POSCO <005490.KS>, the world's third-biggest steelmaker and backed by billionaire investor Warren Buffett, cut its 2011 investment plan and painted a dim outlook after posting a 6 percent rise in quarterly profit that met market expectations.
The outlook from POSCO, which kicks off the earnings reporting season for major Asian steelmakers such as Baosteel <600019.SS> and Nippon Steel <5401.T>, bodes ill for the sector.
Although prices of raw materials such as iron ore and coking coal are softening, weakness in developed economies and tight credit conditions in China are expected to weigh on steel prices.
Unless the global economy gets better and sparks demand, POSCO's steel business will stagger for at least two to three years, pressured by low-end Chinese products, global oversupply and its domestic rival Hyundai Steel growing fast, said Kim Se-hoon, a fund manager at Assetplus Investment Management, which owns POSCO shares.
The company, which trails ArcelorMittal
The profit edged up from 1.03 trillion won a year ago, thanks to higher sales volume and prices, but fell from 1.5 trillion won in the previous quarter because of higher raw material costs, POSCO said.
BLEAK Q4 EARNINGS
POSCO Chief Financial Officer Choi Jong-tae said the steelmaker's fourth-quarter operating profit may decrease to below 1 trillion won and that steel prices are expected to fall until the first half of next year.
I expect our fourth-quarter earnings to be the worst among this year, Choi told analysts after its earnings announcement.
He also said the firm's capital expenditure is unlikely to rise next year, after it slashed this year's investment plan by 18 percent to 6 trillion won.
POSCO said it expected global steel prices to remain weak because of an oversupply, while demand growth is seen slowing due to sluggish economies in advanced countries and China tightening.
At home market, Korea turned into a net steel exporter because volume growth outpaced steel consumption growth...Demand decline is expected to continue in the second half because of sluggishness in major industries, POSCO said in a statement.
The weak won is also set to increase costs of imported raw materials for South Korean steelmakers in the fourth quarter.
The won, one of the region's most vulnerable currencies to global turmoil, lost more than 9 percent against the dollar in the third quarter and is widely expected to remain under pressure over the coming months as global economic jitters dampen investor appetite for riskier assets.
POSCO raised its cost-cutting target to 1.4 trillion won for this year, from the previous 1 trillion won.
Shares of POSCO, in which Buffett's Berkshire Hathaway
POSCO shares ended up 0.3 percent prior to the result on Friday, versus a 1.8 percent gain in the wider market.
($1 = 1145.200 Korean Won)
(Additional reporting by Ju-min Park, Tae-yi Kim and Yoo Choon-sik; Editing by Jonathan Hopfner and Muralikumar Anantharaman)