Major Asian steelmakers are set to post a sharp rebound in March quarter profits on strong demand from autos and electronics makers, but growing cost pressures and concerns about tightening policy cloud the second-half outlook.
After agreeing to pay nearly double for iron ore imports and accepting a quarterly pricing system instead of annually fixed deals, Asian steelmills now face higher cost burdens which may be difficult to fully pass on to customers.
"In view of the flagging construction industry, they will unlikely pass on all cost increases to product prices.
Therefore, earnings will decrease in the second half from the first half," said Kim Gyung-jung, an analyst at Eugene Securities in Seoul.
The top three global iron ore miners -- Vale, BHP Billiton and Rio Tinto -- control around three quarters of seaborne iron ore trade and are moving their sales to quarterly contracts from 40-year-old annually fixed-pricing scheme.
Spot prices of the key steelmaking ingredient have risen strongly on voracious demand from the world's top consumer China, increasing costs and earnings volatility for the likes of Japan's Nippon Steel and South Korea's POSCO.
Analysts expect POSCO to make two rounds of price hikes between April and the third quarter to reflect additional rise in iron ore and coking coal prices.
"We need to pass along costs to markets, but are wondering if the price increase will be all accepted by markets as the pace of demand growth will unlikely follow that of supply growth," POSCO's senior vice president Hwang Eun-yeon told Reuters last month.
Asian customers reached tentative quarterly iron ore deals with Vale, the world's top iron ore miner, at about 90% higher prices for the April-June quarter, while reports say BHP is getting more than twice last year's fixed price.
Unlike ArcelorMittal, which has its own mines, Asian mills such as Nippon Steel and JFE Holdings are more vulnerable to the pricing system change due to low raw material self sufficiency and greater exposure to discretionary consumer products.
POSCO, JFE Shine, Nippon lags : POSCO, which kicks off January-March earnings reporting by major Asian mills, is forecast to log a 1.5 trillion won (USD 1.3 billion) operating profit, a four-hold rise from a year ago, according to a poll by Thomson Reuters.
But it would be down 6% from the fourth quarter due to facility maintenance and as soaring nickel prices erode margins of stainless steel products.
Japan's top two steelmakers could show contrasting results. A problem with a blast furnace is curtailing output at Nippon Steel, while JFE is boosting exports to tap strong Asian demand.
"We see a risk of Nippon Steel missing its forecast for the year ended in March due to the problem," said Shinya Yamada, an analyst at Credit Suisse.
Nippon Steel, which trails only top-ranked ArcelorMittal, estimated in January a 15 billion yen (USD161 mln) net loss in the fiscal year to end-March, its first annual net loss in seven years as a building slump in Japan hits margins.
But many analysts have upgraded their January-March profit estimates for JFE, the main beneficiary of a recovery in export volumes thanks to its alliance with downstream producers like Dongkuk Steel and Hyundai Hysco of South Korea.
China's Baoshan Iron & Steel Co, the world's No.3 steelmaker, is likely to report almost doubling of 2010 net profit at 10.9 billion yuan (USD 1.6 billion), as a solid recovery in the world's third-largest economy will boost steel demand from cars and consumer goods.
The company, which reported stronger-than-expected fourth-quarter results last week, is on a firm recovery path this year. The key will be how far robust demand from China's booming auto sector for high-value steel sheet can outstrip rising costs for iron ore and coking coal.
A potential strength in the Chinese yuan currency poses a risk to the regional steelmills, as it would likely trigger appreciation of other Asian currencies and reduce price competitiveness of Asian steel products, while tightening monetary policy in China could sap both demand and price rises.
"If China raises interest rates which will dent their end users, steelmakers will see room for price increases diminishing further," said Chris Kim, an analyst at Shinhan Investment.