Steel sector – Light at the end of tunnel

• Most of the listed steel companies recorded better 1Q23 net profit compared to the previous two quarters.
• China HRC steel prices have subdued 9% from the peak in mid-Mar 2023 and are expected to continue falling in the coming months due to weak demand.
• Operating profit of steel companies is expected to be positive in 2Q23. However, 2H23 prospects remain challenging as steel prices drop recently and demand recovers slowly.

The toughest time passed but the best yet to come
We attended the 2023 Annual General Meeting (AGM) of listed steel companies, notably most of their managements have a more positive view of the industry’s outlook that 2H22 was the hardest time, but then outlook has gradually improved in 1Q23 and will turn better since 2Q23F. All companies have set FY23F business guidance with positive profit, much more positive than two consecutive quarters of losses in 2H22. However, steel demand will remain weak throughout 2023, making it very challenging for steel companies to complete their full-year business plan.
Positive 1Q23 business results thanks to higher steel selling prices and inventory provision reversal
In 1Q23, steel companies recorded a plunge in business results yoy; however, net profit improved significantly compared to the two previous quarters. We think this trend is mainly due to: (1) the average selling price of Vietnam’s construction steel and HRC in 1Q23 was VND15.9m/tonne (-7% yoy/+6% qoq) and US$660/tonne (-20% yoy/ +18% qoq), respectively; (2) the increase in the steel selling price in 1Q23 helped steel companies record an inventory provision reversal; (3) 1Q23 interest expense climbed yoy reflecting the increased cost of debt and (4) the exchange rate was more favorable and steel companies actively reduced foreign currency debts in 1Q23, which helped to narrow their net exchange rate loss compared to 2H22.
The weak housing market still cast a shadow over the recovery prospect of steel makers in 2H23F
Vietnam’s steel demand is highly dependent on the residential property industry, which accounts for around 60- 65% of the country’s total steel consumption. On April 3, 2023, the Government issued Decree No.10/2023/ND-CP, which will help to ease legal bottlenecks for real estate developers. However, we believe that it is still too early to confirm that the property market will improve in the short term when the actual effectiveness of the implementation of policies is unclear and many bottlenecks have not been completely resolved. Thus, we expect that the domestic property supply will only be able to recover from 2024F when (1) the revised Land Law is adopted to remove legal bottlenecks and (2) banks reducing lending rates and creating more favorable access to capital will support developers and stimulate demand for home buyers. As a result, Vietnam’s steel demand won’t fully rebound until 2024F
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