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Steel

Steel stocks rally on iron ore price falls, Q3 outlook

China's steel production cuts may give short-term boost to Korean counterparts, alongside low valuations

By Sep 07, 2021 (Gmt+09:00)

2 Min read

Steel stocks rally on iron ore price falls, Q3 outlook

Shares in South Korean steelmakers rose sharply in active trade on Tuesday, on the prospect that the declining iron ore price and Chinese rivals' output cuts would boost their earnings sharply in the current quarter, alongside growing demand ahead of the year-end.

The price of iron ore, the raw material for steel production, has tumbled by almost 40% from its peak reached in early May, hit by concerns about reduced demand from China. The Chinese government announced plans to curb steel production, in tandem with its decision to cut carbon emissions significantly by 2035.

The KRX steel index rose 2.82% to 2,075.82 on Tuesday in the heaviest trade since July 19. It bucked the broader market Kospi which dipped 0.50% to 3,187.42.

Small-sized steel companies led the pack. Kyeong Nam Steel Co. skyrocketed 20.25%, with Finebesteel up 10.76%.

Daehan Steel surged 10.02%, and KG Dongbu Steel climbed 5.65%. SeAH Steel and Dongkuk Steel gained 3.54% and 3.52%, respectively.

Their bigger rivals POSCO gained 3.30%, with Hyundai Steel up 4.52%.

The benchmark Chinese spot price for Australian iron ore was quoted at $142.1 per metric ton as of Sept. 3, marking a 20% decline from a month earlier, according to NH Investment & Securities Co. Australia is China's main source of iron ore imports.

On top of the reduced burden of raw material costs, steelmakers are expected to enjoy strong inventory demand in September and October ahead of the year-end.

Reflecting expectations about higher selling prices of steel products, Yuanta Securities forecast POSCO's third-quarter operating profit at 2.7 trillion won, 23.3% higher than the market consensus.

In terms of valuations, steelmakers became more attractive than before. Their share prices against earnings for the next 12 months average 6.3, down from 7.9 three months before. Hyundai Steel and Dongkuk Steel are now traded at 5.6 and 4.6 times their forward earnings, respectively, down from their multiples of 9.1 and 12.2 three months before.

Toward the fourth quarter of this year, prices of steel products may suffer from downward pressure on the prospect that the Chinese economy may slow down, coupled with a possible reduction in the US Federal Reserve's massive stimulus package.

China's Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) added to the cautious view. The gauge of China's factory activity fell to 50.3 in July, versus 51.3 the month before, the lowest level since April 2020.

"The falling iron ore prices and the slowing Chinese economy would put a downward pressure on steel product prices toward the year-end," said NH Investment analyst Byeon Jong-man.

But HI Investment & Securities analyst Kim Yoon-sang played down concerns about a slowdown in the Chinese economy, saying the Chinese government would make every effort to keep the world's second-largest economy buoyant. 

Write to Yoon-sang Koh at  
kys@hankyung.com

Yeonhee Kim edited this article.
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