Steel producers make provisions for devaluation in inventory as prices cool down

January, 25/2022 - 11:16

After increasing inventories at the beginning of 2021 to take advantage of price differences to maximise profits, the strategy has now hit steel producers hard as global steel prices plunged at the end of the year. 

Steel products inside a SMC Trading Investment JSC's warehouse. Photo smc.vn

HÀ NỘI — After increasing inventories at the beginning of 2021 to take advantage of price differences to maximise profits, the strategy has now hit steel producers hard as global steel prices plunged at the end of the year. 

The first two steel companies have announced their financial statements for the fourth quarter of 2021, showing less-than-positive results.

SMC Trading Investment JSC (SMC) said that in the last quarter of 2021, the company recorded a net revenue increase of 37.3 per cent on-year to VNĐ6.1 trillion (US$271.5 million), but profit after tax fell 78.7 per cent to VNĐ34.07 billion. Notably, the gross profit margin decreased from 7.6 per cent to only 2.1 per cent.

In 2021, the company’s net revenue edged up 35.4 per cent to VNĐ21.3 trillion, with profit after tax up by 184.9 per cent to VNĐ903.06 billion.

In the first six months of 2021, when steel prices rose sharply, SMC reported a gross profit margin of 10.2 per cent, much higher than in the fourth quarter of 2021.

Meanwhile, in its fourth-quarter results of 2021, Thái Nguyên Iron and Steel JSC (TIS) showed that its net revenue rose 34.1 per cent year-on-year to VNĐ3.2 trillion with profits after tax at VNĐ9.63 billion, after posting a loss of VNĐ6.74 in the same period of 2020. 

However, its gross profit margin dropped sharply from 6.1 per cent to negative 0.4 per cent, causing the company to do business below cost in the fourth quarter of 2021. The company only escaped losses thanks to a significant decrease in financial expenses.

In 2021, TIS recorded an increase of 26.1 per cent in net revenue to VNĐ12.1 trillion, with profit after tax up over 16.5 times to VNĐ122.67 billion.

In the first half of 2021, TIS's gross profit margin increased to 9.4 per cent thanks to higher global steel prices.

Both companies had increased their inventories in 2021, the financial reports showed, but they started to make provision for devaluation in inventory in the fourth quarter as steel prices cooled down. 

Accordingly, in 2021, SMC has made provision for devaluation in inventory of VNĐ112.93 billion compared to only VNĐ1.1 billion at the beginning of the year. Of which, the company noted to make provision of VNĐ47.16 billion for raw materials; VNĐ42.8 billion for finished products inventory; and VNĐ23 billion for goods.

At TIS, the company just made provision of VNĐ7.68 billion for inventory compared to zero đồng at the beginning of the year. The company did not explain in detail the provision for these items. However, it is most likely because of raw materials and finished products related to the inventory at the beginning of the year.

In the international market, steel prices have reversed the uptrend since May. From May 7, 2021 to January 21, global steel prices decreased by 20.6 per cent from 5,740 yuan per tonne to 4,560 yuan per tonne. If steel prices continue to remain at the current level or fall lower, this will negatively affect businesses in the steel sector that have carried out rising inventory strategies, especially commercial enterprises.

Steel companies all increased inventories in the first nine months of 2021. In terms of value, Hoa Sen Group (HSG)’s inventory increased by VNĐ6.8 trillion, Nam Kim Group (NKG) rose by VNĐ4,8 trillion in inventory and SMC increased VNĐ1.7 billion in inventory.

Stocking inventory amid the volatility of raw material prices is a double-edged sword. If the price of raw materials and goods increases, enterprises' profit margins improve, leading to higher profits for the company. However, if the rally cycle is over, prices of raw materials and goods reverse then businesses must raise the provision for devaluation in inventory, lowing companies' profit margins.

During 2016-2017, steel companies benefited from higher steel prices, resulting in a sharp rise in profits. However, as prices plummeted in 2018-2019, a series of steel producers announced sharp drops in business results and entered a prolonged restructuring period. VNS

E-paper