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Posco: One Sharp Steelmaker


Korea these days enjoys a well-deserved reputation for its digital prowess: a land where lab-coated engineers and scientists work with delicate wafer chips, while pink-haired youths write software for the latest cell phone. But you don't have to dig too deep to find another Korea, one where hard-bodied workers labor in factories to produce the stuff that makes the physical world go. To get an idea of the vibrancy of this part of the economy, visit the Posco (PKX) steelworks in Pohang, on the peninsula's east coast. Here, in sweltering heat, sparks fly as molten iron is ladled into vast bins, and ribbons of fiery metal roll through milling machines.

Old Economy? Sure. But Posco is no rust-belt relic. True, with $12 billion in sales, it isn't the biggest steelmaker on earth. That title belongs to Luxembourg-based Arcelor, more than double Posco's size. But where it really counts, Posco is in a class all its own. The company enjoys the biggest profits in the global steel industry, raking in enough cash to make many a high-tech outfit envious. Thanks to robust demand at home and in China, net earnings from Posco's array of steel products -- used in everything from screws to skyscrapers -- last year shot up 80%, to $1.66 billion. And Daewoo Securities Co. is forecasting a 61% jump in profits, to $2.7 billion, on $15.6 billion in sales this year. "As far as efficiency is concerned, Posco stands taller than any other steelmaker in the world," says Daewoo analyst Yang Ki In.

In fact, Posco isn't as different from South Korea's New Economy innovators as all the sweat and sparks might lead you to believe. The company is considered one of the industry's high-tech paladins. And in August, Posco will enhance that reputation when it breaks ground on a $1.1 billion mill that could boost productivity even higher. The mill will use a new technology, called Finex, that will help cut costs by nearly a fifth and harmful emissions by more than 90%, says Chairman and CEO Lee Ku Taek. For decades, steelmakers have used highly polluting ovens to turn powdery coal and iron ore into chunks called coke and sinter, which are melted with superheated air to make iron. With Finex, coal and ore are turned into iron without coking and sintering. After the plant opens, in about two years, Posco plans to roll out the technology in other mills. "I want to be remembered as the CEO who started another leap forward," says Lee, a 35-year Posco veteran who has become the project's champion since taking over the top job a year ago.

Posco has put plenty of slick information technology to work, too. The company has invested $179 million to network its 80 Korean plants so that it can take orders online and coordinate production and deliveries. So, as molten steel slabs wend their way through the mills at Posco's two major steelworks -- in Pohang and at Gwangyang, on the southern coast -- each is pressed to a specified weight and width depending on a particular customer's needs. This mill-level customization helps push steel out the door faster, which has enabled Posco to halve delivery times and slash inventories by 60%. "This company has a track record of consistently improving productivity," says Park Kyung Min, CEO of Hangaram Investment Management Co., which keeps 8% of its $300 million fund in Posco shares.

BETTING BIG ON CHINA

LIKE THE REST OF Korea Inc., Posco believes its future lies across the Yellow Sea in China. The country has become the world's biggest steel market as well as the biggest producer, with more than 1,000 mills, from giants such as Shanghai BaoSteel Group and Wuhan Iron & Steel Group to tiny operations in outlying provinces. To cash in on this vast opportunity, Posco has invested $800 million in China, its biggest export market. One joint venture, with Benxi Iron & Steel (Group) Co., near Shenyang, will churn out 1.8 million tons of cold-rolled sheets annually for autos and home appliances when it opens in 2006. Another, with Jiangsu Shagang Group, already produces 280,000 tons of stainless cold-rolled coils and some 100,000 tons of galvanized steel every year. In all, Posco has 14 joint ventures in China. By 2006, Posco plans some $1.4 billion in fresh investment on the mainland, especially in galvanized and stainless steel to supply global auto and appliance makers that have opened plants there.

Why the big bet? "With China consuming one-quarter of the world's steel, we must be competitive in the market," says Lee Myung Ho, a senior manager at Posco-China Holding Corp., which oversees the company's mainland operations. Furthermore, China has an acute need for the stainless and galvanized steel products Posco excels at making. And Chairman Lee doesn't think China's efforts to cool its overheating economy will dampen demand for those high-end steel products. Even if China's annual expansion slows to 7% from the current 9% plus, he figures steel demand will still increase at a robust 10% annual clip. "The [growth] trend will continue for at least five more years," he says.

Posco envisions becoming an emerging-markets titan. Before a wave of consolidation in Japan and Europe in 2002, it was the biggest steel company in the world for a brief period. Lee hopes to rival global leaders Arcelor and London-based LNM Group by aggressively investing in India, Russia, and other developing countries. The company has a strong balance sheet, with only $1.2 billion in net debt and $1.7 billion in cash and liquid securities. "We are financially well-equipped, and we could acquire," Lee says.

Posco does have a few weak spots. The biggest: In this age of globalization, the company still relies on Korea for about 75% of its sales, which limits its ability to cash in on booming foreign markets. And some analysts wonder why Posco's clients at home pay nearly 20% less for certain products than do overseas customers. Is the company cutting Koreans a break to keep the government happy, given that Posco controls 55% of domestic steel sales? Lee says no. Posco's low prices, he maintains, are a result of long-term contracts that domestic customers signed before Chinese demand kicked in and sent prices up. He insists that the price structure will right itself in coming years -- which will give the company another profit boost. Others quibble that, before being privatized in 2001, Posco lucked out with sweetheart land deals for its two biggest mills in Korea. Moreover, say critics, as a relatively young company -- Posco was founded in 1968 -- it has low pension liabilities, while its government ties have kept South Korea's militant unions from making inroads, a distinct advantage over rivals.

Perhaps Posco did get some lucky breaks early on. But it's hard to deny that it also has a decade-long record of high productivity and profits. As long as Posco keeps delivering 60%-plus earnings growth and attractive shareholder returns, few investors will gripe. This is one Korean champion likely to be in fighting trim for many years to come.

By Brian Bremner and Moon Ihlwan in Pohang, South Korea, with Dexter Roberts in Beijing


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