POSCO struggles in Middle East

By Lee Hyo-sik

POSCO and its affiliates, including Daewoo International, have been struggling to push ahead with their business projects in Saudi Arabia, Iran and other Middle Eastern nations amid deteriorating economic conditions in the region.

Besides falling crude oil prices, the escalating tension between Saudi Arabia and Iran has made matters worse for the world’s fourth-largest steelmaker, which may force it to choose one nation over the other should bad go to worse, according to industry analysts.

POSCO, headed by Chairman Kwon Oh-joon, is currently seeking to export its FINEX technology to Iran, while Daewoo International, its trading and resources development arm has been trying to establish a joint car plant with the Saudi government.

POSCO Engineering & Construction (E&C) plans to set up a construction firm jointly with Saudi’s sovereign wealth fund. But the project has remained in the doldrums because of Saudi’s worsening economy.

“After the Public Investment Fund (PIF) of Saudi Arabia purchased a 38 percent stake in POSCO E&C for $1 billion last year, POSCO has been exploring a range of business opportunities there,” said an analyst at one of Korea’s major business associations, who declined to be named. “But things have not proceeded smoothly amid plunging oil prices and the escalating geopolitical tension.”

The analyst said it would take longer than initially expected for POSCO and its affiliates to see their investments payoff in the Middle East.

“Saudi Arabia is suffering from massive fiscal deficits, hit hard by falling crude prices. Iran has been emerging at a slower pace than expected from the years-long economic sanctions imposed on it by the United States and other Western countries,” he said. “The escalating conflicts between Saudi Arabia and Iran will make things much more difficult for POSCO to find new business opportunities in the increasingly unstable region.”

Reflecting the steelmaker’s difficulties in the Middle East, POSCO Chairman Kwon said Wednesday that the global business environment will likely deteriorate in 2016.

“We will have to wait and see,” Kwon said, when asked about POSCO’s business prospects in Saudi Arabia and Iran, indicating that things have not moved as the firm had planned.

A company spokesman said nothing has been decided yet as to whether it will export FINEX technology to Iran.

“We are talking with the Iranian government to help it construct the FINEX steel mill, capable of producing 20 million tons of steel annually. But the project is still in its early stages. The economic sanctions imposed on Iran have not been completely lifted,” he said.

The FINEX technology is said to allow the direct use of cheap iron ore fines and non-coking coal as feedstock, resulting in significantly lower operating costs and lower emissions than a blast furnace process.

POSCO E&C’s plan to set up a joint venture with PIF has not moved forward either, given the fund’s deteriorating financial health.

“We opened an office in Saudi Arabia to establish a joint construction firm with the Saudi fund,” a POSCO E&C spokesman said. “We are moving as planned but there isn’t much we want to share with the press at the moment.”

Daewoo International is also having difficulties in setting up a joint carmaker with the Saudi government as it is taking much longer than expected to recruit auto parts suppliers and other entities that offer components and technologies needed to produce vehicles.

“We are now fine-tuning terms of the contract with our Saudi counterparts. We will soon be able to sign a contract to begin the project,” a Daewoo International official said. “Daewoo will have a 15 percent stake in the envisioned carmaker. We are also talking with engine and other auto parts makers to have them join the project.”

But it may take many years for the planned plant to be built and start producing vehicles, mostly compact sedans, the analyst said.