POSCO to lower steel out against price fall

By Lee Hyo-sik

POSCO, the world’s fourth largest steel maker, has decided to lower its steel production later this month as part of its efforts to combat steel prices from falling further amid the prolonged economic slump.

The firm expects plunging demand at home and abroad, and the global supply glut will continue to weigh down on the value of its products.

POSCO reduced output significantly in December 2008 following the collapse of Lehman Brothers and the consequent international financial market meltdown; its first output cut since its foundation in 1968. Through June 2009, the firm curtailed production by 2 million tons.

The steel maker said Monday that it will not operate its plants at a full capacity in late October to prevent prices of steel products from heading further south.

``We will reduce production later this month by not operating our electric furnaces at full capacity. But we will not stop running blast furnaces,’’ a POSCO spokesman said. ``It is common to adjust production volumes through the operation of electric furnaces in accordance with market conditions. So, it is not right to say that we are in full-scale downsizing mode.’’

POSCO operates two electric furnaces churning out 900,000 tons of hot-rolled steel plates each, accounting for 7.6 percent of its entire production.

Steel prices have declined over the past few years on shrinking global demand, while China and other developing economies have produced a growing volume of steel plates, creating a downward pressure on prices.

Arcelor Mittal and other major steelmakers around the world have cut production to deal with falling demand and prop up prices of their products.

In a recent international conference held in Mexico, POSCO Chairman Chung Joon-yang said global steel demand will increase 2.4 percent in 2012, down sharply from 14.2 percent.

He projected the demand will rise only 3.1 percent in 2013 from this year, adding the global economic downturn will persist for at least three more years.

Currently, hot-rolled steel plates produced by a blast furnace are priced at about 790,000 won per ton, while those churned out from an electric furnace is sold at around 770,000 won. In September alone, prices fell about 4.8 percent.

Industry analysts predict that if the prices drop to about 750,000 won, POSCO will likely cut production to stop prices from falling further. They said unlike the value of finished steel plates, the cost of coal and iron ore have continued to head upward.

``With rising raw material costs, it does not make much economic sense to operate electric furnaces when prices of steel products remain low,’’ said Aum Jin-seok, an analyst at Kyobo Securities. ``Given low global demand and oversupply, POSCO and other steelmakers will likely consider cutting production.’’

POSCO earned 32.8 trillion won in the first half, down from 33.3 trillion won in the same period last year. Its operating profit fell sharply to 1.85 trillion won from 3.1 trillion. POSCO is widely expected to continue to struggle through the fourth quarter of this year, due to stagnant steel demand.

The company said it will perform better from the first quarter of 2013, thanks to cheaper iron ore and other commodities and a global economic rebound.