Hyundai Steel Agrees to Buy Ore, Coal for Expansionadmin
Hyundai Steel Co. , South Korea’s second-largest steelmaker, signed an agreement to buy iron ore and coal from Cia. Vale do Rio Doce and Rio Tinto Group as it begins construction today on a $5.5 billion expansion.
The steelmaker may buy as much as 5 million metric tons of iron ore a year from both Brazil’s Vale and Rio Tinto for 10 years from 2010, the Incheon, South Korea-based company said in a statement today. It will also buy as much as 1.5 million tons of coking coal from Canada’s Elk Valley Coal Corp, and the same amount of coal from Rio.
Hyundai Steel joins bigger rival Posco, South Korea’s largest steelmaker, in securing raw materials as prices jump on surging demand from China. Prices of iron ore, which have risen four straight years to a record, may increase as much as 10 percent next year, Credit Suisse Group said yesterday. Vale is the world’s largest supplier of the commodity.
“It’s good news for raw material suppliers because the more customers they have, the more competition there is, which is good for price increases,” said Kim Gyung Jung, a steel analyst at Samsung Securities Co. in Seoul.
Hyundai Steel is the world’s third-largest mill that uses scrap metal to make steel in electric-arc furnaces, and it today began building its first two blast furnaces to make higher-grade steel, potentially doubling its capacity. Posco, the world’s third-largest steelmaker, is South Korea’s only steelmaker that makes the metal from iron ore and coal, which is higher in quality than steel made from scrap.
Prices of iron ore, a key ingredient to make steel, rose 19 percent from April to an all-time high, after jumping 71.5 percent last year. Prices of hard coking coal, another ingredient, fell 8 percent this year after more than doubling last year.
Hyundai Steel agreed in January to buy as much as 5 million metric tons of iron ore a year from BHP Billiton Ltd. for ten years starting 2010. It also agreed to buy as much as 3 million tons of coking coal a year from BHP during the same period.
Rio de Janeiro-based Vale, Australia’s BHP Billiton and Rio Tinto control three-quarters of the world’s iron ore trade.
Hyundai Steel said today it plans to spend 5.24 trillion won ($5.5 billion) on the two blast furnaces, which will have a combined capacity of 7 million tons as early as 2010. The company had previously said it may spend “about” 5 trillion won on the project in Dangjin, 123 kilometers (76 miles) southwest of Seoul.
The furnaces will produce more high-quality steel for Hyundai Steel’s customers like its affiliate Hyundai Motor Co. and Kia Motors Corp., the country’s two largest carmakers.
The total investment may be increased to 7.5 trillion won as the company plans to expand crude steel output to 22.5 million tons by 2015, the statement said. Hyundai Steel currently has a capacity of 10.5 million tons.
Output from Hyundai Steel’s new furnaces is expected to alleviate a domestic steel shortage. Domestic demand for hot- rolled coil, used to make automobile sheets, exceeded supplies by 5.4 million tons last year, while demand for steel for ships exceeded supply by 2.9 million tons, according to today’s statement.
Hyundai Steel said third-quarter profit rose 3.9 percent to 97.8 billion won, giving figures in a separate statement today to the local stock exchange. Sales were 1.38 trillion won, compared with 1.2 trillion won a year earlier, it said.
The company reiterated that it will tap profits to fund half the cost of the furnaces, and borrow the remainder.
“We believe that the $6 billion project is a bit too ambitious for a $3 billion market cap company,” Goldman Sachs Group Inc. analysts Rajeev Das, Charles Min and Jane Sung said in a Oct. 26 report, referring to market capitalization.
Hyundai Steel’s shares, which have risen 44 percent over the past year, settled 1,050 won, or 3 percent, lower at 33,800 won at the 3 p.m. market close in Seoul.