By Kim Hyun-cheol
Staff Reporter
POSCO, the nation's leading steel maker, is expected to raise prices of steel products as raw materials prices are going up.
The company has reached an agreement on annual contract prices for major steel-making materials at much higher levels than before. Following February's settlement on a 65 percent increase in iron ore imports with Brazil's Vale, it agreed Monday to pay 205 to 210 percent more to an Australian supplier for coking coal for a year starting this month.
There are several reasons for the higher-than-expected increases in contract prices, according to POSCO.
"Global demand for commodities remains high and record-setting oil prices are also affecting delivery costs," a POSCO official said. "In addition, floods in Australia earlier this year also seriously damaged coking coal supplies, leading to the unusually high (coal) price."
Australia is the biggest coal source for the Pohang, South Korea-based maker, which accounts for nearly 60 percent of its imports.
POSCO hasn't settled for several other contracts but that doesn't seem to change the outcome, with prices already set in earlier contracts working as a benchmark.
Spiking material prices inevitably lead to prime cost increases in steel products.
It takes 0.7 tons of coking coal and twice as much iron ore to produce a ton of molten iron. If iron ore is up 65 percent and coal 200 percent, each ton of molten iron will cost POSCO
an extra $200.
This means the steel maker will have to raise product prices in the end as the price burden is too large to absorb with internal cost-cutting measures alone.
Yoon Seok-man, POSCO president, made it clear last month that the company will raise steel prices as soon as possible, regardless of raw materials agreements. "The later we raise (the prices), the higher they will be," he said.
Analysts predict an increase of 120,000-150,000 won per ton. "There is still room for raising around 130,000 won per ton," said Kim Gyung-jung, an analyst with Samsung Securities.
A chain reaction of price hikes is feasible in the business because POSCO, the domestic market leader, has kept their products' prices relatively low, thus restricting increases from other makers.
Other steel-consuming businesses are also likely to raise prices of their products. In general, steel takes up some 20 percent in prime cost of products for shipbuilders, and about 5 percent for automakers.