South Korean steelmakers rallied this week after Chinese steelmakers announced restructuring plans to address overcapacity. Competitive expansion by Chinese steelmakers has been largely blamed for the glut and slump in the steel industry.

The recent rally is expected to continue for the time being as second-quarter earnings of Korea’s major steelmakers like Posco Co. and Dongkuk Steel Mill Co. will likely come in well above the market expectations.

On Wednesday, Posco shares jumped 14,500 won, or 6.8 percent, to end at 227,000 won ($199). Its shares gained more than 12 percent in the past three days, re-entering the group of the Kospi’s 10 largest stocks.

Hyundai Steel Co. also surged 4,600 won, or 10 percent, to 50,700 won on Wednesday and Dongkuk Steel soared 12.3 percent to 10,200 won. Dongkuk Steel climbed 23.8 percent for the last three sessions, recovering to the 10,000 won level for the first time since April 21, 2014. The steel and metal industry rallied 4.9 percent on Wednesday, the highest rise among the Kospi industry sectors.

The rally of Korea’s steel stocks began at the end of last month after China’s Baosteel Group and Wuhan Iron and Steel Group, two of the country’s largest steelmakers, announced a joint “strategic restructuring”, which possibly includes a merger of the two steel makers, on June 26. Baosteel Group is China`s second-largest steelmaker, and Wuhan Iron and Steel Group is the country`s sixth-largest in terms of 2015 output.

On top of the restructuring plan, Baosteel Group Tuesday said it will cut 9.2 million tons of crude steel capacity by 2018, raising the expectations of industry-wide restructuring. According to Yuanta Securities Co., Baosteel Group’s crude steel capacity reached about 35 million tons last year and it is expected to slash some 30 percent of its capacity within three years. The steelmaker represents almost half of China’s steel plates for cars. “The Chinese government announced a plan to cut the crude steel capacity of Chinese steelmakers by 150 million tons by 2020,” said Lee Hyun-soo, an analyst at Yuanta Securities.

Park Sung-bong, an analyst at Hana Financial Investment, also said "Beijing is committed to cut supply in pollution-emitting industries such as the steel making industry. Also as the country is preparing the G20 summit to be held in Hangzhou in September, efforts to reduce steel production will likely continue through August.”

Sound earnings are also supporting the rally of the steelmakers. Dongkuk Steel Mill announced its second-quarter pro forma operating profit and sales on a non-consolidated basis that came to 99 billion won and 1.16 trillion won, respectively, beating the market estimates of 70 billion won and 1.13 trillion won. The company’s operating profit margin was 8.5 percent, 2.3 percentage points higher than the estimate.

The country’s largest steelmaker Posco is forecast to report 720 billion won to 740 billion won in operating profit for the second quarter ended June, up 6 percent to 7 percent from a year earlier, according to the market consensus.

Posco that relies heavily on exports to overseas will likely benefit the most from the production reduction in China in the short run.

On Thursday, Posco ended down 0.7 percent at 225,500 won, taking breath after the three-day winning streak. Dongkuk Steel Mill lost 1 percent to end at 10,100 won, but Hyundai Steel inched up 0.2 percent at 50,800 won, extending gains for two straight sessions.

By Lee Yong-gun

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]