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Posco Profit Misses Estimates as Global Steel Prices Slide

Posco (005490)’s second-quarter profit missed analyst estimates after South Korea’s largest steelmaker faced slumping global demand and prices.

Group net income rose to 511.2 billion won ($497 million) in the three months ended June 30 from 250.6 billion won a year earlier, Posco said, falling short of the 563.1 billion won average of 12 analyst estimates compiled by Bloomberg. Sales rose 7 percent to 16.7 trillion won.

While profit doubled, it came from a lower base. In the second-quarter last year, Posco booked a 283 billion won charge related to its foreign currency-denominated debt because of the won’s depreciation.

An awaited revival in global demand for steel has eluded producers as insurgencies from Russia to the Middle East have served to damp consumer confidence. Steelmakers are shuttering plants and cutting jobs because of excess capacity in Western Europe. ArcelorMittal, the world’s biggest producer, closed sites at Liege in Belgium and Florange in France and said it’s considering halting plants in Eastern Europe on falling demand.

“There’s no movement so far showing the demand for steel will pick up any time soon,” Baek Jae Seung, a base metals analyst at Samsung Securities Co., said by phone before the earnings were released. “A strong recovery for the second half of this year is not expected as the main consumers of steel, including builders of cars, ships and houses are also struggling with sluggish demand.”

Posco sold steel at an average price of 742,000 won a metric ton during the quarter, a 6.5 percent decline from a year ago and an almost 2 percent drop from the three months ended March. Crude steel output at Posco during the quarter climbed to 9.26 million tons from 8.85 million tons a year ago, while product sales rose 1.2 percent to 8.5 million tons.

Negative Outlook

Ratings company Standard & Poor’s last month re-affirmed its negative outlook on the company, saying “regional demand for steel is unlikely to recover sharply while significant competitive pressure continues in the near term.”

Second-quarter profit was aided by falling raw material prices. Key coking coal prices touched a six-year low of $120 a ton during the quarter, while the average spot iron ore price at China’s Tianjin port fell more than 18 percent from a year ago.

Posco shares rose 0.8 percent to 320,500 won at the close in Seoul. The earnings were released after trading hours.

Production of cars, home appliances and ships is expected to decline in the third quarter, which is typically a slow season, Posco said in a statement today. Still, the company expects a recovery in global steel prices in the three months started July 1 because of low inventory levels.

The company forecast a 4.2 percent increase in 2014 revenue to 64.5 trillion won, higher than the 63.5 trillion won estimate given in May. Product sales are expected to climb 2 percent during the year to 34.6 million tons.

The company raised its group investment forecast for the year to 6.1 trillion won from 5.6 trillion won given in May.

Posco has no plans to buy additional stakes in ArcelorMittal Mines Canada, Yun Ki Mok, senior vice president of raw materials, said today. The Maeil Business Newspaper reported the company was gathering joint investors for the purchase, citing investment banking officials it didn’t name.

“We are asking local investors to buy stakes in the unit because we want to stop our competitors in China and Japan from buying stakes,” he said.

To contact the reporters on this story: Heesu Lee in Seoul at hlee425@bloomberg.net; Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Indranil Ghosh

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