15 April 2010
POSCO Ups Target; Steel Price Rises may be Small

POSCO's stronger 2010 steel sales will be eroded by rising costs and global monetary tightening, offsetting firm demand from appliance and auto makers and keeping earnings at similar levels to the first quarter.

Asian steelmakers led by Japan's Nippon Steel and China's Baosteel are set to raise steel prices to defend margins after agreeing to pay nearly double for iron ore imports and accepting a quarterly pricing system instead of annually fixed deals.

South Korea's POSCO, the No.4 global steelmaker, on Tuesday raised its 2010 sales target by 8 percent, saying the recovery in demand would continue this year.

But the rise in sales is unlikely to translate into fatter profits, as the uncertain economic outlook may hold back steelmakers' efforts to fully pass on soaring costs to customers.

"Unless the economy enters a full-fledged recovery phase, it won't be easy to raise product prices enough to fully reflect higher raw material prices," said Jung Sang-jin, a fund manager at Dongbu Asset Management.

"The construction sector is not in full health yet and even the expected increase in shipbuilding orders will not be significant... Earnings momentum is solid for the time being and steel companies may be a short-term buy, but longer term I don't think the sector is attractive."

Reflecting such concerns, shares of POSCO, Asia's most valuable steelmaker by market value and South Korea's second-largest listed company, have lost 15 percent from its two-year highs in early January.

The stock, in which billionaire investor Warren Buffett's Berkshire Hathaway owns about 4.5 percent, closed down 1.3 percent on Tuesday prior to the results.


Mills in Asia, the world's biggest producer and consumer of steel, face rising costs as the industry switches from a 40-year-old annually-fixed pricing of raw materials to quarterly pricing scheme, and spot prices of iron ore continue to rally.

POSCO expects the global recovery in steel demand to continue this year, but analysts flagged rising cost pressures, combined with slower growth in China and weaker auto demand, may hit sales and crimp profits.

"My biggest concern is when this strong market momentum will come to a halt," said Atsushi Osa, a fund manager at Toyota Asset Management in Tokyo.

"It's unlikely the government-incentive backed demand for cars will continue indefinitely...and when demand softens in China, that will deal a heavy blow to shares in Asia's steelmills."

POSCO lifted its 2010 sales target by 8 percent to 31.9 trillion won ($28.6 billion) and crude steel output forecast by 100,000 tonnes to 34.5 million tonnes.

(Source: SEAISI Website)

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