Steel Giant to Flex Corporate Muscle
By Kim Yoo-chul
A tumble in profits for the latest quarter doesn't appear to be a major hurdle to POSCO's merger and acquisition (M&A) attempts.
Firmly believing there will be a fast recovery in the global raw materials market over the remainder of this year, the country's biggest steel maker is seeking more opportunities for further external growth.
POSCO officials say it might strike an M&A deal either sometime in the second half or the first half of next year.
Making such scenarios plausible is the company's stable internal cash reserves. As of the end of the second quarter, cash assets held by POSCO reached 5.3 trillion won, according to the company.
Among the projected 7.3 trillion won of this year's total investment in facilities, POSCO plans to spend some 2 trillion won to back up its M&A efforts, it says.
"POSCO is progressing toward overseas acquisitions as M&A is one of the company's key strategies for external growth," POSCO chief financial officer Lee Dong-hee said recently.
"For the time being, however, we can't specify the target regions or even players."
He added that some steel players which had seen rapid external growth via M&As are in restructuring mode, creating better opportunities for POSCO.
Its firm stance toward M&A moves is different from that of other export-driven local companies, such as the makers of electronics, cars and telecommunications equipment.
For example, the head of Samsung Electronics' investor relations team Robert Yi recently declined to confirm market talks over the acquisition of a non-memory chipmaker, citing uncertainties among the global economies.
LG Electronics CFO Jeong Do-hyun also rejected the possibility that it would buy Germany's Conergy for further growth in its relatively weak solar business.
"The business-to-consumer (B2C) market is highly volatile, while the business-to-business (B2B) market is affected by long-term moves in global business. That's why POSCO is taking a different track toward M&A than others," said an analyst at Goodmorning Shinhan Securities.
Lee's remarks came after the company decided to buy a 90-percent stake in Vietnam's Asia Stainless and to build a plant in India, forecasting a demand recovery in the second half.
Helped by cheaper raw materials and reviving demand from carmakers and shipbuilders, Lee said operating profits will jump at least three times in the second half from about 500 billion won in the first.
Asia Stainless, Vietnam's only cold-rolled stainless steelmaker, has an annual capacity of 30,000 tons and plans to expand output to 85,000 tons by 2010. POSCO said in May it would take control of a stainless steel unit of Taihan Electric Wire.
But POSCO denied rumors of a possible joint venture with ArcelorMittal on stainless steel.
"We don't have a plan to set up a joint venture of ArcelorMittal STS division at this point. We haven't received any official request from ArcelorMittal," a company spokesman said Thursday.
ArcelorMittal was reportedly moving to spin off its stainless activities ― worth approximately $3 billion ― through a joint venture with POSCO.
No Interest in Daewoo Construction
POSCO has also emerged as one of the potential buyers for a stake in Daewoo Engineering & Construction.
But the chances of a purchase appear to be slim at the moment. "POSCO's chief financial officer said it has no significant interest in bidding for Daewoo," an analyst said.
"There are speculative views that POSCO and Lotte Group will bid for Daewoo. After analyzing the officer's comments, I can say POSCO wants to extend its footsteps into steel-related fields," another analyst said.
Stakes in Daewoo are now on sale. Kumho Asiana Group and financial investors together control about 72 percent of the firm, with the group directly owning a 33-percent stake.
Main creditor Korea Development Bank wants a 50-percent stake plus one share in the builder sold, while Kumho Asiana prefers a smaller stake sale.
Many analysts say POSCO will get more ammunition from rising export prices, reviving demand and weakening pressure to cut product prices at a time when the steel maker's global rivals are raising theirs.
"POSCO's operating profit will reach nearly 1 trillion won in the third quarter and over 1 trillion won in the fourth quarter," said Um Jin-seok from Kyobo Securities. "That means it has the ability to pursue an overseas acquisition move."
As for a back-up plan to achieve such ambitious target, POSCO is still negotiating iron ore pricing with BHP Billiton. The world's third-largest iron ore miner earlier said it had agreed with unnamed customers to take a 33-44 percent price cut for contracted iron ore shipments.
But some are worried over another oversupply in the global steel industry, as POSCO's global rials are restarting production lines.