Posco's Profit Beats Estimates as Steel Prices Surge in Asia

  • China's economy, property market recovery boosts steel market
  • Outlook for Asian steel producers improving on price jump

Posco, South Korea’s largest steelmaker, posted profit that beat estimates in the first quarter as prices surged, adding to signs Asian producers are recovering while European mills struggle with oversupply.

Net income, excluding minority interests, was 367.1 billion won ($324 million) in the three months through March, from 338.6 billion won a year earlier, the Pohang-based company said Thursday. Analysts had been expecting income of 230.4 billion won, based on 13 estimates compiled by Bloomberg.

Steel prices have jumped this year as China’s economy stabilized and the property market picked up, while policy makers vowed to cut capacity in the world’s biggest producer. Posco is reorganizing its operations by focusing on higher-valued products and diversifying into trading, construction and new materials. The shares have climbed 49 percent in Seoul this year, while the benchmark stock-market index added 3.1 percent.

“Earnings were better than expected,” said Lee Jin Woo, a fund manager at KTB Asset Management Co., who recently added the shares to his portfolio. “Chinese steel prices are rising because the government’s policy of boosting the property market is working. It’s hard to say whether the unexpected demand from property will continue,” he said by phone from Seoul. There’s scope for the stock to rise to 300,000 won from 248,500 won at the close Thursday, according to Lee.

Sentiment Improves

Shares of Asian producers have advanced on improving prospects for the region’s steel markets, and a Macquarie Group Ltd. report this week said that sentiment among Chinese mills was the highest since 2013. Producers in Europe meanwhile have been grappling with excess supply. Tata Steel Ltd. has put its U.K. mills up for sale, and ArcelorMittal, the world’s biggest maker, has posted a net loss for four straight years.

China’s export price for hot-rolled steel, a regional benchmark, has climbed faster than iron ore this year, allowing producers to widen their margins. The company’s hot and cold-rolled steel rates increased by about 50,000 won in April from the start of the year and will continue to rise, said Son Chang Hwan, executive vice president at the steel business strategy department. Prices will stay favorable in the second half, he told an earnings conference call.

Posco’s operating profit was 659.8 billion won, beating the 626.2 billion won average of 11 estimates compiled by Bloomberg, and compared with 731.2 billion won a year earlier, according to the company. Sales were 12.5 trillion won versus a 13.8 trillion won estimate. The company expects to complete its restructuring plans by the end of the year and about 45 percent of its product sales are now higher value, the company said in a statement.

Chinese Exports

While the recovery of Chinese demand and planned capacity cuts have pushed up prices, the rally may fade. There are signs that the rebound has prompted mills to fire up idled capacity. China, which makes half the world’s steel, churned out record supply in March, a turnaround after output shrank last year for the first time since 1981. Steel exports jumped 7.9 percent in the first quarter from a year earlier, according to customs data.

Those sales followed record shipments in 2015 when China sent 112 million tons onto the world market, more than Japan makes in a whole year, sparking trade tensions with India, Europe and the U.S. The country declined to sign up to an international statement on actions needed to tackle the glut at a meeting in Brussels this week.

Posco’s shares rose 3.8 percent on Thursday. The earnings were released after trading ended.

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