11 Januari 2010
Posco Pursues $30 Billion Expansion to Catch China

Posco, Asia's most profitable steelmaker, is set to report the highest net income in six quarters as prices recover. Further growth depends on $30 billion in overseas expansion.

Chief Executive Officer Chung Joon Yang last week added plans for a $7 billion plant in India's Karnataka state to a $12 billion project in Orissa in the south Asian nation and a $6 billion Indonesian plant. Together with an investment in Vietnam, the South Korea-based company may leap from fifth-place to regain its spot as Asia's largest steelmaker.

Chung, 61, who took the helm in February, wants to regain ground lost to China's Baosteel Group Corp. Three years of delay at the Orissa project and slowing domestic growth weighed on the stock, with Posco lagging behind ArcelorMittal, the world's largest mill.

"Posco has to show that it is a growing company," said Kim Do Joon, a Seoul-based fund manager who helps manage $1.5 billion of assets including Posco shares at Hanwha Investment Trust Management Co. "They cannot expect a growth momentum from the local market."

Shares of Posco, which counts Warren Buffett's Berkshire Hathaway Inc. as a stakeholder, climbed 3 percent to 624,000 won at 9:12 a.m. in Seoul trading. They rose 63 percent last year compared with an 89 percent gain in ArcelorMittal. China's Baoshan Iron & Steel Co. and Hyundai Steel Co. doubled.

Profit Double

Profit at the Pohang-based company may almost double to 1.37 trillion won ($1.2 billion) in the three months ended Dec. 31, according to the median estimate of 23 analysts compiled by Bloomberg. It may be the largest quarterly gain in three years. Chung will announce results at 4 p.m. Seoul time on Jan. 14.

The company will announce its 2010 investment plan on the same day, spokesman Choi Doo Jin said. The Korea Economic Daily reported it would invest 10 trillion won this year, without saying where it got the information.

"I'll try to boost the future competitiveness of the company through investments and M&As," Chung, a 35-year Posco veteran, said in February when he took over the job. He declined to be interviewed for this story on his first full-year earnings result as CEO.

In the past year, Chung has acquired Asia Stainless Corp. in Vietnam, TaihanST Corp. in Korea, and is in talks to buy Thailand's Thainox Stainless Pcl. He's approved U.S. and Chinese expansion and is studying a bid for Daewoo International Corp., which has a Myanmar gas project worth at least $4 billion.

Three-Prong Expansions

"Scale is pivotal for competitiveness," Posco's Choi said in an interview. "We're going into India and Indonesia with a main focus on resources and into Vietnam on markets."

Those expansions will add 28 million metric tons of capacity, or 85 percent of Posco’s 33.1 million tons crude steel output in 2008. The Orissa and Indonesian projects alone may add 60,000 won to Posco's stock price, said Kim Gyung Jung, an analyst with Samsung Securities Co.

Chung, who studied at the nation's top Seoul National University, was head of Posco Engineering & Construction Co. when he was picked to be CEO. The metal engineer, who snowboards and plays the saxophone, has spent most of his career in production after joining Posco in 1975.

Like Buffett, Chung is seeking to take advantage of the crisis to expand. Posco is the only steelmaker among the 10 biggest that didn't report a loss in any quarter in the 12 months ended Sept. 30, according to data compiled by Bloomberg.

Aggressive Investments

"You have to invest when others don't," Samsung's Kim said. "You can avoid competition and pre-occupy markets, leaving little room for latecomers."

Steel demand may grow 9.2 percent this year as the global economy rebounds from the recession, the World Steel Association forecast in October.

Posco will be able to maintain its risk profile during the course of "aggressive investments," Standard & Poor's said Dec. 14. It has 8 trillion won ($7 billion) in cash, near-cash items, short-term investments and receivables as of Sept. 30.

Posco is pressing ahead in Orissa after winning government approval to acquire 88 percent of the land needed, spokeswoman Choi Youn Joung said Jan. 4. The project has been delayed since 2007 when construction was to start. It still needs approval from remaining villagers and a permit to mine iron ore, required to feed its steel plant. The delays won’t affect plans for the 6-million-ton plant in Karnataka that were revealed last week.

Chung also has to progress Posco's $5 billion investment in Vietnam, where the government in 2008 told the company to seek a new location for its plant.

Right Thing

"Targeting India, Vietnam and Indonesia is the right thing to do to prepare for the future as demand outlook for the emerging markets is quite good," said Im Jeong Jae, a Seoul- based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $26 billion in assets including Posco shares.

Southeast Asia is the world’s biggest net importing steel market with demand expected to grow 9.2 percent a year, according to Posco's Research Institute.

Posco dropped to sixth in global steelmaking in 2008, overtaken by Baosteel and Hebei Iron & Steel Group. China plans to create one or two producers the size of ArcelorMittal. The world's largest steelmaker had 101.6 million tons of output in 2008, three times Posco's production.

"Bigger Chinese rivals may eventually threaten Posco's edge in high-end products such as automotive steel," said Chung Ji Yun, an analyst with HI Investment & Securities Co. in Seoul.

(Source: SEAISI Website)

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