Posco Posts Smallest Ever Profit Amid Chinese Steel Deluge

  • Net income slides to 181 billion won from 626.1 billion yr ago
  • Average analyst estimate was for profit of 85.5 billion won

Posco, South Korea’s biggest steelmaker, posted its smallest annual profit ever after a deluge of Chinese exports pushed global prices to their lowest in at least a decade. The result still beat analysts forecasts.

The consolidated net income, excluding minority interests, was 181 billion won ($150 million) in 2015, down from 626.1 billion won a year earlier, the Pohang-based company said Thursday. Analysts expected a profit of 85.5 billion won, according to the average of 21 estimates compiled by Bloomberg.

Prices have plummeted as demand in China, which makes half the world’s steel, contracts for the first time in a generation, creating a surplus and spurring mills to sell record amounts overseas. The country’s export price fell 42 percent in 2015, touching the lowest since at least 2006, as shipments climbed 20 percent to 112.4 million metric tons, an all-time high and more than a year’s production in Japan, the second-biggest maker.

“We’re struggling mostly because China is flooding the market with extremely cheap products with the support from the government,” Posco Chief Executive Officer Kwon Oh Joon told a briefing in Seoul. “We cannot help but complain about their low prices as it’s impossible for us to produce at the same level and be competitive.”

The steelmaker posted an annual loss including minority interests of 96.2 billion won, the first ever negative number in this category, versus a profit of 556.7 billion won a year earlier. Consolidated operating profit fell to 2.4 trillion won from 3.2 trillion won and was the lowest since 2002. Operating income in the fourth quarter at 340.5 billion won was the smallest since at least 2010.

Stock Plunge

The company’s shares lost 36 percent in the past year in Seoul and reached the lowest since 2004 this month. The stock that hit a record 765,000 won in 2007 when Chinese demand was booming closed at 174,500 won Thursday.

There are signs that the worst of the Chinese deluge may be over. Mills churned out less last year for the first time since at least 1991. Output contracted 2.3 percent to 803.83 million tons, with December production falling more than 5 percent from a year earlier. Supply may shrink to 781 million tons in 2016, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said in December.

Posco has responded to the oversupply by restructuring and focusing on higher value products. The steelmaker pledged last year to cut the number of domestic units to 22 from 42 by 2017, and reduce overseas businesses to 117 from 167. The company restructured 34 units last year, improving finances by 2.1 trillion won, and plans to remodel 35 more in 2016, it said on Thursday.

‘Hard to Grasp’

The producer, which has operations from Argentina to Mongolia, earned about half its revenue from steel production in the third quarter with most of the rest coming from trading and construction, according to the latest company data.

“Uncertainty remains over the restructuring plans as it’s still hard to grasp how effective they’ve been in improving its finances,” Baek Jae Seung, a metals analyst at Samsung Securities Co., said by phone before the earnings.

The company predicted consolidated sales of 58.7 trillion won in 2016, little changed from 58.2 trillion won last year, and expects capital expenditure of 2.8 trillion won. The producer plans to make 37.2 million tons of crude steel this year compared with 38 million tons in 2015 and forecasts iron ore will average $47 a ton this year and hard coking coal $81 a ton. The company set a year-end dividend of 6,000 won.

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