Posco Profit Misses Estimate as Weak Demand Cuts Prices

Posco, Asia’s fourth-biggest steelmaker by output, reported a 51 percent decline in second-quarter profit, missing estimates, as weak demand cut prices and the won’s drop led to foreign-exchange losses.

Group net income, excluding minority interest, was 250.6 billion won ($225 million) in the three months ended June 30, versus 509.3 billion won a year ago, Pohang, South Korea-based Posco said yesterday in a regulatory filing. The average of 10 analyst estimates was 554.7 billion won, according to data compiled by Bloomberg.

Slowing growth in China, the world’s top steel user, and Europe’s economic crisis sapped demand amid a global glut, squeezing profit at steelmakers. Posco, South Korea’s biggest maker of the alloy, will seek to expand sales of high-end products including car sheets and ship plates to weather an industry slowdown and keep its 2013 sales forecast at 64 trillion won.

“The steel industry has been in a slump over the past four years,” said Lee Jin Woo, a fund manager at KTB Asset Management Co., which oversees about $3.5 billion in assets. “It’s hard to expect a turnaround unless demand improves enough to absorb an oversupply stemming from China. Posco looks very cheap in terms of valuations.”

Posco, which has lost 6.3 percent this year before today, fell 0.8 percent to 324,500 won at 10:28 a.m. in Seoul, while the benchmark Kospi index added 0.2 percent. The Kospi has fallen 4.3 percent in 2013. China’s Baoshan Iron & Steel Co. has slipped 17 percent this year, while Nippon Steel & Sumitomo Metal Corp. gained 43 percent.

Forex Charge

Posco took a 283 billion won charge related to its foreign-currency denominated debt because of the won’s depreciation. That compares with a 272 billion won loss a year ago. The South Korean currency lost 3 percent against the dollar in the quarter.

Group operating profit fell 31 percent to 902.6 billion won, compared with the 897 billion won average of 18 analyst estimates. Sales dropped 5 percent to 15.6 trillion won. Operating margin was 5.8 percent, compared with 4.9 percent in the first quarter of this year and 7.9 percent a year earlier.

Posco’s average selling price dropped 14 percent to 794,000 won a ton in the second quarter from a year ago, Posco said. The first-quarter average was 782,000 won.

Input Costs

“Cost increases in the third quarter won’t be that worrisome as spot prices could decline,” Chief Financial Officer Park Ki Hong said on an earnings conference call yesterday. “We expect to maintain first-half profitability in the second half.”

Spot prices of iron ore may drop to $125 a ton in the third quarter from $126 in the second quarter, while coal prices may drop to $137 a ton from $143, Posco said yesterday.

Iron ore input cost fell about 6 percent to $132 a ton in the second quarter from a year earlier and may rise to $144 in the third quarter, Hong Jin Joo, an analyst at Shinhan Investment Corp., wrote in a June 11 report.

Steel prices in China may gradually recover after bottoming in the third quarter, the company said. World steel demand will probably increase 3 percent this year, helped by “solid” growth in emerging markets, it said. That is in line with the World Steel Association’s estimate of 2.9 percent announced in April.

New capacity starting later this year and a risk of lower-priced imports from Japan and China may increase competition and weigh on local prices, Park Byung Chil, an analyst at IBK Securities Co., wrote in a June 26 report.

Crude Output

Crude steel output declined 6 percent to 8.85 million tons in the second quarter from a year earlier, while sales fell 3 percent to 8.41 million tons, Posco said yesterday.

The South Korean mill may reduce group-based capital expenditure for next year by as much as 2 trillion won from an estimated range of 7 trillion won to 8 trillion won for 2013 as its major expansions in the country will be completed this year, Park said.

Posco was the fourth-biggest in Asia by 2012 output, according to latest rankings by the World Steel Association.

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