Turkish steel companies' profits pressured by a shrinking market, trade wars

ISTANBUL, Nov 8 (Reuters) - Share price targets of Turkish steel companies have declined due to expectations of continued weakness in the final quarter after profit margins narrowed in the third due to a shrinking market, trade wars, concerns over global economic growth and a sharp fall in product prices.

Turkey, the world’s sixth largest steel exporter, is experiencing trouble both in domestic markets and exports. The sector lost nearly 80% of its U.S market after Washington imposed additional tariffs and is also facing difficulties in European Union after quota limitations.

The third quarter net profits of Erdemir and Kardemir, two companies traded on the Istanbul Bourse, were down 41% and 18% respectively.

The decline in their profits was caused by sharp contractions in the construction, home appliances and automotive sectors, the main markets for the steel sector, as well a drop in steel prices despite rising iron ore prices.

According to third quarter results, Erdemir’s EBITDA margin eroded to %19.7 from %32.2 and Kardemir’s narrowed to %9.5 from %37.9 on annual base.

Turkey’s Ziraat Investment lowered its target share price for Erdemir to 8.5 lira from 10.7 lira after the release of the third quarter results. TEB/BNP Paribas lowered it to 9.88 lira from 10.61 lira, while Oyak Investment lowered it to 8.9 lira from 9.3 lira.

Ziraat Investment also lowered Kardemir’s target share price to 2.55 lira from 2.85 lira, TEB/BNP Paribas lowered it to 1.9 lira from 2.33 lira, while Oyak Yatirim lowered it to 2.3 lira from 2.7 lira.

Erdemir’s share price stood at 7.21 lira at Thursday’s close, while Kardemir’s stood 2.33 lira.

According to data from the Turkish Steel Producers Association, steel product consumption in Turkey declined 25.8% to 18.9 million tonnes in the first nine months of the year.

The course of domestic and foreign demand, trade wars, developments in the European economy and the price of steel and raw materials will determine the performance of Turkish steel companies, analysts say.

Erdem Kayli, senior analyst at TEB/BNP Paribas, said the profitability of the two companies is expected to decline further in the last quarter of 2019 and again in the first quarter of 2020.

“Steel prices have been declining since August. The trend is downwards and the profitability of companies per tonne is going to weaken as steel prices fall,” he said.

He said Erdemir’s EBITDA per tonne is expected to decline to $90 in the fourth quarter from $111 in the third. Kardemir’s EBITDA per tonne could decline to $30-$35 in the fourth quarter after declining to $45 in the third, he said. (Writing by Ali Kucukgocmen Editing by Frances Kerry)