Is Recession Creeping in South Korea's Stainless Steel Industry?

SteelMint has heard from its market sources that the slowdown in South Korea's construction sector and passive corporate capital expenditure is having an adverse impact on the country's stainless steel industry.

After years of rampant growth in construction activity and transaction volume, there is the slowdown in South Korea's real estate sector as the number of new projects are tapering off and high demand is challenged by a persistent property glut.

In 2017, the South Korean government tightened the lending rates to control real estate speculations and reduce mortgage loans amid massive household debts. The government also announced plans to slash spending in social infrastructure by an average 7.5% annually for the coming five years to divert more money to social welfare.

The combined value of construction orders -- a leading indicator in the construction sector -- posted a 33% decline in Jul'18 y-o-y basis, swinging from 8.4% growth in 2016 and a 48.4% gain in 2015.

In case of construction investment in the month of Jul'18, both private and public sectors showed a decline and although the civil engineering work in the private sector showed an increase, it is more than likely that the investment in civil engineering and architecture will be sluggish in the future.

This downtrend in the construction industry seems to be directly affecting the sales of stainless steel cold-rolled steel, structural pipes, and piping materials. As per the market sources, the sale of stainless steel pipelines and structural pipes fell sharply in the month of Apr'18 against previous month and this decline in sales due to a decrease in actual orders led to price competition (lowering of prices) resulting which stainless steel manufacturers suffered both in terms of volumes and profits.

The slowdown in corporate capital expenditure

The corporate capital expenditure has been on a downward trend in South Korea especially since the second quarter of the current year due to a slowdown in semiconductor industry investment and delayed construction of additional factories and facilities investment by market leader Samsung.

As per the latest reports, the capital spending by the South Korean companies fell straight for the fourth month in June by 5.9% against the previous month and by 13.8% y-o-y basis. This fall also marked the first time in about 18 years that the facility investment maintained a four-month slump.

Domestic chipmakers made the massive investment in facilities for the past 18 months or so, but the investment in the industry began making a correction from the second quarter of 2018. Also, domestic machinery orders and capital goods import growth, which are leading indicators of facility investment is showing the downtrend. As the growth in facility investment has directly benefited the stainless steel sector, its slowdown is adversely affecting the demand for stainless steel products.

The industry experts believe that given the recent economic indicators, the investment in equipment and construction sector are unlikely to show signs of recovery in the second half of 2018. The proliferation of trade wars and U.S-China tussle are likely to further slow down the recovery in the South Korean stainless steel market. In supply side, the cost of stainless steel products has been rising due to surging raw material costs and South Korean currency depreciation which is having a negative impact on the profits of stainless steel players.