South Korea's Steel Industry Growth to be hampered amid Environmental Regulations?

According to a top rating and research firm, Fitch Solutions, production growth in South Korea's steel industry is expected to slow to an average of 0.3% YoY in the coming decade compared to a recorded average growth of 3.9% during the past ten years.

Now such a slow growth is being mainly driven by the country's emission trading scheme where they have put a cap on the companies' greenhouse emission. The scheme that was implemented in 2015 caps carbon pollution across the economy, from steelmakers, ship-builders and power generators to even large universities, encouraging them to become more energy efficient.

As a result, in order to tackle this emission trading scheme, steel companies are likely to step up investment in technologies that will help reduce environmental footprint, so as to comply with the maximum level of total emissions permitted. These regulations will also set increased risks for penalties.

Tepid demand and trade restrictions on imports impacting country's steel sector
Other factors that are contributing to the South Korea's steel industry slowdown are the decreasing domestic demand and the quota on steel exports to the U.S. South Korean exports of steel have a quota of sending 2.7 million tonnes per annum, which is 30% less than the annual average during 2015 to 2017. U.S. have also imposed higher tariffs on imported cars, leading to automotive steel sheets' decreasing demand.

With these restriction in place, industry experts believe that small South Korean steel companies are likely to hit harder than their larger counterparts due to their greater exposure to U.S.

In the short term, WSA (World Steel Association) has forecasted that steel demand in South Korea will contract further in 2018 with all its major steel using sectors struggling and only a minor recovery is expected in 2019.

South Korean steel industry is also struggling as it continues to experience oversupply excess globally, the downstream industry including automobile and shipbuilding is in a slump and protectionism is spreading worldwide.

According to the Korea Iron and Steel Association, the production capacity of steel producers across the world exceeds the demand by 30 percent as of last year. With an offensive supply of China, which is mainly responsible for global oversupply, and stronger trade barriers of many countries, including the United States, domestic companies' exports are being blocked. In fact the domestic consumption of steel materials in South Korea has remained stagnant at the 55 million tonne level from 55.8 million tons in 2015 and 57.1 million in 2016 to 56.4 million in 2017.

Solution to plunging domestic demand

The only resort left for the industry to overcome structural industrial slump is to supply high value added steel. The government has budgeted 200 billion won (USD 176.37 million) for grouping industrial trends by sector and developing high value added steel materials accordingly.

The government is also planning to develop innovative materials and help small and mid-size companies to secure processing technology at the same time. This is to make the effect of technology development reach not only major companies but also the steel industry as a whole.