Posco Profit Drops 44% as Demand Wanes From Shipbuilders

Posco Profit Drops as Demand Wanes From Carmakers, Shipbuilders
Posco today cut its 2012 sales targets for the second time this year amid falling demand, saying the business environment looks "volatile." Photographer: SeongJoon Cho/Bloomberg

Posco, Asia’s third-biggest steelmaker by output, said second-quarter profit declined 44 percent as demand waned from carmakers and shipbuilders.

Net income was 704 billion won ($614 million) in the three months ended June 30 on a parent basis, compared with 1.25 trillion won a year earlier, the Pohang, South Korea-based company said today in a regulatory filing. That missed the 723 billion won average of 16 analyst estimates compiled by Bloomberg. Sales fell 8.1 percent to 9.22 trillion won.

Posco today cut its 2012 sales targets for the second time this year amid falling demand, saying the business environment looks “volatile.” Sales are forecast to reach 37.5 trillion won on a parent basis, compared with the 37.7 trillion won target released in April, the company said in the statement.

“The demand outlook is still dim amid global economic headwinds, while oversupply issues in key Asian markets are yet to be resolved,” Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which overseas about $28 billion, said today by phone. “Earnings may improve a bit on lower raw materials costs.”

Posco shares rose 0.8 percent to close at 362,500 won in Seoul trading today. The announcement came after the stock market closed. The stock has fallen 4.6 percent this year, compared with a 1.7 percent drop in the benchmark Kospi index.

Steelmaking Profits

Operating profit at Posco fell 29 percent to 1.06 trillion won, beating the 961 billion won average of 22 analyst estimates compiled by Bloomberg. Operating profit margin was 11.5 percent in the second quarter, compared with 14.9 percent a year earlier, and 4.5 percent in the first quarter of this year, the company said.

“Business environments in second half will be worse than expected early this year because of weak demand from construction and shipbuilders,” Chief Financial Officer Park Ki Hong told investors today in Seoul. “Still, our profitability in the second half will be better than the first half, driven by falling raw material prices.”

Third-quarter profit may be 808.6 billion won according to the average of 13 analysts estimates compiled by Bloomberg before today’s results. That compares with last year’s 248.5 billion won.

Steelmaking profits are under pressure as Europe’s debt crisis and China’s economic slowdown curb demand and reduce prices. Baoshan Iron & Steel Co., China’s biggest listed steelmaker, had a bigger-than-expected 60 percent drop in first-quarter profit on slowing demand, while Nippon Steel Corp.’s profit fell 37 percent to 58.5 billion yen in the 12 months ended March 31 from a year earlier.

Shipyard Orders

South Korean shipyards won orders for $11.7 billion of vessels in the first five months of this year, 50 percent less than a year earlier, according to data from Clarkson Research Services Ltd., a unit of the biggest global shipbroker. Demand from carmakers may weaken in the second half due to falling domestic auto sales, Daiwa Securities Capital Markets Co. said in a July 6 report.

Crude steel output rose 1.3 percent to 9.41 million metric tons in the second quarter and sales increased 0.1 percent to 8.67 million tons, South Korea’s biggest producer said today.

Domestic steel demand is expected to rise in the third-quarter from a year ago and China’s steel market may rebound “slightly” after bottoming in the third-quarter, Posco said. Annual steel demand is seen expanding 3 percent driven by emerging markets and the U.S., the company said in a presentation.

The average price of China’s hot-rolled coils, a regional benchmark product, tumbled to 3,720 yuan a ton today, the lowest level since December 2009, according to researcher Beijing Antaike Information Development Co.

Stake Sales

The steelmaker will sell its stakes in more than 10 companies this year that were bought for investments, Executive Vice President Lee Young Hoon and CFO Park told investors today. The funds raised will be used to increase the company’s presence in steel material and energy developments, Park said.

Posco is the world’s fourth-biggest steel producer by 2011 output according to rankings on the website of the World Steel Association. It is Asia’s third-largest producer after Hebei Iron & Steel Group and Baosteel Group Corp.

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