Did steel stocks bottom out?

The local steel industry in the market has displayed negative statistics in the first 9 months of 2023, according to a research from Vietcombank Securities Company (VCBS), with no obvious signs of recovery. Domestic consumption of construction steel declined by 18% in the first nine months of 2023, reaching 5.37 million tons; steel pipes decreased by 7%, and galvanized steel decreased by 4.3%. This loss is ascribed to the domestic real estate market's tardy recovery, a lack of new building projects, and an inadequate deployment of public investment as envisaged. Due to China's surplus supply, there is particularly fierce rivalry with Chinese steel goods.

In terms of market share, Hoa Sen Group (HSG) marginally dropped its market share, but Nam Kim Steel Corporation (NKG) and Dong A Ton Company (GDA) grew their market shares due to NKG and GDA's strong export proportions, demonstrating a greater recovery than HSG in the first nine months of the year. Meanwhile, Hoa Phat Group (HPG) maintains its market share by reinforcing its position in the home market, while other firms in the sector struggle to stay in business.

Export sales have boosted consumption in the steel sector. Currently, the construction steel export volume is showing indications of robust recovery from August 2023, as China steadily lessens rivalry in the construction steel export until the end of the year. Although the export volume of galvanized steel has not yet regained the levels seen in 2021, it has improved from the low point in August 2022. Significant contributions come from steel exports to the EU market, where supply has been severely impacted by the earthquake in Turkey and subsequent energy problems.

The sharp decline and slow recovery of profit margins for construction steel manufacturing companies, as highlighted by VCBS, is due to continuous adjustments in domestic construction steel prices under pressure from weak domestic construction demand and fierce competition from low-cost imported steel from China. Input expenses such as iron ore, high-quality coal, and growing power costs put pressure on the steel sector (accounting for around 10% of the cost of items supplied).

HPG is a rare successful steel company in Vietnam, having returned to profit after several quarters of poor performance. Other manufacturers in the sector are laying off workers, liquidating assets, or selling stock to overseas partners in order to stay in business. VCBS feels that, while company performance have reached rock bottom, the recovery process is sluggish and there are more hurdles ahead.

After several quarters of poor performance, the profit margins of steel export businesses in Vietnam have improved significantly. The explanation is a robust increase in EU and US steel imports amid a lack of local production; steel price recovery helps offset the expenses of big inventory reserves. Profit has grown dramatically in recent quarters, owing primarily to the reversal of prior quarter's provisions for huge inventory reserves. Furthermore, firms who have collected a considerable amount of low-cost inventory have boosted profits by exporting to the US and European markets, taking advantage of the large price gap in the third quarter of 2023.

VCBS expects Chinese steel prices to remain low around $3,600 - $4,200 per ton until at least the first half of 2024, as steel demand has not recovered due to a lack of warming signs in the Chinese real estate market, with continuously declining new housing numbers due to difficulties in project development funding, weakened confidence of Chinese homebuyers, and a lack of motivation to return. Policies that boost the real estate market will take more time to infiltrate and contribute to a genuine recovery.

VCBS believes that decreasing steel supply and the government's policy packages will not provide immediate effects. Based on the Real Estate Market Index (RMI), which is strongly tied to steel price variations, VCBS believes that the steel price cycle will take at least 6 months to reach a bottom. The RMI is currently below 100 (bottom during the 2014-2015 Chinese real estate crisis was 93.44), showing that the Chinese real estate market is still in a very poor phase. Following government stimulus initiatives, the recovery process normally takes 6 months to a year.

According to historical correlation figures, the trajectory of Chinese steel prices is closely tied to the trend of EU and US steel prices. Recent HRC steel prices in the United States and Europe have witnessed significant speculative jumps in anticipation of economic recovery and Chinese backing. However, as VCBS points out, Chinese steel prices are unlikely to rise in the next six months and will face several challenges to keep costs low.

Based on these considerations, it is clear that the price of steel bar in Vietnam has plateaued at VND 13.5 million/ton (the lowest price) and has somewhat recovered to VND 14 million/ton following a series of decreases. This is due to the pressure of lowering prices as a result of global steel prices, a dramatic fall in local steel consumption, and manufacturing enterprises being forced to lower selling prices to drive inventory sales and compete with inexpensive imported goods, particularly from China.

VCBS believes that the steel price of VND 13.5 million/ton (the lowest steel bar pricing of HPG) represents the bottom of the steel bar price, since at this price, electric arc furnace (EAF) steel makers can sustain a breakeven or loss margin. Furthermore, the existing local steel bar price is very cheap in comparison to the imported price from China, so there is less room for price reduction.

However, as noted in the previous section, the steel price cycle will experience variations connected to Chinese steel pricing, and it is unlikely that prices would rise much in the near future. Steel prices have mostly rebounded in recent months as a result of short-term expectations from the Chinese government's policy packages and high input costs. VCBS anticipates that the steel bar price would stay stable around VND 14,000-15,000 per ton until the end of the first half of 2024, before increasing.

According to the World Steel Association (WSA), global steel consumption will rise 1.8% in 2023 and 1.9% in 2024. Most nations, including Europe, Asia, and the United States, are likely to see significant economic recovery... VCBS feels that this growth projection is acceptable, given that interest rates in key nations such as Europe and the United States are expected to fall in the second half of 2024 and that there will be no economic recession.

VCBS anticipates that public investment will break through in 2024, with the payout of projects held over from 2023 and further government economic stimulus packages. However, investors should keep in mind that the share of steel in public investment is small, thus its impact is minimal.

Because of legislative changes, the real estate market (which accounts for 60% of steel demand) is progressively overcoming challenges. The number of active projects demonstrates strong expansion in the North and recovery in the South. This aids the recovery of building material demand in the future quarters. The good news is that the number of newly licensed projects is declining and has reached an all-time low.

VCBS estimates that the total consumption of construction steel in 2023 will decrease by about 15% before recovering by 11% in 2024. The driving force for the growth of the steel industry mostly comes from the recovery of the civil construction market. Therefore, investors should consider continuing to invest in steel sector stocks when this group needs favorable business results to end the bottom-fishing cycle in 2023.