How will Hyundai's $6B investment in U.S. play out?

Hyundai Motor Group Executive Chair Euisun Chung announces a $21 billion investment in the United States as U.S. President Donald Trump, second from right, and Louisiana Gov. Jeff Landry, far right, stand in the Roosevelt Room at the White House in Washington on March 24. [AP/YONHAP]

[Behind the Numbers]
 
The nub of Hyundai Motor Group's recent $21 billion investment announcement at the White House lies with a $5.8 billion Hyundai Steel plant in Louisiana. But with its measly cash reserves, how to secure the funds remains in question, raising widespread speculation about the means of fundraising, including massive borrowing.
 
With Hyundai Steel pledging not to launch a rights issue for the gigantic U.S. investment, it plans to secure half of the funds, totaling $2.9 billion, through its own equity, while the remaining half will be borrowed from external sources.
 
The Louisiana steel mill, adopting an electric arc furnace, will primarily produce steel plates for automobiles, mostly for the Hyundai Motor and Kia plants in Alabama and Georgia. The groundbreaking is set for the third quarter of 2026, with mass production set for 2029 at an annual capacity of 2.7 million tons.

Hyundai Steel’s paltry coffers
The steelmaker had only 1.3 trillion won ($912.9 million) in cash assets as of the end of last year, according to its regulatory filing, compared to the minimum of at least 4.2 trillion won it must secure through its own equity. Its debts rose 0.6 percent to 9.74 trillion won during the period.
 
There is a slim chance that the company will secure the cash from its business, mostly selling steel. Hyundai Steel's operating profit suffered an 80 percent drop on year to 159.5 billion won in 2024, hit by weak demand and an influx of low-priced Chinese products.

 
“The steel market remains sluggish, while Hyundai Steel’s profitability maintains low compared to the massive investment,” said analyst Park Hyun-wook from Hyundai Motor Securities. “Hyundai aims to produce steel plates for automobiles in an electric mill at the plant, and the market demand for that sector still lacks confidence.”
 
With inadequate cash reserves, Hyundai Steel’s shares dipped almost 7 percent on March 25, the day it announced the $6 billion U.S. investment, amid snowballing concerns over uncertainties about funding on a tight budget.
 
Hyundai Steel on April 1 suspended operations at its steel reinforcement rebar plant in Incheon for a month due to disappointing demand, slashing its production capacity by half, in the first shutdown since its founding in 1953. The halt left around 400 workers at home, receiving only 70 percent pay.
 
It’s also in the middle of offering early retirement to all salaried employees 50 or over to slim down the workforce and cut raw costs. The salaries of all executives were slashed by 20 percent under an emergency management mode.
 
This has forced the company to consider other sources of funds, with a sell-off of its stakes in its affiliates a potential method.
 
 
Running up loans on unpaid debts
Hyundai Steel must secure half of the investment, at least $2.9 billion, from bank loans, which may come with high interest rates on top of unpaid debts from updating existing steelmaking facilities.
 
Though the company did not give details on the form of “external sources,” a few scenarios can be considered, including borrowings from banks.
 
Assuming that Hyundai Steel borrows $2.9 billion at a conservative estimate of 4 percent interest reflecting its crediting rating of AA, it will have to pay some 170 billion won in interest every year. That’s more than the company’s full-year operating profit in 2024.
 
"The interest rate of bank loans usually starts from 4 percent, but some government-backed [low interest rate] loans can also be an option for Hyundai Steel," said researcher Jang Jae-hyeok from Meritz Securities. "Hyundai Steel hasn't really paid back the loans it took out a few years ago when updating the Dangjin factory in South Chungcheong."
 
"Concerns loom since their plans on how to borrow half of the needed funds have not been disclosed," Jang said.
 
The U.S. Department of Energy (DOE)'s clean energy financing program could be an option. Through it, companies can get direct loans from the U.S. Treasury’s Federal Financing Bank backed by 100 percent “full faith and credit” DOE guarantees, where the interest rate stands at the U.S. Treasury curve, plus a liquidity spread equal to three-eighths, or 0.375 percent.
 
