POSCO Rides Out Global Slowdown Storm
Cost Cuts, Efficient Measures Power Korean Steel Giant’s Growth, Productivity
By Jane Han
Staff Reporter
Steel makers around the world don't have good memories of last year. Battered by dwindling orders, production cuts and tanking steel prices in the second half of 2008, companies witnessed a boom-to-bust scenario that wiped out even the good times in the first half. But is the worst over yet?
Some analysts carefully suggest that depressed prices could make a rebound but add that an overall recovery of steel demand won't be likely until the second half of the year.
According to Fitch Ratings' 2009 global steel outlook, issued earlier this month, the current sharp contraction in steel demand will continue through the first half of 2009, as the global financial crisis reduced construction activity and weakened demand for consumer durable goods.
The building boom in China and the Middle East has been fanning demand for steel goods for the past several years, but demand has sharply slowed since August 2008.
In the report, Fitch said, ``Demand for steel should improve following the aggressive expansion of central bank liquidity provisions since early September, in combination with major fiscal injections to the U.S. and European banking system, as well as major stimulus packages announced for China and expected for the U.S.''
It said ``real demand'' will recover in the second half of 2009.
Such weakening consumption has forced steel makers to respond by cutting output.
ArcelorMittal, the world's No. 1 producer, doubled its output cut to some 30 percent. Nippon Steel, the world's second-largest maker, in November slashed output by 2 million to 2.2 million tons, while South Korean steel giant POSCO also announced its first-ever production cut by slashing output by 200,000 tons in December and by 370,000 tons in January.
POSCO Research Institute (POSRI) said Tuesday that the production adjustments and uncertain market conditions may ultimately shake up the current order of steel supremacy.
For POSCO, the world's fourth-largest maker and considered the most efficient, the timing may be ideal to beat out its rival players.
What is POSCO's Strategy?
The steel giant says it is going forth with increased flexibility this year.
``Slugging demand for steel coupled with turbulent raw material prices and currency rates make it difficult for us to set out a clear cut plan for this year,'' said Lee, adding that POSCO will set two separate plans based on two different scenarios. ``This will help us respond in a more flexible way.''
It seems like an ideal approach, according to Fitch, as it says that companies with strong balance sheets and flexible operations will fare best over the latest downturn.
``Flexible operations will allow production cuts to optimize profitability and conserve cash,'' it said.
Aside from flexibility, Asia's third-largest steel firm sees cost cutting as essential for survival.
It said that the company is aiming to cut costs by 958.4 billion won this year, up from 738.2 billion won last year. In-house programs, such as Quick Six Sigma (QSS), Six-Sigma and work diet, have increased productivity and eliminate waste factors, POSCO says.
The company also said it would expand its usage of cheaper fuel and more by-products released from its furnace.
Securing raw materials is another urgent task for POSCO, which says that it would increase its investment to lock in a stable supply of essential raw materials.
Iron ore prices have risen consistently in recent years and hit a record high last year. Coking coal producers from Australia, Canada and Russia will start talks soon with steel makers to settle contract prices for the year starting April 1.
Normally, deals would have been concluded by this time, but miners and steel mills have not yet kicked off negotiations yet on account of steel market turmoil.
Taking a turn from its years-long bullish run, industry experts expect mineral prices to fall, but POSCO still stresses the need to aggressively invest to prepare for when prices increase again.
Most recently, POSCO announced a deal last July to develop nickel mines in New Caledonia and export the ore to South Korea over the next 30 years. It also bought last June a 10 percent stake in Macarthur Coal to secure a steady supply of coal. In April of last year, the steel giant bought a 13 percent stake in a manganese mine in South Africa as well.
Investment Continues
Despite the gloomy circumstances, POSCO eyes the current crisis as an opportunity for growth.
Lee said recently that the company will ``once again steer ahead of its rivals when circumstances seem insurmountable.''
To power growth, the company announced last month that it would invest a record 6 trillion won in 2009, more than a 50 percent jump from 2008.
``It's not easy to carve out a large amount of money during these pressing times, but it's essential for us to prepare now for when the economy rebounds,'' said Lee.
POSCO plans to beef up its investment in research & development (R&D) by allocating 1.44 percent of the company's revenue to innovation, more than last year's 1.35 percent.
The Pohang-based firm also expressed interest in acquisitions, stake purchases and partnerships overseas to rev up its presence abroad.
Analysts welcome POSCO's move, as they say that the company could put its cash pile to better use. The company, considered to be in strong financial standing, posted gains last year.
POSCO's performance last year fared weaker than analysts' estimates but remained strong.
The company posted earnings of 30.6 trillion won in 2008, up 38 percent from the pervious year due to higher global sales prices.
In the fourth quarter of 2008, net profits rose 1.1 percent over the previous year to 721 billion won.
