By Lee Hyo-sik
A dismal performance in the first three months of the year foreshadows unchartered territory for POSCO, the world’s third largest steelmaker.
Analysts warn POSCO Chairman Chung Joon-yang’s aggressive merger and acquisition (M&A) drive has worsened its financial soundness and failed to create synergy over the past few years. They say the company should have entered resources development business earlier than it did.
POSCO blames surging prices of iron ore and other raw materials and the global oversupply of steel but is confident of doing better from the second quarter, citing a recovery in global steel demand and lower commodity prices.
Most analysts agree it will perform better in the coming months, but caution it should not become complacent.
They stress the firm needs to make an all-out effort to cut costs and develop state-of-the-art technologies to maintain its competitive edge.
POSCO said its first-quarter operating income fell 41.2 percent to 423 billion won from a year earlier.
The figure was also the lowest quarterly-earning since the first quarter of 2009.
“Prices of iron ore surged about 40 percent this year from 2011. But demand for steel products plunged, weighed down by the European debt crisis and slowing Chinese economy,” the company said in a statement.
Chinese steelmakers have boosted production to capture larger market shares, making POSCO and other local producers unable to reflect rises in prices of iron ore and other raw materials, it said.
“We will soon consume commodities that we bought last year at higher prices, which will help us reduce material costs in the future,” POSCO said.
This might not last for long as Mun Jeong-up, senior analyst at Daishin Securities, said the steel firm could face pressure from its corporate customers again to cut prices of various steel products in the coming months as it purchases raw materials at lower costs.
“Given uncertainties surrounding global economic conditions, POSCO will continue to face hardship to turn its business around both at home and overseas.” But Mun agreed with POSCO’s assessment, saying that the second quarter for the steelmaker will be better.
“I think the steel industry hit the bottom in the first quarter. Business will improve for POSCO from April to June. But the recovery could be short-lived if the world economy continues to remain stagnant.”
Worsening financial standing
Mun said POSCO bought Daewoo International for above the market price two years ago.
The company acquired the resources development firm at 3.37 trillion won in 2010 and has spent trillions more to construct plants in foreign countries, as well as buy stakes in iron ore and coal mines overseas. Chung took the helm of POSCO in February 2009 and unveiled a grand scheme to turn it into a comprehensive material enterprise.
To finance a series of M&A, POSCO’s debts more than doubled to 26.8 trillion won in 2011 from 12.2 trillion won in 2009. Late last year a worsening balance sheet led Standard & Poor’s to downgrade POSCO’s credit rating by one notch to A- from A.
To help resolve its cash crunch, POSCO recently disposed of some stakes in SK Telecom, KB Financial Group and Hana Financial Group, to raise about 583 billion won.
“Most analysts think POSCO paid more than it should have for Daewoo. Some say Chairman Chung’s M&A spree is in line with President Lee Myung-bak’s resources development campaign to boost the nation’s self-sufficiency,” the analyst said. “But it is too early to say whether Chung’s aggressive expansion was a sound decision or not.”
Others comment that the timing was off. Aum Jinseok, an analyst at Kyobo Securities, said POSCO should have made inroads into the resources development sector earlier than it did.
“Things would have been much better if the steelmaker had bought stakes in iron ore and coal mines overseas during former Chairman Lee Ku-taek’ reign,” Aum said. “When the company fails to create synergy between Daewoo and existing POSCO’s units, and faces financial difficulty, employees tend to blame the CEO. That is the way it is.”
POSCO is also facing fresh legal battles with Nippon Steel. The Japanese firm claims patent infringement in electrical steel sheet technology.
On April 25, Nippon Steel filed a lawsuit with a Japanese court seeking the suspension of POSCO’s production and sales of highly-profitable electrical steel sheets. POSCO flatly rejected the allegations. It said it will take all possible measures and sternly respond to Nippon Steel’s legal action.