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

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

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 percent on-year to 6.1 trillion VND (271.5 million USD), but profit after tax fell 78.7 percent to 34.07 billion VND. Notably, the gross profit margin decreased from 7.6 percent to only 2.1 percent.

In 2021, the company’s net revenue edged up 35.4 percent to 21.3 trillion VND, with profit after tax up by 184.9 percent to 903.06 billion VND.

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

Meanwhile, in its fourth-quarter results of 2021, Thai Nguyen Iron and Steel JSC (TIS) showed that its net revenue rose 34.1 percent year-on-year to 3.2 trillion VND with profits after tax at 9.63 billion VND, after posting a loss of 6.74 billion VND in the same period of 2020.

However, its gross profit margin dropped sharply from 6.1 percent to negative 0.4 percent, 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 percent in net revenue to 12.1 trillion VND, with profit after tax up over 16.5 times to 122.67 billion VND.

In the first half of 2021, TIS's gross profit margin increased to 9.4 percent 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 112.93 billion VND compared to only 1.1 billion VND at the beginning of the year. Of which, the company noted to make provision of 47.16 billion VND for raw materials; 42.8 billion VND for finished products inventory; and 23 billion VND for goods.

At TIS, the company just made provision of 7.68 billion VND for inventory compared to zero VND 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 percent 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 6.8 trillion VND, Nam Kim Group (NKG) rose by 4.8 trillion VND in inventory and SMC increased 1.7 billion VND 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./.