Abstract
The South Korean steel industry is enjoying a revival in export markets and a modest pick-up in domestic
demand, but BMI's latest South Korea Metals Report warns against complacency, with a likely
appreciation of the Korean won posing a threat to the industry's external competitiveness.
In H109, South Korean crude steel output fell 17.2% y-o-y to 22.85mn tonnes, but output in Q2 was up
17.1% over Q1 as the depreciation of the Korean won boosted exports. By mid-2009, the weak won made
South Korean steel products 36% cheaper than Japanese production. At the same time, the Chinese
government's stimulus package is boosting Asian demand at a time when inventories are near depletion.
As a result, POSCO secured a marked increase in sales in Q2 with exports to China up 66% y-o-y to
926,000 tonnes. Additionally, the domestic market is being lifted, assisted by resumption in orders in the
shipping industry, which is lifting demand for heavy sections, as well as the automotive sector, notably
Hyundai.
The domestic situation is changing, with BMI's core scenario improving. In line with improving
macroeconomic trends since March 2009, we have decided to revise up South Korea's real GDP growth
forecast from -3.3% to a more modest contraction of -1.9%. This forecast is based on expectations of a
better-than-expected outturn in Q209, and a continued, if modest, recovery through H209. One of the key
factors underpinning private consumption in H109 was the government's massive fiscal stimulus,
unveiled in a series of special measures from late 2008 to July 2009.
The key question is how much of the additional capacity due to be installed over the next two years will
be utilised. BMI's crude steel production forecast of 46.04mn tonnes in 2009 (down 14% y-o-y) would
imply a utilisation rate of just over 74%. We forecast output at 51.55mn tonnes in 2010, with output
growing by 12% as the recovery picks up pace. However, this will still mean capacity utilisation
sustained at around 74%, well down on the 89% utilisation rate estimated in 2008.
POSCO CEO Chung Joon-Yang voiced his concern that the crisis in the steel industry could last between
two to three years, leading to a 30% reduction in output. It will therefore be some years before the South
Korean steel industry approaches its full potential, with BMI's forecasts showing that 2008 output levels
will not be exceeded until 2011. Growth will be limited by the maturing of the domestic steel market and
the rapid growth in China's industrial capacity, which has limited steel and steel product export growth,
although there is still room for growth. Nevertheless, by 2013 steel exports will by up 16.5% over 2008
levels at 23.4mn tonnes, while domestic finished steel use will rise 1.3% to 59mn tonnes.
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