Coronavirus crisis realigns Asia's steel industry stars

TOKYO -- In late July, Vietnam-based steelmaker Hoa Sen Group made a surprising announcement: it was abandoning the construction of a $10 billion production complex.

"The current objective situation is no longer consistent with the original strategic goals," the company said. The group originally proposed the project in 2016. It was to construct multiple blast furnaces that together would have the capacity to turn out 16 million tons of steel a year.

Meanwhile, in China, Chen Derong, president of the country's top steelmaker, Baowu Steel Group, had recently announced a five-year plan to invest $2.8 billion in Hubei Province.

Hoa Sen's retreat and Baowu's big step ahead illustrate how the pandemic has divided steel-makers into winners and losers -- with the winners in China and the losers everywhere else.

With the pandemic hammering steel demand in much of the world, Hoa Sen is not alone in pulling back in a bid to survive. Well-known Asian players, from Japan's Nippon Steel to South Korea's Posco, are shuttering blast furnaces and reviewing capital spending plans.

Analysts say these moves are overdue. "The pandemic has highlighted steel-makers' lagging structural reforms," said Atsushi Yamaguchi, a senior analyst at SMBC Nikko Securities.

Asian steel-makers are now rushing to shutter high-cost facilities and reduce their capacity. Posco in July announced it will shutter a furnace at the Pohang works that can produce up to 1.3 million tons of steel a year, or 3% of Posco's total capacity. The company said it will also consider closing or revamping another furnace as early as 2025.

The announcement came three years after Posco first said it would shut the furnace. This time, the death sentence seems certain, with the pandemic crushing domestic steel demand and revenue plunging 16% in the April-June quarter.

In Japan, annual steel production is expected to be less than 80 million tons for the first time in 52 years.

Wherever they are, except China, steel-makers are bracing for huge net losses.

In February, Nippon Steel, announced that it would be shutting two blast furnaces, in Hiroshima and Wakayama prefectures, for good in the next few years.

And in a capital expenditure review, Japan's largest steelmaker slashed 300 billion yen ($2.8 billion) from its initial 2018-2020 target. Spending on business investments, including mergers, will be reduced by 10% from the initial 2018-2020 target of 600 billion yen, according to a company representative. "We'll carefully and strictly select the targets," the representative said.

JFE Steel, Japan's No. 2 player, in March announced it would close a blast furnace by 2023 to cut production capacity by 13%. The move is part of structural reforms announced the same month.

Before the pandemic, steel-makers outside of China were already struggling as the U.S.-China trade war took a toll. After Washington raised tariffs on steel, exports from Turkey and Russia originally meant for the U.S. made their way to Asia, pulling down prices in the region.

Chinese steel-makers, meanwhile, rode a rebound in domestic demand prompted by government-led economic stimulus and infrastructure spending, with steel production in 2019 hitting a record high and accounting for 53% of the global supply.

As China bought more iron ore to meet growing domestic demand, other Asian players began suffering from low margins, squeezed by climbing raw material prices and tumbling product prices.

Then the pandemic struck, reinforcing China's dominance in the global steel market.

Sep 20, 2020 12:12
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