Steel makers hit by triple whammy

Korea's steel makers face a triple whammy of global economic downturn, a weak yen and government regulation of energy consumption with the summer just around the corner.

The Park Geun-hye administration said last Friday that it will require companies that use more than 5,000 kilowatts of electricity per month to reduce their consumption by up to 15 percent. This latest measure comes on the heels of declining profits for domestic steel manufactures in the first quarter.

The local steel industry is already suffering because the economy of China, Korea's biggest trading partner, has been steadily losing steam due to the euro zone crisis and fragile U.S. economy.

This has resulted in very low demand for steel as well as a dip in prices. POSCO, the country's leading steel maker, said its first-quarter net profit dropped 42 percent year-on-year to 539 billion won ($480.7 million).

Its biggest local rival Hyundai Steel also reported a decline in net profit in the first quarter by 84 percent year-on-year to 24.8 billion won.

The gloomy forecast for POSCO and other smaller firms in the industry has a lot to do with the reduction in demand from the country's automakers, their chief customers. The automakers are coming under increasingly competitive pressure from their Japanese rivals because of the weak yen.

The yen has depreciated more than 20 percent against the greenback since September, backed by Japanese Prime Minister Shinzo Abe's aggressive monetary easing policies. On the other hand, the won has risen around 34 percent per 100 yen in the cited period.

While the benchmark Korea Composite Stock Price Index (KOSPI) has shown an upward trend since mid-April, POSCO shares have remained around 31,000 won to 32,000 won.

The government's measures on electricity are adding to the woes of steel makers, according to industry sources.

"Most steel makers use enormous amounts of electricity to run their plants," said a spokesman of Dongkuk Steel, one of the country's top 10 players.

"But we'll do our best anyway to reduce consumption during peak hours."

He added that other major players such as Hyundai Steel and Dongbu Steel will face a similar problem considering their methods of production.

"The furnaces at their plants are electrical, and it's so obvious those companies will find it difficult to cope with the government's regulations."

The government's measures came after it was forced to shut down two nuclear reactors as well as delaying the scheduled operation of two other reactors.

Experts are warning that the nation's power reserves are likely to run out in during the peak summer period with demand surpassing supply, which may cause a nationwide blackout unless measures are taken to reduce consumption.

POSCO said it is "prepared" to meet the government's demand.

"We generate up to 80 percent of the electricity that we consume annually," a POSCO spokeswoman said. "And I don't think the government's measure will affect our plant's operations."

Another expert said, the fortunes of the steel makers will only improve if the euro zone crisis improves and the economy of China picks up.

"Increase in demand from China is the key for the Korean steel manufacturers to succeed this year," said Kim Kang-oh, an analyst at Hanwha Investment and Securities.

"And it is likely business conditions will recover in the second half of this year as the world's second largest economy will see a rise in demand for raw materials, such as steel."