A sharp drop in prices of key raw materials, such as iron ore, is posing a quandary for South Korean steelmakers who are eager to raise prices of their steel products for the second half of the year, industry observers said Saturday.
According to data from Korea Resources Corporation, the price of iron ore, one of the main raw materials used in steel production, stood at US$85.79 per ton last week, marking a 30-percent drop from this year's high of $124.05 on July 5, which was mostly driven by stable supply from Brazil and Australia.
Sliding raw material prices, generally regarded positive for manufacturers, came as local steelmakers are in negotiations with customers, such as shipbuilders and automakers, over a hike in prices of key steel goods.
"Recent drops in iron ore and coking coal prices are weakening steelmakers' calls for a price hike," said Byun Jong-man, an analyst at NH Investment & Securities Co. "The longer the negotiations, the lower possibility of price hike."
South Korean steelmakers, including POSCO and Hyundai Steel Co., have been looking to raise prices of their thick steel plates, a key material for shipbuilding and automobile steel sheets, in the second half so that they can make up for losses in the first half caused by high raw material costs.
The price of iron ore jumped from $72.63 in January to $124.05 in July, which is more than a 70 percent increase, before it went downwards, which ate into steelmakers' bottom lines.
POSCO saw its operating profit drop 15.3 percent on-year to 1.5 trillion won (US$1.2 billion) in the first half, while Hyundai Steel posted operating profit of 445 billion won, down 33.5 percent from a year ago.
"Local steelmakers froze steel prices in the first half, which we consider a concession to shipbuilders," an official at Hyundai Steel said. "Usually, changes in raw material costs are reflected in product prices one or two quarters later, meaning the recent iron ore price drop should not be taken into consideration for the second half price negotiations."
South Korean shipbuilders have been reportedly demanding a freeze in prices of thick steel plates in the second half so that they can stay competitive amid the global economic slowdown.
The country's top three shipyards -- Hyundai Heavy Industries Group, Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. -- bagged a combined US$12.1 billion won worth of orders in the first eight months of the year, down 21.3 percent from a year earlier, industry data showed.
Analysts said there will be a long tug-of-war between the steelmakers and their customers.
"The price negotiations for automobile steel sheets started earlier this month, but it's not likely that they will reach an agreement soon because of recent iron ore price drops," Bang Min-jin, an analyst at Eugene Investment & Securities Co., said. "It will also not be easy for the steelmakers to raise the price of thick steel plates since increased Chinese steel imports are hurting their business." (Yonhap)