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Posco Full-Year Profit Falls on Raw Material Costs, Demand

Posco, the world’s third-largest steelmaker, reported a 12 percent decline in full-year group profit after raw materials costs rose and demand weakened.

Consolidated net income fell to 3.7 trillion won ($3.3 billion) in the year ended Dec. 31 from 4.19 trillion won a year earlier, the Pohang, South Korea-based company said in a regulatory filing today, without providing quarterly results. Sales rose 44 percent to 68.94 trillion won.

Coking coal prices surged as supplies were hit by floods in Australia and labor strikes in Peru, Chile and Indonesia last year. Posco, which coped with a 40 percent gain in raw material expenses last year by focusing on pricier products, joined China’s Baoshan Iron & Steel Co. and Nippon Steel Corp. of Japan in forecasting weaker demand for the alloy used in cars, ships and construction this year.

“The outlook for the overall steel market does not appear to be good,” said Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $28 billion of assets. “Even if capacity growth is limited, the demand side does not appear to be strong this year.”

Global steel demand is being tempered by cooling economies in China and Europe, where orders for steel products are stagnating and are keeping the alloy’s prices and overseas shipments muted. Posco cut parent-basis capital expenditure for this year to a range of 4.5 trillion won to 5.1 trillion won from 5.7 trillion won last year.

Waning Demand

World consumption of steel may grow 3 percent this year, Posco said today. That compares with 5.4 percent forecast in October by the World Steel Association and a 4.5 percent growth forecast, the median estimate of 14 steelmakers, analysts and traders surveyed by Bloomberg. Growth may be as low as 1.2 percent, according to Bloomberg Industries analysts.

Posco fell 0.4 percent to close at 417,000 won in Seoul trading today. The announcement came after the stock market closed. The shares have lost 9.5 percent in the past year, compared with a 4.8 percent drop in the benchmark Kospi index.

The South Korean company forecast sales in 2012 will probably be in the range of 37.7 trillion won to 41.2 trillion won on a parent basis, compared with 39.17 trillion won last year. Group sales will climb to between 70.6 trillion won and 74.3 trillion won from 68.94 trillion won, it said.

‘Worst Quarter’

“This quarter will probably be the worst quarter of this year in terms of earnings,” Posco Chief Executive Officer Chung Joon Yang said in a briefing to investors today in Seoul. “However, we expect profit to improve from the second half as the U.S. economy is getting better and China, the most important market for us, is also faring well relatively.”

Group-based operating profit was 5.41 trillion won last year, compared with 5.43 trillion won in 2010, Posco said.

The company’s average selling prices for its benchmark hot-rolled coils probably dropped by about 5 percent in the fourth quarter of 2011 from the previous quarter, Chris Kim, an analyst with Samsung Securities Co., wrote in a Jan. 11 report. South Korea’s economy grew the least in two years in the fourth quarter. Local demand for steel may climb 1.0 percent this year, Posco said today.

Baoshan, China’s largest publicly traded mill, said Jan. 13 that its unaudited 2011 full-year net income fell 43 percent. Nippon Steel, Japan’s largest steelmaker, last week reported its first loss in three quarters and cut its full-year profit target to zero, while JFE Holdings Inc. forecast its first annual loss. Angang Steel Co., the biggest Hong Kong-traded steelmaker, swung to a loss last year.

Operating Profit

Posco’s operating profit may fall in the current quarter and then recover to more than 1 trillion won in the second quarter helped by a likely increase in prices and lower costs of iron ore and coal, Lee Jong Hyoung, an analyst with Meritz Securities Co., wrote in a Jan. 18 report. Input costs may drop by about 10 percent in the first quarter and another 10 percent in the second quarter, said Jeon Seung Hun, an analyst with Daewoo Securities Co.

The South Korean mill’s parent-basis crude steel output may rise to 38.3 million metric tons this year from 37.3 million tons last year, it said today. Product sales will probably rise to 35.4 million tons from 34.5 million tons.

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