News Room - Steel Industry
Posted on 07 Mar 2016
Major Korean industries fall into supply glut trap
The atmosphere in Pohang, the capital city
of Korea's steel industry some 360 km southeast of Seoul, cannot be
gloomier these days. "Up to 30 percent of midsize
steelmakers in the Pohang Steel Industry Complex are in a fix: they want
to suspend operations because of plunging sales and profits but cannot
do so because of mountains of inventories," an industry executive said.
"Financial situations at a quarter of companies here have so aggravated
that it has become urgent to collect debts." The
industry is one of the first victims of the global supply glut as
worldwide demand has sagged since the 2008 financial crisis. Domestic
steelmakers, which have to compete with price-cutting Chinese rivals,
have done all they can to stay afloat but to little avail. Dongbu
Steel, which came under creditor receivership last year, has recently
even returned KS factory certification, virtually suspending its
operation. Dongbu planned to hot-roll plates by using electric furnaces
and high-quality steel scraps but gave up amid flat demand and iron ore
price falls. Last July, Dongkuk Steel halved its output of thick plates
as demand plunged because of the shipbuilding slump. Even
major makers such as POSCO and Hyundai Steel have effectively cut their
output since last year, by increasing the portion of plates that take
longer to produce but create higher added value. According
to officials, the production and exports of steel companies in the
complex have been on a sharp decline. Last December, output and overseas
shipments stood at 972.2 billion won ($787.2 million) and $216.6
million, down 32 percent and 44 percent, respectively, from the same
month of 2014. Production and exports in January were 913.5 billion won
and $200.8 million. The situation is little
different with display makers, which have led global markets thanks to
aggressive investment in the mid-2000s. The average supply price of
liquid crystal displays (LCD) has nearly halved over the past year,
similar to production costs. "There are heaps of
inventories carried over from last year but we can see few signs of
demand picking up this year," said an industry official. "Not a few
makers are seriously considering curtailing their capacity utilization."
According to IHS, a market researcher, the
shipment of displays for TVs and smartphones in the first quarter is
expected to stop at 196 million units, down 8 percent from a year ago,
recording the first year-to-year decline in the first-quarter comparison
since 2009. Nor is the semiconductor sector, one
of Korea's industrial lifelines, free from the oversupply concerns. NAND
flash chips, which lead the memory market along with DRAMs, had a sales
drop of 2.3 percent in the fourth quarter of last year amid global
supply gluts. NAND flash memories are popular among smartphone and
tablet PC makers because they can store data when power supply is cut
and can be stacked vertically, helping increase memory capacity in a
small space. In the petrochemical industry,
businesses have started corporate restructuring. Hanwha Chemical,
Korea's largest maker of caustic soda (CA), recently decided to sell its
CA and chlorine-producing plant to UNID. Domestic CA supply has reached
2.1 million tons a year, far exceeding the demand of 1.3 million tons,
forcing the two rivals to reach a "voluntary traffic control," an
industry executive said. Some market experts cautiously hope the worst may be over, though. "Because
of an earthquake in Taiwan last month, some Taiwanese display makers
have suspended operation, helping to ease part of the supply gluts,"
said a researcher. "Also, demand is beginning to revive for new IT
products this year, which could slow down price falls in the second
quarter." The Chinese steel industry has also put a
curb on competitive production, beginning with ailing provincial
makers. Prices are slowly bottoming out in the order of hot-rolled
plates, cold-rolled plates and thick plates. "The Chinese authorities
are saying they will cut production by 30-40 percent this year," an
industry official said. "We will be able to breathe ease if only they
reduce output by just 2 percent."
