South Korea's metcoal demand to fall modestly amidst coronavirus outbreak

The Korean economy is being buffeted by both the domestic coronavirus outbreak and its high exposure to China. South Korea exports more goods to China - US$205 billion - than any other country, while importing a considerable US$110 billion. China’s response to the outbreak, which included widespread transport constraints, has created enormous repercussions for sectors such as automotive manufacturing in Korea as supply chains have dislocated.

Hyundai, Korea’s largest car maker, has temporarily shuttered domestic production of automobiles due to the unavailability of auto parts made in China, and a drop in vehicle purchases in China.

Unfortunately, as the outbreak has shifted to Europe, Southeast Asia and the US, Korea’s exports to those markets will also suffer. 

Wood Mackenzie senior analyst Min Li said: "The South Korean steel sector is facing margin pressure from weakening demand and high raw material costs in the wake of the coronavirus outbreak.

"Korean steel margins were already low after a sharp rise in iron ore and metallurgical coal prices since late 2019, but the coronavirus outbreak and low oil prices have undermined their push for a steel price hike.

"Of particular concern is reduced demand for Korean exports of steel. Korea’s ship and automobile exports are being materially impacted by the pandemic and global economic slowdown. The shipbuilding industry is persistently demanding a freeze or cut in steel prices from Korea’s major steel-makers.

"As a result of global events we now think South Korean hot metal production will decline by almost 10% or 4.2 Mt in 2020. There is of course a risk that production decline would be greater, if containment of the virus is unsuccessful."

Notably natural resource-poor, South Korea is a major importer of inputs to steel production, including almost 34 Mt of metallurgical coal in 2019. Any drop in hot metal production is likely to be mirrored by falling demand for coke and coal use, and therefore imports. A 10% drop in hot metal demand could lead to a 2.5 Mt drop in coking coal.

Fortunately for metallurgical coal suppliers, Korea has avoided the worst of regional shutdowns seen elsewhere. But it is vulnerable to demand falls for its auto exports, and will have to contend with the fallout of deep demand losses, while social distancing measures remain in place. Met coal import demand will fall modestly, but Korea's losses will add to the lower demand already expected in Japan this year. Additionally, Korea will not be in a position to replace lost import demand for met coals into India.

Li said: "The convulsions of 2020 may lead to some longer term changes to coal procurement in Korea. We do not expect Korean steel makers to fundamentally change their approach of optimising coke blends and PCI use, and diversifying from Australia whenever possible. However, some changes may be forced on them as the economic fallout from the coronavirus crisis exposes weaknesses in some suppliers."