Boston, MA -- (ReleaseWire) -- 04/11/2014 -- South Korean metals consumption growth is set to moderate in 2014, as the country's exports of manufactured goods are hit by a global economic slowdown and an expected contraction in Europe. South Korea is a major producer of steel and slab zinc, but domestic mining output of ferrous and nonferrous metals is small and reliant on imports for the raw materials required by the metals industry. Domestically produced metals and metal products are fundamental to the country's industrial base, as well as trade.
South Korea has very small reserves of copper and the production level of both mined and refined copper is insufficient to meet domestic demand. The country has to rely on imports to supplement domestic production, and is the world's sixth largest importer of refined copper and the world's fifth largest importer of copper blisters and anodes, which are unrefined forms of copper.
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The deep decline in infrastructure activity suggests the stimulus measures initiated by the government since 2009 are fast receding, with an impact on construction metal products, such as steel rebar and sections, aluminium panels and extruded products and copper pipes.
Below-Consensus Views Bearish For Production
Our views on the Chinese economy are below consensus, and we foresee a significant impact on South Korea's export sectors, as China is South Korea's largest export market, with a 25% share of total exports. Inflationary pressure is mounting in the Chinese economy and we expect to further tightening measures, which would likely exacerbate weaknesses in the country's housing market. Given that the property sector has been the main engine of growth for the entire mainland economy, a correction would inevitably hurt Chinese demand for South Korean metal goods.
Two of South Korea's other sizeable export markets, Hong Kong (5.4% of total exports) and Taiwan (3.2%), are very dependent on the Chinese economy, meaning demand from these two may face similar downward pressure. The slowdown in China is also leading to overcapacity, with Chinese metal products flooding the Asian market. Indeed, we remain below consensus across base metals based on our China view. As we do not expect a sustained recovery in prices, expecting metals to head broadly lower over 2014, it is likely that expansion plans will be delayed and new projects curtailed.
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