SEOUL (Reuters) -- Hyundai Motor Co. is poised to report a 14 percent fall in quarterly earnings on Thursday, hit by higher steel prices and heavy marketing costs, according to a Reuters survey.
Analysts have warned that Hyundai's profitability may weaken further due to ballooning labor costs, wilting external demand for cars, particular in China, and cutthroat competition in a sluggish domestic market it dominates with a 42 percent share.
While healthy exports to China and Europe led overall sales in the June quarter, they failed to offset lagging sales at home where consumer spending has slowed, analysts said.
"Hyundai ramped up marketing expenses to tackle freezing domestic sales. This, together with the rising costs of raw materials, probably hurt Hyundai's bottom line," said Song Sang-hoon, a Hyundai Securities analyst.
Global steel prices, which make up 7 percent of Hyundai's total material costs, rose 14 percent in the first half. Analysts said an average 10 percent boost in steel prices would increase Hyundai's costs by 190 billion won ($164 million) this year.
Hyundai is estimated to have earned net profit of $421.6 million for the three months to June, according to a Reuters survey of seven analysts, compared with a profit of $490 million in the same 2003 quarter.
Second-quarter sales are expected to have risen by 8 percent to $6.09 billion, with local sales down 11 percent to 144,336 units and exports, which make up 60 percent of earnings, up 23 percent to 427,666.
Hyundai is expected to post a $1.97 billion net profit in 2004, up 17 percent, according to Reuters Estimates.
There is some market optimism about next month's launch of an upgraded version of the EF Sonata sedan, a top seller in Korea. The new Tucson, a smaller version of the hot-selling Santa Fe SUV, hit showrooms in Korea in April and is set to debut abroad this year.
Unionized workers at Hyundai agreed early this month to accept a pay rise of more than 6 percent and a one-off bonus, which analysts say would raise labor costs by $302 million, or 13.8 percent, this year to $2.48 billion.
The settlement followed a five-day strike.
Investors are also concerned that Hyundai Motor may be forced to support sibling firm INI Steel's takeover of bankrupt Hanbo Steel, analysts said.
"Poor consumer sentiment could last longer than expected and if domestic sales worsen, domestic marketing costs -- already rising sharply since May -- will increase more," said Kim Hag-ju, a Samsung Securities analyst.
"To make matters worse, we believe overseas auto demand growth could slow due to interest rate hikes," Kim added.
Car sales in China fell for the third straight month in June as Beijing's efforts to rein in its red-hot economy kept buyers at bay and forced manufacturers into a round of price cuts.
Hyundai and affiliate Kia Motors Corp. last month unveiled plans to invest more than $1 billion extra in China, the world's fastest growing automotive market, where Hyundai has set a goal of producing 600,000 units per year.
Hyundai holds a 2.1 percent share of the European market, and ranks seventh in U.S. sales with a 2.4 percent market share, just after Nissan Motor Co. and above Mitsubishi Motors Corp.
Hyundai wants to become one of the world's top five automakers by 2010. It now ranks seventh.