Bumpy Road Ahead
Korean steel companies are focusing on improving their financial structure. As the recession continues, they are trying to increase the cash flow by sell-offs of minor businesses and IPOs of subsidiaries. This is how they react to a chronic recession of the industry, due to increasing supply and decreasing demand.
According to sources in steel industry on July 10, the big four steel companies of POSCO, Hyundai Steel, Dongkuk Steel, and Dongbu Steel are trying to restructure their financial status during the second half this year. Facing serious liquidity problems, some companies are even considering selling out not only minor businesses but also healthy subsidiary companies.
Although POSCO, the number one steel company in Korea, is relatively stable compared to other companies, financial restructuring is still very crucial. Since Chairman Kwon Oh-joon has come on board, the IPO of subsidiary companies such as POSCO Energy and selloff of Daewoo International, one of POSCO's major subsidiaries, have always been options. POSCO is planning to make money by selling off marketable assets without seriously impairing its competitiveness in market. POSCO decided not to acquire the package of Dongbu Steel Incheon plant and Donbgu Power Dangjin due to financial difficulties, as well.
Hyundai Steel is also speeding up on financial restructuring by appointing Kang Hak-seo as CEO. CEO Kang, ex-CFO, is expected to be very strict in his management activities. Hyundai Steel is the only company with a two-digit growth rate in both revenue and profit among all Korean steel companies. However, Hyundai Steel has a high debt ratio because of big investments so far. Its debt ratio during the first quarter of this year is 121.69 percent, which is higher than the 90.02 percent of POSCO, number one in industry.
Dongguk Steel, number 3 in the industry, is having very hard times these days, as it is the only case among all Korean steel companies to form a financial restructuring contract with creditors. Before the financial restructuring contract, Dongguk Steel gained 200 billion won (US$196.6 million) in capital by issuing new stocks. Chairman Jang Sea-joo’s family participated in this.
As the selloff of Incheon plant has failed, a creditor council started to control Dongbu Steel in order to improve its financial structure and stabilize management. Depending on the agreement of the creditor council, exercising debenture will be postponed and due diligence executed for three months. Dongbu Steel is also trying to sell out Dongbu Special Steel, number two in the Korean special steel market.
Some claim that it will take very long for steel companies to achieve financial stability even with a lot of efforts.
Jung Min-soo, director of Korea Investors Service, predicted, “The market outlook for construction and shipbuilding which require steel is still quite bad. It will take time to improve financial structures due to a long-lasting recession of the steel market and other front industries.”