Hoa Sen Group (HSG) may benefit if the EU market lacks steel supply due to the closure of factories in the near future.

According to the World Steel Association (WSA), crude steel production in July was 149.3 million tons (-6.5% Yoy), down from June’s 158.1 million tons. Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities, believes that the world steel supply will fall further because of (1) closing steel plants in the EU due to the unresolved energy crisis and (2) the policy of reducing output and protecting the environment in large steel-producing countries like China.

Domestic crude steel production declined due to weak demand and large inventories. In August, finished steel production reached 1,982 million tons, down 12% MoM and down 21.6% YoY. Accordingly, 8M22 crude steel reached 20,808 million tons (-5.8% Yoy). The sold volume of finished steel was 19,261 million tons (-1.6% YoY).

"We expect domestic steel consumption in the last three months of the year to recover because (1) the rainy season—the low season for construction—has passed, so steel demand should increase in 4Q when construction work accelerates; and (2) public investment is expected to accelerate at the end of the year. Disbursement speed in August was faster than in July 2022. Disbursed capital in the first eight months of 2022 completed 51% of the year plan and increased 16.9% YoY. The source of investment to be disbursed for the period 2022-2023 is still abundant, which will be the driving force to domestic steel consumption", emphasized Mr. Tran Duc Anh.

Meanwhile, the economic support policy of the Chinese government on August 24, 2022 also boded well for the steel industry. Of particular note was an additional CNY300 billion that state banks can use to invest in infrastructure projects. The recovery of the Chinese market is the main driver of the world's steel demand in 2023. However, the outlook for world steel demand is uncertain due to concerns about inflation and recession.

Steel prices in early September in the Vietnam market showed a recovery after consecutive declines. Steel prices were supported when domestic demand and coke prices rebounded. Coal prices increased due to the EU's ban on coal imports from Russia that took effect from August 11, 2022. This means that the EU will have to proactively search for alternative supplies from other countries such as Australia and Colombia. The global price of sea-transported coal will increase accordingly. The FOB price of coking coal at Australian ports on September 6 was USD254.5/ton. However, steel producers will be less pressured because raw material prices are still much lower than those in early May and selling prices have started to rebound slightly. So, Mr. Tran Duc Anh expects the business results of steel companies to improve in 4Q.

"Steel prices and domestic steel demand are likely to recover in 4Q. However, inflation and recession in other countries may worsen the global steel market, having certain impacts on the Vietnam market. Hoa Phat Group (HPG) with a strong competitive advantage, can be considered as an investment opportunity when the domestic construction steel market is recovering. In addition, Hoa Sen Group (HSG) and Nam Kim Steel (NKG) may benefit if the EU market lacks steel supply due to the closure of factories in the near future. However, the extent of benefits may not be so clear as Vietnam's hot-dip galvanized steel (HDG) products into the EU are currently subject to import quotas", said Mr. Tran Duc Anh.

The stocks of steel companies have dropped sharply since the beginning of April 2022. This partly reflects concerns in the market about the subdued business performance of businesses when the prices of raw materials skyrocketed and profit margins and consumption decreased. In the past, the price of steel stocks often bottomed before the announcement of business results. Although the steel industry is still in a difficult period, Mr. Tran Duc Anh believes that stocks of Vietnam's steel industry will bounce back thanks to the return of steel demand and more positive business results in 4Q.