Steel companies post low profits on rising iron ore prices

Friday, Aug 09, 2019 08:48

Hoa Phat's steel products. Hoa Phat Group (HPG) reported 6-per-cent increase in revenue to VND15.3 trillion (US$656.7 million) in the second quarter but its profit after tax declined 7 per cent in the reviewed period. — Photo

Second-quarter earnings of steelmaking companies showed signs of deterioration as prices of iron ore continued to increase, leading to higher production costs and lower profit.

Hoa Phat Group (HPG), the biggest listing steelmaker, reported revenue of VND15.3 trillion (US$656.7 million) in the second quarter, up 6 per cent year-on-year, but its profit after tax declined 7 per cent in the reviewed period, reaching VND2.05 trillion.

Ending June, the company’s revenue increased 10.3 per cent on-year to more than VND30 trillion, but its net profit dropped 12.8 per cent to VND3.86 trillion.

Hoa Sen Group (HSG) reported its net revenues slumped by 30 per cent to VND7.2 trillion ($309 million) in the third quarter for the fiscal year 2018-19 (April 1 – June) but its net profit rose 94 per cent year-on-year to VND161 billion.

It said it managed to cut management costs by 50 per cent thanks to installing the enterprise resource planning (ERP) and focus on exploring new export markets.

Sharp increases in iron ore prices were attributable to unenthusiastic business results of steel companies, according to analysts at Vietinbank Securities JSC.

The price of iron ore, which account for 30-40 per cent of the cost of steel production, rose to $130 per tonne in some future contracts, the highest since 2016. Higher cost of production accompanied by increasing capacity of domestic enterprises is driving up competition, a July report on the steel industry of Vietinbank Securities JSC showed.

“The increase in capacity is happening faster than in consumption which has pushed many businesses into losses since 2018 and early 2019,” the report said.

Except Hoa Phat which has a high profit margin, other businesses in the industry have very low profit margins and therefore are quite vulnerable when there are adverse developments in the industry, according to the report.

Investment in expanding capacity of large enterprises such as Hoa Phat would create competition and put pressure on many businesses in the coming years, it said.

A number of steel companies have posted their second-quarter and first-half earnings with lower revenues and profits. They included SMC, Vietnam Germany Steel Pipe (VGS), Thai Nguyen Iron and Steel (TIS) and Tien Len Steel (TLH).

For SMC, its revenue grew 8.7 per cent in the first six months but its cost of capital increased by 10.56 per cent, resulting in a decrease of 22 per cent in gross profit.

VGS’s first-half revenue dropped just 1.3 per cent year-on-year to VND3.46 trillion but its profit after tax fell 11.7 per cent to just VND28 billion. Meanwhile, revenue and net profit of TLH declined 16.4 per cent and 72 per cent, respectively.

TIS reported a 5.4-per-cent decline in revenue and 10.5 per cent drop in net profit in the first half to VND5.5 trillion and VND38 billion, respectively.

According to analysts, the steel industry is facing many challenges, including the trade war between the US and China, intense competition in the domestic market from cheap low-quality imports and slump of the property market.

In addition, the US imposition of anti-dumping tax on steel sheet products imported from Viet Nam using materials imported from South Korea and Taiwan has also forced steel exporters to seek new material sources. — VNS

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