Posco Profit Misses Estimates as Steel Demand Declines

Posco, Asia’s third-biggest steelmaker by output, reported a worse-than-estimated quarterly profit as slow demand depressed prices and a weaker won led to foreign-exchange losses.

Net income for the parent company was 383.4 billion won ($345 million) in the three months ended March 31, Pohang, South Korea-based Posco said today in a regulatory filing. That compares with the 505.5 billion won average of 15 analyst estimates and the 538.6 billion won reported in the same period a year earlier, according to data compiled by Bloomberg.

Posco today cut its group sales forecast for this year by 3 percent to 64 trillion won, while predicting global steel demand may recover from the second quarter. The company and its global peers are coping with declining profits as China’s economic slowdown and the European debt crisis reduces demand for the alloy used in cars, ships and building construction.

“The market conditions remain tough,” Posco Chief Financial Officer Park Ki Hong told analysts on a conference call today. “As we expect the overall steel market to improve in the second half helped by stimulus by governments, however, we will try to maintain stable profitability.”

Posco climbed 0.9 percent to close at 322,500 won in Seoul trading, paring this year’s drop to 7.6 percent. The local benchmark Kospi index fell 2.3 percent in the same period. Baoshan Iron & Steel Co., China’s largest publicly traded steelmaker, has lost 2 percent during the same period, while Nippon Steel & Sumitomo Metal Corp. has gained 24 percent. The earnings came after the stock market closed.

Weaker Won

Parent operating profit rose 23 percent to 581.4 billion won, compared with the 580.7 billion won average of 18 analyst estimates. Sales fell 19 percent to 7.68 trillion won.

Net income also fell because the weaker won incurred about 100 billion won in foreign-exchange losses related to its foreign-currency denominated debt, Posco said today. The Korean won weakened 4.4 percent to 1,111.35 a dollar in the first quarter.

Posco’s product prices averaged 832,000 won per metric ton in the first quarter, down from 1.03 million won a year earlier and 849,000 won in the fourth quarter, Kwon Hae Soon, an analyst at Mirae Asset Securities Co., estimates.

China’s hot-rolled coil, a regional benchmark steel product, has fallen about 6 percent to 3,727 yuan a ton this year. China is the world’s biggest consumer and producer of steel.

‘Cost Gains’

“We hardly see any catalyst to boost demand this year,” Park Byung Chil, a steel analyst with Seoul-based IBK Securities Co., said before the profit announcement. “On the supply side, there won’t be much improvement in this region, with China still pumping up output. While Posco will try to increase prices to reflect cost gains, it won’t be easy.”

Raw material input costs may gain in the current and next quarters after second-quarter contract prices were settled at higher levels from the first quarter, analyst Sungmee Park at Citigroup Inc. said in an April 4 report. Posco’s iron ore prices rose 33 percent to $137 a ton, while hard coking coal prices gained four percent to $172 a ton, Park wrote.

While Posco needs to increase product prices in the second quarter to reflect higher costs, it would be “hard to raise on weak demand and an oversupply”, said said Kim Jae Yeol, senior vice president for marketing strategy.

Posco’s parent-basis net income may drop to 2.3 trillion won this year from 2.5 trillion won last year, according to the average of 16 analyst estimates compiled by Bloomberg.

Crude steel output fell 3.8 percent to 9.07 million tons in the first quarter, Posco said. Its 2013 sales forecast was left unchanged from a January estimate at 34 million tons. Posco sold 35 million tons in 2012.

Korea’s biggest steelmaker accounted for 55 percent of the market in 2012 in terms of crude output of the metal, a company filing showed in March.

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