By Kang Seung-woo
POSCO’s “Vision 2020” is facing a great deal of challenge but it remains to be seen how one of Korea’s blue-chip firms will get back on track.
The global economic slump is a key factor. Also adding to this are pressures from rival firms and the rising price of raw materials. As a result, the world’s third largest steelmaker saw its credit valuation downgraded.
POSCO’s 2020 plan aims to achieve 200 trillion won in revenue by 2020.
Under the plan, unveiled in February, the group expects 120 trillion won in sales from its core steel business, with 60 trillion won in sales coming from its energy and petrochemicals-related ventures. Areas such as alternative energy are expected to generate 20 trillion won in sales by that time.
On Monday, Standard & Poor’s announced that its downgrade of the Korean steel giant’s long-term corporate credit and debt ratings to “A-” from “A” due to slowing demand, growing competition and weaker-than-expected earnings.
The downgrade came five months after the U.S.-based rating agency lowered its credit outlook for POSCO to negative from stable due to its weakened financial profile that last year invested more than 9.4 trillion won, including the purchase of Daewoo International for 3.4 trillion won.
Despite the market-welcomed failure to strike a deal to take over logistics firm Korea Express, estimated at 1.5 to 2 trillion won, POSCO was stripped of the A grade.
According to S&P, the company’s debt-to-EBITDA ratio is likely to stay above two times over the next 12 months due to weak operating performance as a result of slowing demand for steel and an erosion of its competitive position.
EBITDA means earnings before interest, taxes, depreciation and amortization.
An approximate measure of a certain company’s operating cash-flow is based on data from the company’s income statement.
POSCO, founded in 1968, has maintained a dominant position in the local steel market without any serious challenge. But recently, Hyundai Steel has aggressively strived to boost its capacity, while Japanese and Chinese firms are also exporting both high- and low-end steel products to Korea, which undermines the company’s dominance of the domestic market.
Hyundai Steel, an affiliate of Hyundai Motor Group, is constructing its third blast furnace that will enable the steelmaker to produce a combined 12 million tons of steel per year. Hyundai is producing lucrative automotive sheets and ship plates in its efforts to catch up with POSCO.
In the second quarter, Hyundai’s sales jumped by 50 percent to a record 4.05 trillion won and its operating profit increased 12 percent to 409 billion won.
Despite swinging to the red in the third quarter due to currency losses, it, along with Hyundai Hysco, another Hyundai Motor’s subsidiary, enjoy a synergy effect from the parent group, securing the No. 2 spot in the steel industry.
As for POSCO, its third-quarter earnings plunged 78.4 percent from a year earlier.
With demand for steel expected to weaken amid the global economic slowdown, Chairman Chung Joon-yang’s Vision 2020 plan may affected.
“Amid growing threats from foreign steelmakers and the economic downturn, POSCO is expected to face challenges in improving its performance in the near future. In addition, other players are setting up facilities including a blast furnace, so POSCO’s opportunities for profit generation may be reduced,” said a Seoul-based economist.
In February, Chung formed a four representative director system by adding Senior Executive Vice Presidents Oh Chang-kwan and Park Han-yong, both of whom are key aides to the chairman, to President Choi Jong-tae.