HPG's steel manufacturing

The selling price of HRC to turn down

The global price of HRC recorded a significant recovery after China relaxed its dynamic zero-COVID policy since Nov 2022. Market participants expected global steel demand to grow in 2023F thanks to (1) the resumption of economic activities in China to help restore global industrial production and supply chains and (2) China's efforts to promote infrastructure investment and policies to support the property sector gradually taking effect. High expected demand also made steel mills increase utilisation rate and raw materials (iron ore, coke) inventories, leading to steel input prices climbing. Cost-push is also a major factor driving steel prices to jump in 1Q23.

However, VNDirect said 1Q23 actual steel demand was not as strong as consensus's expectations. Despite 16 new policy measures announced in Nov 2022, the outlook for China’s residential property sector remains subdued, with real estate investment and newly- launched property projects down around 7% and 29% yoy in 1Q23, respectively, based on My Steel data. Strong steel production volume amid weak demand caused China steel prices to decline since the end of Mar 2023.

The S&P Global Eurozone Construction Total Activity Index remained in contractionary territory in early 2023, though with the rate of falls slowing across all three sub-sectors (housing, commercial and infrastructure). The rate of inputcost inflation also appears to have cooled in recent months, though new orders remain weak given the high level of economic uncertainty still present in the market. The European auto industry continues to face challenging conditions in 2023. High energy prices, parts shortages and falling global trade are all impacting manufacturers.

“The outlook for US steel demand in 2023 remains positive thanks to (1) CHIPS and Science and Inflation Reduction Acts lend support to domestic manufacturing activity and (2) US$1.2tr Infrastructure and Jobs Act, which includes US$550bn in new federal government investment. However, with the US manufacturing PMI 35 Resources and Energy Quarterly March 2023 falling deep into contractionary territory in early 2023, and new orders slumping, challenges in the near term remain.The S&P Global Eurozone Construction Total Activity Index remained in contractionary territory in early 2023, though with the rate of falls slowing across all three sub-sectors (housing, commercial and infrastructure). The rate of inputcost inflation also appears to have cooled in recent months, though new orders”, said VNDirect.

Cost-push and temporary supply shortages due to the earthquake in Turkey - a major steel exporter - was the main reason for the recent sharp increase in steel prices in the US and EU. However, with the prospect of steel demand not having much improvement, we believe that the price increase in these regions will cool down in the coming months.

Slower demand growth and more supply

Spot iron ore prices have rebounded strongly in early 2023 after falling more than 50% in the second half of last year. The higher prices reflect a partial recovery in Chinese steel production (accounting for around 57% of global iron ore demand in 2022), and an anticipated rise in China’s steel demand this year — as the economy reopens with the end of the government’s dynamic zeroCOVID policy in late 2022.

According to data from the World Steel Association (WSA), China's crude steel production reached 262m tonnes in 1Q23, a surge of 6.1% yoy. As of 7 Apr, China's National Development and Reform Commission was still soliciting opinions from major Chinese steel mills on details of the 2023 crude steel output cuts, according to some mill sources. Although the official announcement has not been made yet, many major organizations (including Bloomberg, Reuters, S&P Global) forecasted that China will reduce crude steel production by 2.5% yoy in 2023. That means China's crude steel production and iron ore demand will decline in the remaining months of 2023 to offset 1Q23 growth.

In 2022, China announced its first decline in population, and with real estate constituting as much as 25% of the Chinese economy, weakness in the country’s property sector will continue to diminish the country’s near-term steel demand. In fact, spot iron ore prices have now turned down 12% from the peak at the end of March 2023. In addition, with the goal of reducing CO2 emissions, China is projected to see a mild decline in total steel production over the outlook, this should see a softer rate growth (0.9% annually) in global iron ore demand in coming years.

On the supply side, the world’s two largest producers — Australia and Brazil — are expected to continue to collectively grow export volumes by 3.2% per annum over the outlook period. This follows a ramp up of greenfield projects for major Australian miners, and major expansions planned by Brazilian producers of Vale, CSN and others. New supply from emerging producers in Africa will also contribute to annual growth of around 3% in global trade of iron ore.

According to Australian Department of Industry, Science, Energy and Resources (DISR) estimation, the FY23F average iron ore price is forecasted to reach US$100/tonne (-6.5% yoy), the benchmark iron ore price is projected to average around US$63 per tonne by FY28F.

Growth in metallurgical coal prices

Coking coal prices have recently lifted to their highest level since mid-2022, amidst a less pessimistic outlook for China and other major economies.

“Prices are expected to ease slowly over the outlook period, with the largest fall expected in 2023 as supply conditions (notably in Australia) improve and normalise. The end of the La Niña cycle should allow waterlogged mines and disrupted terminals and rail to resume full output”, said VNDirect.

DISR forecasts coking coal to ease from an average of US$299/tonne in FY23F, but is expected to fall by almost a half as supply conditions normalise. Prices are ultimately expected to reach around US$160/tonne by FY28F, representing a shift towards their pre-FY21 level.

Steel companies' EBITDA margin to improve

According to spot price (steel, iron ore, coking coal and steel scrap) movements, we estimate that the EBITDA margin of HPG’s steel segment in Apr 2023 is 1.5% pts higher than the previous quarter, despite the decline in steel selling prices.

VNDirect expects the gross margin of steel companies in 2Q23 will continue to improve compared to the previous quarter. However, the steel demand is forecasted to be still weak in the coming months, profit margin of steel companies may still face many fluctuations, especially the small companies with limit ed inventory management skills.