Gradual recovery in domestic construction and export demand to drive moderate 2024F sales volume growth. Total industry sales volume for galvanized steel sheet and steel pipe fell 14% YoY in H1 2023 due to subdued domestic construction activities and low export demand. Momentum shifted in H2 2023 with the recovery of both markets, driving 12% YoY growth in H2 2023 total volume. However, full-year 2023 volume declined 1.8% YoY. In 2024F, we expect a low-teens growth rate in galvanized steel demand, driven by (1) gradual recovery of the domestic real estate market, (2) moderate exports rebounding, and (3) construction of new FDI factories.

Galvanized steelmakers’ gross margins to expand from 2023’s low base. After a rally in early 2023 and a price correction during April-May, prices of steel-related input commodities have since largely moved sideways due to weak construction demand in China. On a calendar year basis, NKG’s and HSG’s 2023 gross margins fell to their lowest and second-lowest levels since 2020 and 2019, respectively, which we attribute to 2023’s weak demand and higher-cost inventories accumulated in H1 2023. In 2024, we forecast galvanized steelmakers' margins to rise from 2023's lows due to recovering output prices and modestly increasing input costs. This uptick is driven by stronger domestic and export demand, outweighing sluggish growth in Chinese demand. Additionally, we believe higher sales volume will also increase gross margin of galvanized steel producers due to higher utilization that effectively lowers unit COGS.

Global shipping disruption to pressure EBIT margins for more export-reliant galvanized steelmakers in 2024F. The Red Sea tension and Panama Canal drought are driving global freight rates higher. We expect this situation to persist in the short term, putting more pressure on EBIT margins for NKG than for HSG in 2024 due to NKG’s higher shipping costs/sales ratio. This is because NKG focuses more on exports since the domestic market has been dominated by HSG.

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