Inflation caused by COVID-19 and the surge in raw material prices due to Russia’s invasion of Ukraine are leading to an increase in South Korea’s steel prices. However, compared to the rise in domestic hot-rolled coil (HRC) prices, the price increase of downstream products such as steel pipe does not seem to have kept pace.
Limited increase in steel pipe prices
The prices of hot-rolled products for the domestic market has risen by KRW 600,000 per tonne (t) ($477/t) in CY’21. However, it is estimated that the selling price of domestic structural pipe makers has increased by KRW 400,000/t ($318/t).
Particularly, in December and January the prices of domestic hot-rolled products decreased by KRW 50,000/t ($40/t) to the level of KRW 100,000 ($80/t), but the market selling price of structural tubes fell by more than KRW 180,000 ($143/t), nearly double the level.
The profitability of domestic steel pipe companies deteriorated significantly in the second half of last year, as the rise in raw material prices did not properly increase during this period and, during a period of decline, raw material prices fell significantly.
Although, HRC prices rose until the third quarter of last year, steel pipe prices did not rise commensurately and in the fourth quarter discount sales competition was repeated due to the delayed recovery of demand and the consequent intensification of competition for orders.
The situation was the same for steel pipe companies that were supplying to automakers and related parts suppliers. This is because even the increase in raw material prices is not properly reflected in the delivery unit prices.
The result of failing to properly reflect the increase in cost in the selling price is repeated every time since steel pipe companies are sandwiched between the large raw material supplier, such as steel, and large customers such as automobiles and construction, according to sources.
In addition, intensifying competition for orders also contribute to the increase in manufacturing costs, making it impossible to fully reflect the sales price.
It is pointed out that the burden of manufacturing costs such as labour and logistics as well as various subsidiary materials is not properly applied.
The slow recovery of demand is also likely to act as a burden. It is pointed out that the price of steel pipe has been raised due to the sharp rise in the price of domestic raw materials such as hot-rolled and hot-dip galvanised steel sheet and the effect of a decrease in supply.
It is said that there is no choice but to worry that the price increase will likely retreat again as the situation of competition for orders similar to that in the fourth quarter of last year reappears.
In the end, it seems that they are actively making efforts to secure low-cost raw materials such as hot-rolled products from China where prices are falling.
However, it is also burdensome that raw materials such as hot-rolled products from China, which are low in price, have recently been difficult to secure. Also, there is a limit to lowering manufacturing costs as the smooth inflow of cheap Chinese raw materials into Korea is limited due to the uncertainty of the local government’s export policy and logistics burden.
Uncertainty in earnings
In the case of steel pipe products, it is pointed out that since the proportion of raw materials is high, steel pipe companies have had no choice because of the rapid price changes in recent years.
In fact, in the first half of last year, the price of steel pipe products was actively raised due to the sharp rise in raw material prices, but for the quantity already contracted with construction companies, it had to be delivered at the existing price or cancelled with a penalty.
The situation of parts makers, such as small and medium-sized drawn steel pipe makers that are dealing with large auto parts makers, was not much different.
The escalation clause according to raw material prices such as HRCs, subsidiary material costs, and manufacturing cost fluctuations should be used or a formula for unit price adjustment should be adopted is gaining strength.
It is necessary to establish a system that can reflect the increase in raw material prices in the sales price, so that stable production can be secured, as well as R&D efforts to develop and supply better products.
Note: This insight has been published in accordance with an article exchange agreement between SteelMint and SteelDaily.
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