Steel prices have climbed around 50% this year, and so far the third quarter earnings reports of steel companies have reflected the turn around in the steel market, but looking forward to the fourth quarter, there are concerns that the rise in the cost of steelmaking ingredients will erode steel companies’ margins.
The steel sector has struggled for years, with prices falling each year from 2010 – 2015 as overcapacity pressured prices. In 2016, steel prices rebounded on renewed infrastructure spending from China, but surging costs for steel inputs, such as metallurgical coal and zinc, are starting to cut into the margins of the major steel companies.
Late last week, Posco, South Korea’s largest steelmaker and the fourth-largest steel producer in the world, posted its largest quarterly profit since 2013. Net income was 539.3 billion won ($476 million) in the three months through September, after a 550 billion won loss a year earlier. Moody’s Investors Service revised the company’s ratings outlook to stable from negative, citing positive expectations for the company over the next 12 to 10 months. The company’s debt reduction is a big reason behind the Moody’s upgrade. Moody’s also noted that the company’s fourth quarter profitability should improve year-over-year, but it will be weaker than in the third quarter of 2015.
While steel prices have improved, the industry faces some challenges. The major challenge is the increase in the prices of steel inputs. Of major concern is the price of coking coal, which has more than tripled this year as China moved to curb domestic coal production. Although China has since reduced its regulations on its coal industry, there has yet to be a meaningful impact on the coking coal supply chain. Prices remain supported.
Looking forward to fourth quarter steel sector results, input costs will be a major challenge with the rise in steel prices lagging the rise in input costs. In a best case scenario, steel companies will be able to continue to boost steel prices, but probably not enough to compensate for higher input prices.
SOurce:Economic Calender