Galvanized Steel Sector Update - HRC price rally to support 2023F earnings, but share prices have run ahead of fundamental developments

Sluggish domestic construction activity and declining exports have weighed on the demand outlook in early 2023. Weakened global has caused the total industry’s galvanized steel sheet & steel pipe export sales to drop YoY throughout H2 2022 and into January 2023. The total industry’s galvanized steel sheet & steel pipe sales volume fell 13% YoY in 2022 — with exports dropping 35% YoY and flat domestic sales YoY. For 2023, we continue to expect sluggish domestic construction activity (especially from the private sector) will weigh on domestic sales, which together with continuing weak exports should dampen the demand outlook for galvanized steel in 2023.

Steel price rally to support steelmakers’ margin expansion in 2023, but uncertain demand outlook limits the ability to pass on higher costs. Absolute prices of steel-related input commodities have rallied since November 2022 as a result of China’s stepped-up policy support for its ailing property sector and the country’s post-COVID reopening. Output steel prices, including hot rolled coil (HRC) and galvanized steel sheets, have also rallied from the support of higher costs and positive demand expectations. We believe Vietnam’s steelmakers are facing both a cost-push material price rally and demand disruption (especially in the domestic market) that could lead to the increase of output prices being outpaced by the increase of input prices, thus resulting in pressure on margin. These factors prompt us to lower our forecast for FY2023 gross margin for both NKG and HSG; however, we still expect gross margin to improve on a YoY basis thanks to 1) high-cost HRC inventory being depleted, 2) absolute selling prices of galvanized steel sheets rising, and 3) both NKG and HSG having inventory provisions that can be reversed when steel prices recover.

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