Seoul: Posco, the world’s No.3 steelmaker, posted its best quarterly profit in nearly two years thanks to solid demand from automakers, but higher costs and oversupply could weigh on second-half earnings.
Posco, which kicks off April-June earnings reporting by major Asian mills, faces rising raw material costs and its failure to fully pass on soaring input costs to customers will slow profit growth, as China’s monetary tightening and Europe’s fiscal crisis weaken demand.
The firm raised on Tuesday its 2010 sales target by 5% to 33.5 trillion won ($27.8 billion) to reflect two price hikes amounting to 32% so far this year, but expected operating profit at 5.6 trillion won, suggesting second-half profit would tumble by 30% from the first half.
“As long as Posco reflects raw material price growth in a timely way through product price hikes, we think their earnings in the second half will not disappoint,” said Oh Seong-jin, head of research at Hyundai Securities.
Posco earned 1.84 trillion won ($1.53 billion) in second-quarter operating profit, higher than a consensus forecast of 1.73 trillion won polled by Thomson Reuters I/B/E/S.
The profit jumped 11 fold from last year’s 170 billion won and marks the best result since it recorded a 1.98 trillion won profit in the September quarter of 2008.
Second-quarter sales at Posco, which overtook Nippon Steel last year to rank just behind ArcelorMittal, and Baosteel , were 7.93 trillion won, versus a forecast 8.08 trillion won.
Shares of Posco have lost around 20% so far this year amid increased earnings volatility, as global steel firms shift to a quarterly pricing plan of raw materials from the previous annually fixed scheme.
Posco, Asia’s most valuable steelmaker by market value, counts billionaire investor Warren Buffett’s Berkshire Hathaway as a top shareholder.
Prior to the result, Posco shares closed down 0.2%, versus a 0.06% rise in the wider market.
Posco, which earns 70% of its revenue in Korea, raised domestic prices of benchmark steel products by only 6% from July, far lagging a more than 20% rise in raw material costs expected this quarter.