Steel stocks belie expectations, in deep slump
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The Vietnamese steel industry was expected to benefit from the Russia-Ukraine crisis, but stocks of companies have been plunging due to rising input costs and declining demand.
The shares of industry leader Hoa Phat Group fell Thursday to a 14-month low. HPG has dropped by over 27 percent this year as against a 14 percent fall for the VN-Index.
Hoa Sen Group’s share price fell to its lowest in 15 months in May and has barely risen since. It has lost 42 percent this year. Nam Kim Steel is down 23 percent and Pomina Steel Corp, 40 percent.
After Russia launched military operations in Ukraine in February, some top Ukrainian steel manufacturers said they would have to cut production to a minimum this year, while Russian producers face an embargo from western countries.
The two together exported 57 million tons of steel last year, or 3.1 percent of global demand, and there was an expectation that Vietnamese manufacturers would fill the gap.
Stock brokerage VNDirect said in March, “We believe that top Vietnamese exporters have the opportunity to increase their production in the near future.”
Steel stocks soared in February, with NKG rising by 60 percent that month even as the VN-Index inched up by less than 1 percent.
HSG rose by 36 percent, POM by 21 percent and HPG by 17 percent.
But after reaching a new peak of nearly US$1,600 a ton in early April, steel prices have dropped to around $1,160 now.
“We believe that top Vietnamese exporters have the opportunity to increase their production in the near future.”
Analysts blamed this on slower than expected economic recovery and the resultant drag on demand.
In its latest forecast, the European Steel Association said consumption could fall by 1.9 percent this year instead of rising by 3.2 percent as it projected in February.
This is because high energy prices, disruptions in the supply chain and the Russia-Ukraine crisis could lead to a slump in demand for cars and consumer electronics, and lockdowns in China’s major cities are likely to have negative impacts on the global economy, it said.
In a double whammy, production costs are surging.
Analysts at KIS Vietnam Securities expect the rising costs to drag Hoa Phat Group’s profit margin down by 4.4 percentage points this year to 23 percent.
In the first quarter its pre-tax profits were nearly 14 percent lower than in the second quarter last year when steel demand was booming.
Hoa Sen saw profits decline for a fourth quarter in a row, while Nam Kim’s fell by 40 percent from the second quarter of last year.
“Shareholders will see dreadful earnings figures in the second quarter,” Hoa Phat chairman Tran Dinh Long said at the company’s annual general meeting on May 24.
HPG dived by 5 percent that day.
But analysts at SSI Research expect the steel industry to begin recovering when China eases its Covid restrictions.
Questions & Answers
Q.What factors caused the Vietnamese steel industry to perform worse than initially expected?
What factors caused the Vietnamese steel industry to perform worse than initially expected?
The industry faced increased input costs and a decline in demand. Slower economic recovery, high energy prices, supply chain disruptions, and China's lockdowns all contributed to the slump in demand for steel-reliant products.
Q.How did steel stock prices in Vietnam react after the Russia-Ukraine conflict began, and what happened subsequently?
How did steel stock prices in Vietnam react after the Russia-Ukraine conflict began, and what happened subsequently?
Steel stocks initially soared in February, with some companies seeing rises of 17% to 60%. However, prices then dropped significantly from a peak of nearly US$1,600 a ton in early April to around $1,160 now.
Q.What is the European Steel Association's revised forecast for steel consumption this year?
What is the European Steel Association's revised forecast for steel consumption this year?
The association now predicts consumption could fall by 1.9 percent this year. This is a significant revision from its February projection, which anticipated a rise of 3.2 percent for the year.
Q.What financial impact have rising costs had on Hoa Phat Group's profit margin?
What financial impact have rising costs had on Hoa Phat Group's profit margin?
Analysts at KIS Vietnam Securities expect rising costs to reduce Hoa Phat Group's profit margin by 4.4 percentage points this year, bringing it down to 23 percent. Pre-tax profits in Q1 were also nearly 14% lower than last year's Q2.
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