Seoul: Posco, the world’s No.3 steelmaker, warned on Thursday of sharply higher raw material costs due to the flooding in Australia, after its quarterly profit missed its own estimate by a wide margin and fell to its lowest level in six quarters.
The South Korean firm, already a laggard in profits and share performance due to its heavy reliance on imported steelmaking ingredients iron ore and coking coal, is set to see its 2011 profit margins come under further pressure.
“Iron ore prices are seen firmer in the first half due to reduced exports from India and increasing steel production... Coking coal supply will be also tight because of flooding in Australia and spot prices may rise sharply from the current contract level,” Posco said in a statement.
The company, which counts billionaire investor Warren Buffett and Japan’s Nippon Steel as major shareholders, said its contract prices of both iron ore and hard coking coal for the first quarter were set at 8% higher from the previous quarter.
Steelmakers are facing a double whammy this year with demand growth from top consumer China slowing to single-digit level and raw material costs rising due to limited supplies.
Iron ore prices, currently trading at eight-month highs due to tight Indian supplies and worries over shipment disruptions in Australia and Brazil, may continue higher for the first half of 2010 with additional capacity not expected to come into the market until the second half.
That should continue to strain margins of steelmakers across Asia still reeling from a near tripling in iron ore prices last year when global miners switched to a more frequent quarterly pricing system to reflect wild swings in spot prices.
Steelmakers across Asia have been raising product prices to cope with a projected increase in raw material prices, particularly coking coal.
Baoshan Iron & Steel , China’s biggest listed steelmaker, said early this week it will raise its key product prices in February, while China’s Wuhan Iron and Steel Co Ltd followed suit.
But Posco kept its domestic steel prices unchanged for a second consecutive quarter for the January to March period, as it faces growing competition, with its home rival Hyundai Steel selling auto steel to its affiliate Hyundai Motor.
“Korean steelmakers lack room to raise steel prices, like their Chinese and Taiwanese peers did, because of the weaker demand from the downstream industry in the country,” said Judy Chen, fund manager at Prudential Financial Securities Investment Trust in Taipei.
Posco sources around 60% of its coking coal and iron ore needs from Australia.
Spot iron ore prices were expected to race to fresh eight-month highs on Thursday, driven by sustained Chinese buying and supply concerns as a tropical cyclone threatens to disrupt production and shipments in top exporter Australia.
Miners in Australia, from BHP and Rio Tinto to Macarthur Coal, are either fully or partially under force majeure due to massive floods in Queensland state and some of the ports and rail lines were closed, which may disrupt supplies to Asia.
Posco, the first major Asian steelmaker to report December quarter earnings, posted a 653 billion won ($589 million) operating profit for the October-December period, below its revised target of around 800 billion won that it set in October and a consensus forecast of 956 billion won from Thomson Reuters I/B/E/S.
The quarterly profit is down from 1.59 trillion won a year ago and from 1.1 trillion won in the previous quarter.
Fourth-quarter profit was also hit by weak steel prices as the South Korean firm offered some discounts to domestic customers to revive stagnant demand and narrow the price gap with cheaper imports, analysts say.
Posco, which generates two-thirds of its revenue from the South Korean market, kept domestic prices unchanged for the October to December quarter amid weak profit outlook.
Shares in Posco, which trails ArcelorMittal and China’s Baosteel, slumped 21% last year, underperforming the broader market’s 22% gain.
Prior to the result announcement, the stock closed down 2.6%.
Posco said on Thursday sales would rise by 11% to 36 trillion won in 2011 and crude steel output may increase by 7% to 36 million tonnes.
Investment will decrease to 7.3 trillion won from 9.4 trillion won a year ago, when it made its biggest ever acquisition with a $3 billion deal to buy Daewoo International Corp , a move into a non-core business which was viewed with concern by some investors including Buffett.
Posco, under chief executive Chung Joon-yang, is also reviewing a bid for an around $1 billion stake in logistics firm Korea Express Co Ltd , and is widely seen as a leading contender to buy its major customer Daewoo Shipbuilding & Marine Engineering Co Ltd , to be up for sale again soon.