Inventory value recorded a sudden growth in many steel enterprises. What is the cause of this increase in hoarding and will it bring risks to enterprises in the near future when steel prices are forecasted to correct at the end of the year?

Sudden increase in inventory
The financial statement of the second quarter of 2021 of Hoa Phat Group Joint Stock Company (HPG) recorded an inventory increase of one and a half times compared to the beginning of the year, at approximately VND 39,867 billion. In which, raw material inventory accounted for the largest proportion, reaching 18,765 billion VND, up 58%; finished product inventory also increased by 49% to VND 8,182 billion.
Inventories of Nam Kim Steel Joint Stock Company (NKG) at the end of June 2021 were also 2.5 times higher than at the beginning of the year, at VND5,958 billion. Focused mainly on finished goods (VND 3,100 billion, up 86%) and raw materials and materials (VND 1,886 billion, 7.4 times higher than at the beginning of the year).
At Hoa Sen Group Joint Stock Company (HSG), the third quarter financial report of the fiscal year 2020-2021 also shows that HSG’s inventory at the end of June 2021 amounted to VND 11,712 billion, double that of with the date of October 1, 2020. This caused the proportion of inventory to total assets to increase sharply from 31% to 46%. Among these, raw materials increased by nearly 400%, reaching VND 5,650 billion; finished products doubled, to VND 3,440 billion.
Similarly, at the end of June, inventories of SMC Trading Investment Joint Stock Company also increased by 126% compared to the beginning of the year, to VND4,081 billion. At Pomina Steel Joint Stock Company, inventory also increased by 74% to VND3,909 billion.
This sudden increase in inventory value is explained by experts of HSC Securities Company mainly because the price of input materials is HRC and the price of finished steel has increased sharply in recent times. However, looking at the balance sheets of enterprises, it can be seen that the sharp increase in the value of inventories has caused the proportion of inventories to total assets of enterprises to skyrocket. The evolution of steel prices in the coming time will greatly affect the business performance of steel enterprises. If steel prices continue to go up, businesses will make big profits, but if steel prices go down, businesses will bear risks.
Worry about?
In the past, there were times when the inventory level of steel enterprises increased to a high level. Specifically, the ratio of inventory to total assets of HSG reached the highest level of 42% in the fourth quarter of 2017 and the second quarter of 2018. After that, the price of HRC dropped from 673 USD/ton to 536 USD/ton, causing the gross profit margin of this enterprise to decrease to 0% in the fourth quarter of 2018 and the first quarter of 2019. At the same time, NKG also had a peak inventory ratio of 40% and faced the same scenario as HSG.
Currently, this proportion is above 46% at HSG and 42% at NKG. However, according to Mr. Nguyen Dang Thien, Mirae Asset Securities Company, at the present time, this risk has been significantly reduced when the export segment, which accounts for 35-40% of revenue, has been determined by contract price. 3-4 months in advance. However, Mr. Thien still believes that the rapid increase in the rate of speculation in inventories is a big risk in the fourth quarter of 2021 and the first quarter of 2022 in the context of China taking measures to reduce iron ore prices.
HSC Securities also said that, although the value increased very strongly, the current inventory level of NKG is only equivalent to 12.5 weeks of production – a reasonable level compared to 15 weeks of production that the company maintains. at the end of the second quarter of 2020. Along with that, the signing of forward contracts with guaranteed profit margins for export orders helps NKG’s high inventory levels not be a cause for concern.
However, there will still be certain risks. Specifically, in the domestic market, according to Mr. Thien, with the sharp increase in the price of construction materials in recent years, many businesses have had to postpone construction to wait for the decision to offset the price of materials, making the progress of the construction process difficult. maybe 6-18 months later. In addition, the re-emergence of the Covid-19 epidemic has paralyzed construction activities in the South since June and shows no sign of ending. This will greatly affect steel consumption in the domestic market.

In that context, export is the salvation for enterprises. Through working with HSG, HSC Securities Company revealed that the export price of contracts signed by HSG for the delivery period from July 2021 to the end of November 2021 is higher than the export price. during the previous 9 months. This trend reflects continued strong demand in Europe and North America. Therefore, HSG’s export profit margin is forecasted to increase in the coming time along with the improvement of product structure, despite the negative impact of falling domestic demand.
However, many comments also indicate that the world’s steel supply has begun to recover. Therefore, it is forecasted that steel prices will gradually return to the average level in the long term. In fact, from July 2021, the domestic steel price has started to decrease after 4 consecutive months of increase since February 2021, however, still at a much higher level than the same period last year. In the world market, steel prices have also tended to decrease from the beginning of June until now.

T&G International Joint Stock Company

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