH

In this challenging situation, investors interested in the steel industry need to focus only on leading enterprises within this industry.

Abnormal fluctuation

Steel prices and iron ore prices in the world are going in opposite directions, which negatively affect the profit margin of steel enterprises. When one of the three largest steel producers in the world, Brazil’s Vale Mining Company, suffered the collapse of the Brumadinho dam on 25 January 2019, iron ore prices soared by 31% and reached a high peak, seriously affecting global iron ore supply, and even Vale's production of iron ore decreased by 10%, equivalent to about 40 million tons.

On the contrary, world steel prices are in a strong downtrend due to oversupply. Especially when the US is constantly imposing many taxes to protect their domestic economy, therefore creating technical trade barriers for steel exporting countries, resulting in a backlog of goods.

The picture of the domestic steel industry in the first eight months of 2019 was generally gloomy. Only hot rolled steel products recorded a positive growth of 34%, while the remaining items showed signs of a slowdown, no longer maintaining the growth of two digits as in the previous period. Sales output of construction steel in the whole industry reached 7.1 million tons (up 7.5% over the same period), but the growth of steel pipes is only 1%, even recording a negative growth for galvanized steel, due to oversupply and difficulties in exports under current US tariff barriers.

Specifically, in 2018, the US applied 25% tax on imported steel products from Vietnam. In addition, in September the US decided to apply 456.23% tax on rust rolled steel and cold rolled steel imported from Vietnam due to suspicions of tax evasion. Besides slowing of output growth, the average selling price of domestic steel is also falling by about 12% over the same period.

Two leading steel enterprises

In the first eight months of the year, the steel market did not see many significant changes. In the field of construction steel, Hoa Phat Group Joint Stock Company (HPG) continues to lead the steel industry with a total market share in the entire country of around 25.1% in the last eight months. One noteworthy point is that the market share of construction steel of HPG in the South has shown an increase, corresponding to the "South Progress" strategy of this enterprise through their big projects.

In this challenging situation, investors interested in the steel industry need to focus on leading enterprises within this industry, take advantage of closed scale, high competitiveness, and a healthy financial situation.
For example, HPG investment in Dung Quat iron and steel complex has a convenient location in the Central Coastal Region, owning a deep-water port with an authorized tonnage of 200,000 tons and an investment of VND 500 bn. By using Dong Nai Port to transport steel to the South, HPG market share in the southern region is now 11.1% compared to 5.9% in the same period last year.

Meanwhile, for steel pipe and corrugated iron, HPG and Hoa Sen Group Joint Stock Company (HSG) continue to maintain a leading position relying on their own competitive advantages. Specifically, within the last eight months, HPG occupied 30.4% of market share of steel pipes, and HSG was in the next position with 30.3% market share of galvanized steel sheets, in the entire country.

In the first half of 2019, regarding the business results of listed steel enterprises, due to high raw material prices, high cost of goods sold, and high interest expenses, profits were lower than the previous year. In addition, many steel enterprises are restructuring to reduce costs and divestment in non-core investment sectors. Typically, HSG continuously conducts divestments in the fields of ports and real estate. Besides, they also changed their business model into a branch model in several provinces.

Two risk factors

From the business results of the first six months, plus abnormal fluctuations, it shows that the prospects of steel enterprises in the period 2019-2020 are facing two big risk factors.

The first risk factor is the deadline of the anti-dumping tax which will expire on 22 March 2020, leading to the risk that Chinese cheap steel products will flood into the Vietnamese market, as Vietnam is China's second largest steel import market after South Korea, making up for 10% of the country's total exports.

The second risk factor is that from 2018, domestic steel enterprises have increased their steel production capacity. But this form of strong investment is through borrowing more capital, thus leading to a situation where interest will eat into the profits.

Translated by Minh Châu

Nguyễn Thị Ngân Tuyền, Director of Individual Customer Research, Maybank Kim Eng. Securities

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