POSCO warns of slow steel demand, high costs in H2

By @ibtimes on

POSCO <005490.KS>, the world's No.3 steelmaker, warned of weakening demand growth and persistently high input costs in the second half, after posting a 17 percent fall in quarterly operating profit.

Steelmakers' earnings are set to be further squeezed as record production in China floods the market when demand is under pressure from tightening monetary policy in China and debt problems in Europe and the United States.

High prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of a sharp retreat.

Sluggish demand and the oversupply issue will stay for the time being (and) Chinese demand will not strengthen. Investors do not find POSCO attractive, said Kim Se-hoon, a fund manager at Assetplus Investment Management, which owns POSCO shares.

POSCO, which trails ArcelorMittal and Baosteel <600019.SS>, did not give a profit outlook for this year in its earnings statement, but its CFO Choi Jong-tae told reporters that its second-half operating profit was expected to be slightly lower than the first half's 2.4 trillion won.

It reported 1.5 trillion won ($1.4 billion) in April-June operating profit, broadly in line with the consensus forecast of 1.46 trillion won in a poll by Thomson Reuters I/B/E/S.

The South Korean firm raised its domestic product prices for the first time in nine months in April, which helped sales rise by 27 percent to 10 trillion won, but profit dipped as it failed to fully pass on cost increases.

The price rise was also overshadowed by cheaper imports from Japanese rivals struggling to make up for a demand slump from customers such as automakers after the March 11 earthquake.

CHINA, HIGH COSTS WEIGH

Tightening in China, the world's top steel producer and consumer, may weigh on demand from sectors such as automobiles, while planned construction of 10 million affordable houses this year alone is expected to keep steel output at close to record levels.

The steel market is expected to bottom out in the third quarter and gradually improve, POSCO said in a statement.

Shares in POSCO, which counts billionaire investor Warren Buffett's Berkshire Hathaway as a major shareholder, have underperformed the wider market this year.

The stock closed up 0.9 percent ahead of the earnings release on Friday in a market <.KS11> that gained 1.2 percent.

Many institutional investors have already slashed their holdings of POSCO and instead added its smaller but nimble rivals such as Hyundai Steel, as its growth outlook is not bright, said Jung Sang-jin, a fund manager at Dongbu Asset management.

With POSCO shares already lagging the market, the stock is unlikely to fall sharply from the current level.

POSCO, which generates around two thirds of its revenue from the home market, faces rising competition from cross-town rival Hyundai Steel <004020.KS>, which started its second blast furnace this year.

POSCO said its 2011 crude steel output would rise 10 percent to 37.1 million tonnes, while sales are seen rising to 39.9 trillion won from 32.6 trillion won a year ago.

The firm, which plans 7.3 trillion won of investment this year, said it was not considering bidding for a controlling stake in its core client Daewoo Shipbuilding & Marine Engineering <042660.KS>.

POSCO has been on an active acquisition trail in recent years, snapping up trading firm Daewoo International <047050.KS> and Thainox Stainless .

(Additional reporting by Miyoung Kim and Ju-min Park in SEOUL and Ruby Lian in BEIJING; Editing by Jonathan Hopfner and Vinu Pilakkott)

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