Korean Shipyards Plan to Buy 12% Less Steel Plate, Deepening Posco Slump
South Korean shipyards plan to buy 12 percent less steel plate this year, worsening a demand slump that has hurt prices at Posco, the world’s biggest producer.
Hyundai Heavy Industries Co. (009540), Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. will cut purchases to a combined 6.5 million metric tons from 7.4 million tons, according to company figures. The yards are the world’s biggest buyer of steel plate, which is used for making hulls and in construction.
The shipbuilders, the world’s three biggest, are making fewer oil tankers and container vessels as they focus on more lucrative drill ships and offshore units that generally need less steel. The shift may hurt earnings at Posco, Dongkuk Steel Mill Co. (001230) and Hyundai Steel Co., which have boosted plate-making capacity 72 percent since 2008.
“Steelmakers are in for a tough year,” said Bang Minjin, an analyst at HI Investment & Securities Co. in Seoul. “Their one bright spot is about to fade.”
Hyundai Heavy, based in Ulsan, South Korea, expects to cut the use of steel plate, its biggest raw-material cost, by 14 percent to 3.6 million tons this year. The tally includes two affiliates.
The company’s orders for oil tankers, container ships and dry-bulk vessels halved to 23 last year because of competition from China and a global drop in orders caused by a capacity glut. The worldwide order backlog fell 26 percent in 2011, the biggest decline since Clarkson Plc began compiling data in 1995.
At the same time, Hyundai Heavy won a record 11 orders for drill ships last year as oil companies increase exploration. Such vessels, used for boring test wells, require about 20,000 tons of steel plate, half the amount needed for a 300,000- deadweight ton oil tanker, according to the shipbuilder. New tankers have double hulls to help prevent leaks.
A shipyard can sell a drill ship for about $600 million, about six times the price it will get for a 300,000-deadweight oil tanker, according to Lee Jae Won, an analyst at Tongyang Securities Inc. in Seoul.
The three Korean steelmakers have boosted annual plate- production capacity to 13.89 million tons from 8.09 million tons in 2008, according to data from the Korea Iron & Steel Association. They added facilities after five years of record orders caused steel-plate prices to almost quadruple to as much as 1.41 million won ($1,240) per ton in 2008.
Posco (005490)’s average selling price may drop to 920,000 won this quarter, Chris Kim, a Samsung Securities Co. steel analyst, wrote in a Jan. 11 report. The Pohang, South Korea-based steelmaker’s average price was probably 980,000 won in the fourth quarter of last year and 1.053 million won in the preceding three months, Kim said.
Posco, the world’s third-biggest steelmaker, doesn’t have any plans to adjust production and prices, said Kim Dong Ho, a spokesman. The company, which gets 20 percent of sales from steel plate, opened a 1.7 trillion won plant for making the material last year, boosting capacity to 7 million tons a year.
The steelmaker reported a 13 percent decline in net income for last year, missing analyst estimates. Profit may be little changed this year at 3.3 trillion won, according to the median of eight analyst estimates compiled by Bloomberg.
Hyundai Steel (004020), an affiliate of Hyundai Motor Group, has no plans to cut plate output, said Lee Choong Hee, a spokesman. The Incheon-based company opened two blast furnaces in 2010 costing a total of 6.23 trillion won and able to produce 1.5 million tons of plate a year. Kim Sun Hong, a spokesman for Dongkuk Steel, declined to comment.
“The oversupply of steel plate is likely to last a bit longer,” said Lee Young Seog, who helps manage about $7.8 billion in equities including Posco shares at Korea Investment Management Co. in Seoul. “Shipbuilding orders fell considerably last year and we don’t expect it to improve this year.”
Posco gained 1.8 percent to close at 414,500 won in Seoul trading. Dongkuk advanced 2.4 percent to 23,300 won and Hyundai Steel climbed 2.4 percent to 109,000 won.
Posco has fallen 13 percent in Seoul trading in the past 12 months, compared with a 15 percent decline for Hyundai Steel and a 30 percent slump for Seoul-based Dongkuk. The benchmark Kospi Index has dropped 7.4 percent in the period.
The steelmakers have cut prices as they seek to boost sales in markets including China, the biggest consumer and producer of the metal. South Korea’s exports of plate increased 42 percent last year to 2.9 million tons, according to the Korean steelmakers group.
“Steelmakers will have to sell more overseas, even though prices will be lower,” said HI Investment’s Bang. “This is going to be bad news for profits.”
The average price of steel plate in China fell to 4,173 yuan ($661) per ton on Jan. 9, the lowest price since July 2010, according to Beijing Antaike Information Development Co.
Posco is also challenging European and Japanese steelmakers to supply plate for offshore structures. The company hasn’t traditionally operated in this market because of booming demand from shipbuilding. In October, it won a five-year deal to supply plate for offshore units to Royal Dutch Shell Plc. (RDSA)
Steelmakers may also benefit from a decline in raw material prices, partly caused by reduced production in China. Posco’s contract prices for iron ore may fall to an average $141 per ton this year from an estimated $161 in 2011, according to a Jan. 13 report by Jeon Seung Hun, an analyst at Daewoo Securities Co. Coking coal prices may drop to $230 a ton from $289, he said.
Daewoo Shipbuilding expects to cut plate use 10 percent from last year’s tally of 1.7 million tons. The company, which built the world’s biggest floating oil production and storage vessel for Total SA (FP), plans to double output of offshore units this year.
Samsung Heavy intends to buy 1.4 million tons of plate this year, a 6.7 percent decline. The company is building the world’s first floating LNG production and storage plant for Shell. Hyundai Heavy is constructing two floating oil production and storage vessels as well as a gas-processing facility for Chevron Corp.’s Gorgon project in Australia.
“Working on more offshore projects will be good for shipyards’ earnings because they have higher margins,” Tongyang’s Lee said. “It’s definitely not going to be good for steelmakers.”