For Dongkuk Steel Mill Co., South Korea’s third-largest steelmaker, Companhia Siderurgica do Pecem steel mill in Brazil, commonly known as CSP, has long been a thorn in its side.
Since the Brazilian steel mill, in which Dongkuk holds a 30% stake, began operations in 2016, it has run a deficit almost every year, resulting in an accumulated loss of 2.23 trillion won ($2 billion) as of 2020.
But the Brazilian affiliate swung to a profit last year, posting an operating gain of 19.6 billion won and analysts expect CSP to post more than 200 billion won in operating profit this year, adding momentum to Dongkuk Steel, which is also seeing a significant turnaround in its Korean business.
“With the normalization of CSP from the fallout of the pandemic last year, the Brazilian steel mill showed a dramatic earnings improvement,” said Lee Jong-hyung, a Kiwoom Securities analyst. “CSP’s profit will improve further this year on the back of the rebound in the global steel industry.”
The purchase of CSP, located in the Brazilian state of Ceara, was led by Dongkuk Steel Chairman Jang Se-joo, who saw the overseas steel mill as one of Dongkuk’s key growth drivers.
Since Jang’s retirement from Dongkuk’s active management in 2015, his son and Vice Chairman Chang Sae-wook has also tried to improve CSP’s financial standing with extra investments.
CSP is 50% owned by Brazil’s mining giant Vale S.A. Korea’s top steelmaker POSCO holds the remaining 20% stake in CSP.
FX TRANSLATION LOSSES FROM CSP
Most losses Dongkuk suffered from CSP derived from the rapid depreciation of the Brazilian currency real against the dollar. Donkuk Steel has booked 490 billion won in accumulated losses from its Brazilian unit since 2016, including foreign-exchange translation shortfalls.
The Korean steelmaker expects CSP, which manufactures steel slabs, semi-finished steel products, to post over 200 billion won in operating profit this year.
The export price of steel slabs, called the free on board (FOB) price, rose to $768 a ton in January this year, up from $434 a year earlier.
Dongkuk Steel Mill Vice Chairman Chang Sae-wook
“Other than repayment of a long-term loan, we don’t have any other significant fund outflow for CSP, whose cash flow has been improving,” said a Dongkuk official.
He said CSP was able to run at more than 90% capacity last year even at the height of the COVID-19 pandemic because the steel mill was designated by the Brazilian government as a national backbone facility.
The turnaround at CSP comes amid a global industry recovery, which is also brightening Dongkuk’s earnings prospect.
In 2020, the global steel industry underwent an unprecedented slump, with demand from the shipbuilding and automobile industries plummeting, alongside surging iron ore prices.
Dongkuk Steel, however, dazzled the market with a positive earnings surprise, posting its highest operating profit in a decade.
Its 2020 operating profit rose 79.1% to 294.6 billion won, the highest since 430.4 billion won in 2010.
COLOR STEEL PLATE TO BOOST PROFITABILITY
The Korean steelmaker partly attributed its remarkable performance to its mainstay product section steel and its blooming color steel plate business, products of which have higher margins than general steel products.
Dongkuk Steel is at the forefront of the color steel plate industry, and it plans to hold on to its leading position. Vice Chairman Chang Sae-wook has said the company will boost the company’s profitability by widening the gap with other players in the color steel plate industry.
Dongkuk Steel employees inspect color steel plates. According to the steel industry on Apr. 9, Dongkuk is expected to post 73.9 billion won in operating profit in the first three months of this year, up 31.7% from the year-earlier period.
The steelmaker expects this year’s earnings to hit a record on the back of the rising demand for its mainstay products amid a recovering construction industry.
Some analysts, however, say that a renewed fall in the value of the Brazilian real could put pressure on Dongkuk’s earnings.
