POSCO Set to Ramp Up Rebound Amid Growing Demand
By Kim Hyun-cheol
Just looking at the numbers, POSCO's third-quarter showing might not seem too impressive. South Korea's biggest steelmaker posted 1.02 trillion won ($879.3 million) in operating profit in the July-to-September period, down 48.7 percent from a year ago.
Signals, however, point to the fact that the manufacturer is one of the few quarterly winners in the industry across the world: The figure is nearly five times higher than its mark in the previous quarter. Net profit fell 6.2 percent to 1.14 trillion won from the previous year, but still rose 165 percent from the second quarter on the back of a stronger won, which substantially cut costs of imported raw materials.
Third-quarter revenue fell 22.3 percent year-on-year to 6.85 trillion won but was up 8 percent from the previous quarter. POSCO's realized prices for exported products increased 12.6% in the third quarter, while domestic Korean demand recorded best-of-year levels across all segments. Demand from Korean shipbuilders has returned to 92% of its peak 2008 levels.
Going through a global slump late last year, other figures mostly contracted year-on-year, but have grown from three months ago in a turnaround from a steep decline earlier this year. Overall sales amounted to 6.85 trillion won, a 22.3-percent yearly contraction but an 8-percent quarterly growth. Net profit posted a 6.2-percent fall at 1.14 trillion won from a year earlier, but was still up 165 percent from the last quarter.
POSCO's operating profit was 373 billion won in the first quarter, and dropped to a record low of 170.5 billion won in the second quarter.
The company, which is competing with India's ArcelorMittal, Nippon Steel of Japan and China's Baosteel in world rankings, looks to set its full-year performance target for this year higher than it did in the second quarter based on a positive outlook for global steel demand, lower production and raw material costs.
It now aims to achieve 27.1 trillion won in sales and 3.2 trillion won in operating profit this year, up from 25.8 trillion won and 2.6 trillion won, respectively.
The rising export prices of products were mainly attributable to the improvement in POSCO's earnings, along with dropping raw material prices in international markets. Its cost-cutting efforts led to a gain of up to 288.9 billion won in the third quarter, POSCO said.
Belt Tightened, Global Stance Accelerated
Since new CEO Chung Joon-yang took over in March, the company has been striving to cut costs in production and management in a belt-tightening program that includes the use of cheaper fuels and the expansion of production spinoff applications.
This year so far, it has saved 127.3 billion won, including 288.9 billion won in the third quarter, reaching 87 percent of its annual target, according to a POSCO report last month.
Stances of the company on the global level, however, are in stark contrast with its internal frugality. The steel giant plans to focus its efforts on operations in new overseas facilities, as well as investment in resource exploration projects and the development of new materials, in a blueprint for long-term strategies.
In the third quarter alone, POSCO began the commercial operation of its first overseas steel plant in Mexico, and also completed construction of a cold-rolled steel mill in Vietnam.
In August, POSCO began commercial operation of the company's first overseas steel coil production plant in Altamira, where Mexico's largest automobile clusters are located, placing the steel mill in the group of prime suppliers of high-end sheets to the global auto industry.
The continuous galvanizing line (CGL) in eastern Mexico is equipped with a production capacity of 400,000 tons of steel a year, spurring POSCO's annual automotive steel coil output to almost 7 million tons. With the addition of the CGL plant, it now covers a comprehensive supply service ― from manufacturing and processing to sales ― in the region that produces more than 2 million vehicles per year.
Earlier, POSCO completed a series of Asian facilities to broaden its global production. It completed steel-processing plants in India and Thailand in April to better meet the steel demands of electronic and auto companies.
In May it established a plant in Japan with an annual processing capacity of 150,000 metric tons to be used for automobile production. The Japan factory, named POSCO-Japan Kyushu Processing Center, will facilitate the steel demands of Japanese car maker Toyota Motor.
Cash-rich POSCO has recently been shopping for some "good buys" to help build its profile and network overseas, with the latest addition being a Vietnamese stainless steel mill purchased in July.
Most recently, the company completed construction on a plant in Vietnam that will produce 1.2 million metric tons of steel a year to tap into the fast-growing Southeast Asian market.
The $528 million cold-rolled steel plant in Vung Tau, near Ho Chi Minh City, will be sold to Vietnam and other Southeast Asian nations including Thailand, Indonesia, Malaysia and the Philippines.
POSCO, which is planning a $1-billion steel project in India, is joining global rivals such as ArcelorMittal in seeking to build plants in Asian economies with demand surging for cars and buildings. Demand for steel in Vietnam is projected to increase 8.7 percent a year until 2020.
What further buoys POSCO is the anticipation that global steel demand will continue to grow next year. According to last month's data from the World Steel Association, the overall volume is expected to grow 9 percent to 1.21 billion tons in 2010, as demand is projected to grow by 15 percent in developed countries and 10 percent in emerging markets.
Global steel output increased to 107 million tons in September, down 0.6 percent from the same month last year, according to the World Steel Association. Month-on-month, however, steel output improved slightly from 106.5 million tons as worldwide crude steel production has been continuing to steadily grow since April.
Steel production had reached its highest level in July this year on the back of a moderate rise in demand and the resumption of idled facilities by producers. The total output of 103.9 million tons was an improvement of 4 percent from 99.8 million tons in October, but down 11.1 percent year-on-year.
Analysts expect POSCO to perform even better in the current quarter, leading a global steel market recovery, backed by healthier demand from domestic automakers, whose need for flat steel was fueled by robust domestic and overseas sales.
Independent International Investment Research (IIIR), a U.K.-based research firm, forecast last month that steel prices bottomed in the first quarter of this year. Production cuts by major steel producers have reduced supplies while massive stimulus spending by various governments on infrastructure and construction and a rebound in economic activity as recessionary forces subside is boosting demand.
This is especially positive for POSCO given its position as one of the lowest-cost steel producers, enabling it to generate healthy cash flows even when prices are depressed. The company was able to increase steel prices for three consecutive months from June to August before maintaining them in September, IIIR said.
Additionally, the company has successfully negotiated a substantial cut in annual contracted prices for iron ore and coking coal which will further boost margins in the coming fiscal year, which adds more credibility to an optimistic outlook for the company.