beyondbrics

The slowing global economy and rising raw material costs are taking a toll on steelmakers worldwide. Posco, the world’s most profitable, is no exception.

The South Korean company reported a 12 per cent fall in profits last year as the eurozone crisis and China’s slowing rate of growth dampened demand. There was some improvement in the fourth quarter – but not as much as analysts expected.

Net profit at the world’s third-largest steelmaker fell to Won3.7tn ($3.3bn) from Won4.2tn in 2010. Fourth-quarter operating profit rose 33 per cent to Won692bn from a year earlier, below market consensus.

However, Posco performed better than its rivals. Baoshan, China’s largest publicly-traded mill, reported a 43 per cent drop in 2011 net profit. Nippon Steel, Japan’s biggest steelmaker, last week reported its first loss in three quarters and slashed its full-year profit target to zero. JFE Holdings forecast its fist annual loss while Angang Steel, the biggest Hong Kong-listed steelmaker, also swung to a loss last year.

Chung Joon-yang, Posco’s chief executive, forecast the current quarter to be its “most difficult” period and said earnings would improve in the second quarter as raw material costs got lower. But the company – in which billionaire investor Warren Buffett has a 5 per cent stake – cut its planned investment for this year to between Won4.5tn and Won5.1tn, down from Won5.7tn last year.

The uncertain global economic outlook is adding pressure to Posco, which is aggressively expanding its overseas production capacity by building plants and acquiring mines. Posco recently said it planned to invest Won1.8tn in an iron ore mining venture in Western Australia as it aims to increase its raw materials self-sufficiency ratio to 50 per cent by 2014 from 20 per cent today. Chung also expected to go ahead with one of the company’s three planned steel mill projects in India this year.

To stay profitable, Posco says it will focus on cost saving this year. It managed to cut production costs by Won1.5tn last year by using lower-grade raw materials and recycling by-products.

But investors are not satisfied with cost cutting alone. Posco’s share price has fallen nearly 10 per cent in the past year to Won417,000 as it failed to pass on higher raw material costs to customers. Its raw material costs jumped more than 40 per cent last year but the company’s average selling prices for its benchmark hot-rolled coils dropped by about 5 per cent in the fourth quarter from the previous one, according to Samsung Securities.

The company says it will monitor market conditions and adjust steel prices later. But it will not be easy to raise prices to the extent that investors want, given the Korean government’s drive to keep inflation in check. There seems to be not much the company can do to boost its flagging stock price other than wait for a global economic recovery.

Related reading:
Posco to invest in Australian mining venture, FT
Siemens warns Posco over new steel technology, FT
Posco buys Thainox for steel dominance, beyondbrics