Bloomberg News

Posco to Cut Spending, Costs After Quarterly Profit Slides

October 21, 2011

(Updates with comments from president in fourth paragraph.)

Oct. 21 (Bloomberg) -- Posco, the world’s third-biggest steelmaker, will cut spending and reduce costs after third- quarter profit slumped 75 percent from a year earlier as demand for the alloy used in cars and buildings weakened.

The steelmaker said it will lower its planned spending for this year by 18 percent to 6 trillion won ($5.2 billion) after reporting today net income fell to 248.5 billion won in the three months ended Sept. 30 on a parent basis. Posco will also cut costs by 1.4 trillion won compared with 1 trillion won proposed previously, the Pohang, South Korea-based company said.

Steel prices are falling as a slowing global economy cut demand in countries including China and India, squeezing the profits of steelmakers. ArcelorMittal, the world’s largest steelmaker, plans to save $1 billion next year by idling some European plants and moving production to cheaper alternatives.

“I don’t think next year would be any better than this year,” Posco President Choi Jong Tae told investors in Seoul after the earnings announcement. “Things are getting worse because of the European debt crisis and the U.S. economic slowdown. The steel market will remain weak in the fourth quarter, but we will make our utmost efforts to be profitable.”

Global steel demand may rise 6 percent this year as the global economy slows, and prices may continue to weaken, Posco said today. Consumption growth may ease to 6.5 percent in 2011 after expanding 15 percent last year, the World Steel Association said on Oct. 12.

Steel Prices

Shares of Posco have dropped 26 percent in Seoul trading this year, compared with the 10 percent loss in the local benchmark Kospi index. The stock rose 0.3 percent to end at 360,500 won, before the earnings announcement.

Posco’s domestic average selling prices for benchmark hot- rolled coils probably fell to 910,000 won in the third quarter from 926,000 won in the second quarter, and may decline further to 890,000 won in the last three months of the year, according to Sungmee Park, an analyst at Citigroup Global Markets Inc.

The company doesn’t plan to cut output or change product prices, it said today.

Earnings were also eroded by a 10 percent drop in the Korean won against the U.S. currency in the third quarter. Posco incurred about 1.08 trillion won in currency losses on a consolidated basis in the third quarter, compared with 208 billion won in foreign-exchange gains a year earlier, according to the earnings statement.

A depreciation of 1 percent in the local currency against the dollar cuts Posco’s 2012 net income estimate by 3 percent, Citigroup’s Park said in a report on Oct. 13.

“The fourth quarter is going to be tough,” said Kim Jae Dong, the Seoul-based head of equity at SEI Asset Korea Co., which manages about $5.6 billion in assets. “The demand-side situation looks fragile with signs of China’s economy moderating and the global economy slowing. The steel market is likely to remain weak through the first half of next year.”

--With assistance from Shinhye Kang, Saeromi Shin and Sangim Han in Seoul. Editors: Ryan Woo.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Richard Dobson at rdobson4@bloomberg.net.


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