Scaling down of China's steel sector could hurt Korean steelmakers

Scaling down of China's steel sector could hurt Korean steelmakers

POSCO’s Gwangyang steel plant in South Jeolla Province / Courtesy of POSCO

By Kim Hyun-bin

China’s strengthened restrictions on steel production, on top of the Evergrande Group real estate crisis, are keeping Korean steelmakers on their toes.

China, which manufactures 57 percent of the world’s steel, plans to drastically reduce output this year, which has impacted the global markets for both steel and iron ore.

China’s steel prices set the global standard, and if that drops, the bottom line of South Korean steelmakers could face a threat.

In a bid to curb pollution, China is scaling down its steel sector, and imposing tariffs on steel-related exports, in order to fall in line with the global ecofriendly trend ahead of the 2022 Beijing Winter Olympic Games slated for February.

“China restricting its steel production was a favorable factor for local steelmakers, leading to stock and steel price hikes, but the Evergrande crisis cut into the recent uptrend. So we are waiting to see how this situation plays out,” a major local steelmaker said, Friday.

Evergrande, the world’s most indebted property developer, has over $300 billion in liabilities. Analysts believe that there is the possibility of wider contagion in the real estate sector, and larger financial systemic risks in China in the future. Evergrande, also China’s No.2 real estate developer, owns more than 1,300 real estate projects in over 280 cities in China, according to the company’s website, and a collapse of the company is expected to reduce demand for steel.

Iron ore is also facing a downturn, with prices dropping below $100 per ton, after hitting record heights of $233 per ton in May.

“There are no changes to China’s low carbon emission policies, and Beijing is expected to further reduce steel production ahead of the February Beijing Winter Olympics,” Park Sung-bong, an analyst at Hana Financial Securities, said. “However, the recent drop in iron ore prices will limit the price hikes of steel products, reducing the Chinese government’s market intervention concerns.”

A fall in iron ore prices will make it difficult for local steelmakers to justify recent steel plate price hikes. POSCO, the country’s leading steelmaker, concluded its negotiations with major shipbuilders last month to increase its steel plate prices nearly 60 percent, to 1.1. million won ($950), for the second half of this year.

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