South Korea’s major steelmakers are running their plants only at night to cut costs as demand for rebars, or reinforced bars, widely used in construction of apartment houses plummets amid an economic slowdown.
Dongkuk Steel Mill Co., the country’s No. 2 rebar maker, recently changed its four-team, three-shift work system to a night shift production system at its electric furnace in Incheon to work from 10 p.m. to 8 a.m. the next day.
“Unless demand significantly rises, we plan to continue working only at night,” said a company official. “With this measure, the factory operation rate will drop to the 60% range from 87.3% last year.”
Dongkuk, which produces 2.2 million tons of rebar products annually, hopes to cut production costs through these measures.
At night, electricity rates are half the daytime rates. Power prices account for about a tenth of steel production costs.
With rebar demand plummeting due to the worsening situation in the construction industry, analysts say other Korean steelmakers are set to follow suit by turning their electric furnaces off during the day.
RISING INVENTORIES
Dongkuk’s rebar inventory has risen to 660,000 tons in the first quarter, up 40% from 470,000 tons in the year-earlier period. The latest figure represents the highest since the company began looking into monthly average inventory levels in 2012.
The rising inventory is largely due to a significant fall in construction of new buildings and rising rebar imports from China.
As inventory piles up not just at Dongkuk but also at seven other rebar makers in Korea, domestic rebar distributors are pushing out products at 700,000 won ($511) a ton, much lower than their purchasing price of 900,000 won a ton, according to industry watchers.
“If production volumes decline with more steelmakers turning to a night shift system, the market’s oversupply situation will ease,” said an executive at a local steelmaker.
GAME OF CHICKEN
Reinforced bars used in apartment frameworks account for more than 90% of the domestic construction market. The worsening construction industry is one reason for higher inventory, but a bigger problem is the chronic oversupply situation, analysts said.
Korean rebar makers have been engaged in a “game of chicken” to keep their market share as they refrained from slashing production despite rising inventories.
According to the Ministry of Land, Infrastructure and Transport, the number of housing permits dropped to 74,558 houses in the first quarter, down 13.7% from 86,444 houses a year earlier.
The sharp decline in new apartment construction hit steelmakers’ earnings hard.
Dongkuk Steel posted 52.5 billion won in first-quarter operating profit, cut by more than half from a profit of 127 billion won in the year-earlier period.
MAINTENANCE AND REPAIR WORK
Hyundai Steel Co., also suffering from sluggish demand, said it is in the middle of an unscheduled maintenance and repair work at its electric furnace in Incheon from February through June.
Regular maintenance and repair work usually takes two to three weeks and industry officials said Hyundai Steel’s longer-than-usual work stoppage is tantamount to voluntary production cuts.
Hyundai Steel is also slated to conduct a three-month maintenance and repair work at its plant in Dangjin, South Chungcheong Province from the middle of September.
“We want to be more flexible in controlling our inventory through the maintenance and repair work,” said a company official.
Chang In-hwa, new chairman and chief executive of Korea’s top steelmaker POSCO Holdings Inc., said in April that the company is also tightening belts.
“We will take drastic cost-cutting measures to counter difficulties caused by global steel oversupply and the intensifying US-China trade war,” he said.
Analysts said worsening profitability at Korean steelmakers could negatively impact their investments in eco-friendly future projects, including adopting an industry initiative to achieve zero carbon by 2050.
