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POSCO Expects to Make More Profits Thanks to Higher Steel Plate Prices
China Expected to Cut Steel Production
POSCO Expects to Make More Profits Thanks to Higher Steel Plate Prices
  • By Yoon Young-sil
  • October 2, 2018, 10:57
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POSCO  chairman Choi Jeong-woo (right) encourages employees at the second blast furnace in Pohang in July.

The price of POSCO shares dropped as much as 11.4 percent this year. It recently fell below the 300,000 won (US$270) level due to concerns over the trade dispute between China and the United States. However, market analysts rather recommend investors to buy the stock as they believe that China’s production reduction during the winter time and favorable market conditions will help improve POSCO's performance in the future.

China’s cuts on steel production to improve the atmospheric environment is highly likely to help steel prices remain at a high level. Some say that China’s steel production will not be cut down as much as expected as provincial governments, not the central government, will be in charge of supervision. However, it can be verified through the operating ratio of the blast furnace to be announced on October 12.

The market conditions are favorable as well. Eugene Investment & Securities Co. said that the increase in ship plate prices and unit price of exports would push up the average unit price of carbon steel by 10,000 won (US$9) per ton in the second half of the year compared to the previous quarter. On the other hand, the unit price of raw materials would decrease about 5,000 won (US$4.5), leading to higher profits.

The fact that China is expanding infrastructure investment amid the recent trade dispute is also raising expectations of the steel industry. Kwon Soon-woo, an analyst at SK Securities Co., said, “It is hard to predict how far the trade dispute will go, but the fact that China is considering executing measures to boost domestic demand and expand investments in order to respond to the U.S. is also a favorable factor for POSCO.”

The securities industry expects that POSCO will show a steady growth in performance. POSCO saw its sales surpass the 60 trillion won (US$53.98 billion) level again for the first time in three years last year, recording the highest operating profit in six years. Its sales and operating profit are forecast to grow 5.5 percent and 19 percent, respectively, to 63.96 trillion won (US$57.55 billion) and 5.5 trillion won (US$4.95 billion) this year. POSCO’s price-to-book ratio (PBR) estimated by Korea Investment & Securities Co. is very low at 0.5. Choi Moon-sun, an analyst from Korea Investment & Securities, said, “Given its valuation, POSCO shares are irrationally undervalued."

Recently, POSCO has started investing in its future growth. The group is planning to invest a total of 45 trillion won (US$40.49 billion) to advance the steel business and develop a new growth engine business by 2023. Out of the 45 trillion won (US$40.49 billion), 26 trillion won (US$23.39 billion) of money will be spent on establishing a smart system in the third blast furnace in Gwangyang, expanding production facilities dedicated to giga steel and building new by-product gas generating plants to maximize energy efficiency of the steelworks, 10 trillion won (US$9 billion) on advancing technologies of secondary battery materials and building new electrodes plants and 9 trillion won (US$8.09 billion) on clean thermal power and solar power projects.

In particular, POSCO chairman Choi Jeong-woo said right after taking office in July, “We will increase POSCO’s energy material market share to 20 percent and have an annual turnover of 15 trillion won (US$13.5 billion) by 2030.” The group’s two subsidiaries – POSCO ESM and POSCO ChemTech – currently produce cathode and anode, which are core materials of electric vehicle batteries and energy storage systems (ESS), respectively. POSCO is planning to grow the business by consolidating them and employing external specialists.

Meanwhile, POSCO is considered a stock to benefit from economic cooperation between North and South Korea. The group will play a crucial role in resource development, including 5.8 billion tons of iron ore buried in North Korea, and infrastructure investment that requires a considerable amount of steel. This is why eBEST Investment & Securities Co. chose POSCO as the biggest beneficiary of the inter-Korea economic cooperation and suggested the target stock price of 480,000 won (US$431.85), the highest in the securities industry, last month.