As a project to reduce carbon emissions, DOE announced a $500 million funding award to steelmaker Cleveland-Cliffs for its project to shift its Middletown Works facility in Ohio to electric and hydrogen, as well as $75 million to upgrade gas furnaces at the Butler Works to run on electricity.
 
However, U.S. President Donald Trump’s hostility toward climate-friendly projects still remains as a variable. Trump on Inauguration Day ordered all agencies to review all subsidy and incentive distribution in his push for fossil fuels.

Hyundai Steel's steel reinforcement rebar plant in Incheon, which was shut down on April 1 for a month due to weak demand. [YONHAP]

Capital injection may lead to a vague equity structure
The other half of the funds, roughly $2.9 billion, will be raised piecemeal through help from its well-funded bigger affiliates, which makes Hyundai Motor, Kia and Hyundai Mobis among the potential engagers.
 
Other companies like Posco and Luxembourg-based ArcelorMittal, the world's second-largest steelmaker, are also reportedly considering investing in the factory, which would then make it a joint venture.
 
Hyundai Steel said in a conference call that it was “in talks with Hyundai Motor Group to make a joint investment for a little more than 50 percent" of the amount it planned to raise through its own equity, without giving details about the rate. That means Hyundai affiliates, including Hyundai Steel, and some other partners will altogether invest $2.9 billion, while the distribution of stakes has not been decided.
 
“The Louisiana factory will highly likely be built as a joint venture, which decides whether Hyundai would be able to recognize it as its own to reflect the profitability into its financial statements in the future,” said research Lee Eu-gene from Eugene Investment & Securities.
 
"Until the specific equity ratio is disclosed, capital costs, which cannot be verified in numerical terms, signify uncertainty."
 
Market watchers estimate that Hyundai Steel will attempt to own "at least 30 percent of the plant, which translates to 870 million won,” said Rhee Jae-kwang, a researcher at NH Investment & Securities.
 
That scenario, however, is also gummed up by Trump’s 25 percent tariffs on car and auto part makers, which inevitably force Hyundai affiliates to tighten their purse strings while embracing the uncertainties and enormous expenses.
 
Industry watchers are cutting their estimations for Hyundai’s profit figures, with Shinhan Securities on Friday predicting its 2025 profit to slide 5.4 percent on year to 13.5 trillion won. That’s an 11.9 percent drop from the initial prediction.

Hyundai Steel's steel reinforcement rebar plant in Incheon, which was shut down on April 1 for a month due to weak demand. [YONHAP]

Liquidation of holdings
Another possible option could be a potential sell-off of its stakes in Hyundai affiliates, including in Hyundai Mobis and HD Hyundai Oilbank.
 
Hyundai Steel currently has a 5.8 percent stake in Hyundai Mobis, which is valued at some 1.3 trillion won, while its 2.2 percent in the oil refiner is worth some 116.3 billion won.
 
In 2013 when the steelmaking company made a 3.2 trillion won investment in constructing the No. 3 blast furnace in its steel mill in Dangjin, it offloaded 5.4 percent of its stake in Hyundai Card to Hyundai Motor and secured roughly 175 billion won.
 
Hyundai Steel pushed to sell out the 2.2 percent of the stake in Oilbank in 2020 to enhance its financial structure, but that ended unsuccessfully as the oil refiner failed to launch its proposed initial public offering.
 
The liquidation of stakes in affiliates, however, isn’t a simple task considering that Hyundai’s circular shareholding structure involves cross-ownership between Hyundai Motor, Hyundai Mobis, and Kia.
 
“Hyundai Mobis is currently the largest shareholder of Hyundai, which owns Kia, so for Hyundai chief Euisun Chung to strengthen his control of the group, the shares of Mobis play a key role,” said an industry source on the condition of anonymity.

BY SARAH CHEA [chea.sarah@joongang.co.kr]