Global economic downturn can lower steel demand

Recovery in steel prices has saved steel stocks from touching bottom for now. However, investors still remain cautious because of unexpected impact due to the global economic downturn which could possibly lower steel demand.
Global economic downturn can lower steel demand

Reduced production

According to the Vietnam Steel Association (VSA), crude steel demand has recovered partially from its lowest level in late 2022, although it is still far from the level between September 2021 to May 2022, when both production and consumption were about 25 percent lower. This may be the reason why upstream steel producers seem to remain pessimistic when the production rate is slower than the consumption rate from December 2022. It could also be that these manufacturers were adjusting for overproduction between August and October 2022 when sales suddenly fell dramatically.

Alarmingly, while large producers such as TISCO, Hoa Phat (HPG), and Formosa have moderate capacity reduction, many smaller producers have cut output by two-thirds and sold inventory, as in the case of VNSteel, Vinakyoei and Pomina (POM). The cause may have been difficulties due to the increase in raw material prices while the selling prices did not increase accordingly, so reducing production while liquidating inventory was the most reasonable strategy at this time.

Businesses cautious

According to the steel industry analysis report just published by Viet Dragon Securities Company (VDSC), most steel manufacturers are still cautious when setting output plans for 2023. There are some steel companies that have announced plans for the new financial year. For instance, SMC Trading Investment Joint Stock Company, one of the largest steel traders in the domestic market, launched a consolidated output plan in 2023 of only one million tons due to weak domestic steel demand.

Similarly, in the fiscal year starting in October, the Hoa Sen Group Joint Stock Company (HSG) postponed their Annual General Meeting (AGM) for two months to re-evaluate the business strategy for the fiscal year until 2023. The AGM document of HSG includes sales targets presented in two scenarios that were lower compared to the previous financial year.

Given the fact that the sales volume for the financial year 2021-2022 is 9 percent lower than the same period last year, HSG Board of Directors has contributed to a pessimistic outlook for the galvanized steel market in the medium term, as this group currently holds the largest market share.

The giant of the industry, HPG, has just released a plan for 2023 with revenue growth of 6 percent and net profit down 5 percent. Although more assumptions about materials and selling prices are needed to evaluate this business plan, VDSC still thinks that the revenue growth plan in 2023 is too optimistic. Because HPG has not yet resumed operations of all blast furnaces, it means that there is a high possibility that the business output in 2023 may be lower than in the same period.

On the other hand, the possibility of a significant increase in steel prices in 2023 is also not high. Domestic prices are currently 7 percent lower than in the same period last year and 17 percent below the peak in May 2022. Therefore, the possibility of prices rising above last year’s levels is quite low.

Stocks move sideways

At the 2023 Annual General Meeting of Shareholders held on 30 March, Mr. Trần Đình Long, Chairman of HPG, said that the most difficult period of the steel industry has probably passed. However, Mr. Long shared the information that HPG will switch strongly to producing high-quality steel, leaving the playing field of basic steel such as construction steel to other businesses. Accordingly, HPG will invest in depth to produce fabricated steel. Along with this, HPG will increase investment and export of high-quality steel products.

Mr. Long's statement made the leaders understand that HPG is at a stalemate in production and business activities. In fact, after recording a record loss of VND 2,000 bln in the fourth quarter of 2022, HPG continues to record negative profits in the first two months of 2023. In the latest report on the HPG stock code, VNDirect Securities (VNDS) analysts are also cautious about HPG short-term net profit growth in the first quarter. The reason is that the low operating efficiency of the factory in the first half of 2023 will affect HPG profit margin. Therefore, VNDS forecasts that HPG net profit may still be negative in the first quarter.

Previously, Mr. Lê Phước Vũ, Chairman of the Board of Directors of HSG, excitedly announced that the worst time for the steel industry had passed. Mr. Vũ affirmed that HSG has never been as good as it is now, and it has basic conditions for future development. Currently, the profit of the corrugated iron segment is 10 percent higher than the competition due to the brand name. The export profit is also 3 percent to 5 percent higher than the competitor, and the depreciation expense is the lowest compared to other enterprises in the same industry.

However, the above statements cannot lead investors to have a more optimistic view of steel stocks. This is also the reason why HPG and HSG could not rise despite such positive statements. The remaining group of steel stocks such as SMC, TLH, POM, and HMC also did not see many changes, but were even decreasing as in the case of Nam Kim Steel Joint Stock Company (NKG) after bad news about business results. Recently, HoSE announced to add NKG stock to the list of additional securities not eligible for margin trading.

The reason is that the profit after tax on the audited financial statements in 2022 was negative. HoSE’s decision to cut the margin was made after the company recorded a double loss after the audit. Specifically, NGK recorded a post-audit loss of up to VND 124.7 bln, double the loss of VND 66.7 bln shown in its independent report.

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