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Asian steelmakers face input cost rise, eye price hikes

Japanese and Korean steelmakers are seen posting weak December quarter profits as tepid demand and rising raw material costs hurt margins, but mills in China and India could outperform, helped by stronger domestic growth.

January 11, 2011 / 08:38 PM IST

Japanese and Korean steelmakers are seen posting weak December quarter profits as tepid demand and rising raw material costs hurt margins, but mills in China and India could outperform, helped by stronger domestic growth.

A reduction in stockpiles in China and rise in global steel prices in recent months have helped lift prices in Asia, and companies are expected to push through further price hikes during the first half of the year to cover rising input costs.

Steel mills in Asia are staring at cost increases following floods at Australian coal mines, forcing them to scour for new suppliers, and coking coal prices are expected to rise a fifth to USD 300 a tonne, the highest in nearly two years.

South Korea's POSCO, the world's No.3 steelmaker, will be the first major Asian producer to report quarterly earnings on January 13 and is likely to report among the biggest declines in earnings.

POSCO is forecast to post a 40% drop in operating profit to 956 bn won, according to the consensus forecast of 13 analysts polled by Thomson Reuters I/B/E/S.

However, earnings could miss those forecasts after POSCO cut its outlook in October. Starmine SmartEstimates, which gives greater weight to recent forecasts from top-ranked analysts, points to a 17% downside surprise and an operating profit of around 793 bn won.

Analysts believe POSCO's profit may have bottomed out in the fourth quarter, and would recover in the first quarter, helped by higher steel prices globally and consumption of cheaper raw materials purchased in the preceding quarter.

"I do not expect POSCO earnings to rebound sharply, but they would post gradual recovery in the first half," said Kim Mi-hyun, an analyst at NH Investment & Securities in Seoul.

"The key is raw materials prices. Unless they rise sharply, it would not be difficult for POSCO to pass along raw materials costs on to customers in the second quarter, when there is high seasonal demand," she said.

Japanese steel mills, which supply to some of the world's top car makers, are also expected to report profit declines, hurt by the yen's ascent, a slide in domestic car sales and weakness in export prices in Asia, their main export region.

"The yen's strength was a pain, although buoyant exports of specialty steel to the US on the back of strong car sales there may have helped raise output at Nippon Steel and Kobe Steel," said Kazuhiro Harada, analyst at Nikko Cordial.

Profits at Nippon Steel Corp are seen down 8% in the December quarter according to the average of two analysts' forecasts, while JFE Holdings earnings could slip 41% in the period, based on the average of three analysts. Most Japanese analysts do not forecast quarterly profits.

Sumitomo Metal Industries, Japan's third-biggest steelmaker, could also slash pretax profit estimate for the year to March 2011 after trouble at a blast furnace cut output and affiliate Sumco posted large losses.

Profits up in China, India

China's Baosteel, the world's No.2 steelmaker, is forecast to post a modest 7% rise in quarterly net profit, according to the average of 21 analysts polled by Thomson Reuters I/B/E/S, far less spectacular than a 12-fold increase in profit in the first six months of the year. The figures are derived from subtracting nine month profits from full-year forecasts.

"In the fourth quarter it is clear that costs have grown faster than steel prices," said Helen Lau, steel analyst with UOB Kay Hian in Hong Kong.

With Beijing tightening monetary policy and iron ore prices at high levels, analysts are pessimistic about the year ahead for the country's steelmakers.

"I don't see things improving given there will be no fundamental improvement in steel demand, with construction of low-cost housing unable to offset overall decline in the property market. Raw materials prices will continue to increase as demand recovers over the rest of the world," Lau said.

Preliminary figures showed its net profit in 2010 reached 12.81 bn yuan up 12%, Baosteel said on Monday.

The company said it will raise its key product prices for the second straight month in February, driven more by rising costs than a pickup in demand.

Indian steel firms are seen posting higher volumes during the quarter, helped by continuing demand from construction and auto sectors, but rising input costs may hurt profitability, analysts said.

Tata Steel, the world's No. 7 steelmaker, is forecast to more than double profit from a year earlier, when it had posted its first profit after the global demand slump.

However, margins at European unit Corus, which accounts for two-thirds of its global capacity, are likely to be squeezed due to lower steel prices in Europe and higher raw material costs.

first published: Jan 11, 2011 07:22 pm

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