Seoul: Posco, the world’s No.6 steelmaker, reported its lowest quarterly profit in at least nine years due to low prices and weak demand from automakers and other manufacturers, but forecast second-half earnings would nearly quadruple from the first half.
The worst may now be behind most Asian steelmakers, which had to cut output by as much as 50% in the first half, as manufacturers have now started to replenish low inventory, boosting prices by around 15% from recent lows in April.
But a strong rebound in steel output growth worldwide is threatening to reverse the recovery, as demand has yet to fully recover amid fragile signs of a global economic rebound.
“The steel sector has relatively underperformed because of oversupply worries. The poor (Posco) earnings only confirmed that those concerns were valid,” Kim Hak-kyun, an analyst at Korea Investment and Securities.
“It looks like earnings have hit the bottom but the pace of recovery in the future will depend on supply control, such as a possible restructuring.”
South Korea’s Posco, which competes with Japan’s Nippon Steel and JFE and China’s Baosteel , raised its 2009 crude steel output target by 6.4% to 29.8 million tonnes and gave its first guidance for 2009 operating profit at 2.6 trillion won ($2 billion).
The figure suggests second-half profit would top 2 trillion won, up sharply from 543 billion won in the first half, as it cranks up production using cheaper raw materials and as global steel prices rebound.
The firm cut second-quarter steel output by 15% from a year ago to 7.13 million tonnes, but that marked a 16% rise from the first quarter, when production fell by a quarter.
Posco, the first major Asian steelmaker to report results, is faring better than rivals such as top-ranked ArcelorMittal and Nippon Steel, which have made output reductions of around 40% early this year.
Japanese steelmakers including Nippon and JFE are the biggest casualties of the downturn in Asia and are seen reporting heavy losses later this month, hit by price cuts and reduced demand from the auto industry, their main customer.
Higher Steel Prices
Global steel prices have more than halved to below $500 a tonne early this year from record highs hit last year.
Prices have since rebounded, with China, the world’s No.1 steelmaker, leading the recovery, helped by a near-$600 billion infrastructure-focused stimulus package.
Posco expected a modest rise in global steel prices in the second half as automakers increase production and Chinese demand improves.
April-June operating profit tumbled 91% to 170 billion won ($131.7 million), the lowest since it started releasing quarterly results in 2000, but in line with an average forecast for 172 billion won by 12 analysts.
Net profit was 431 billion won, sharply above the 197 billion won forecast, thanks to increased foreign exchange related gains.
Revenue dropped 15% to 6.34 trillion won as Posco made record steel price cuts in May and reduced output.
In May, Posco agreed to cut fine iron ore prices by a third and coking coal prices by around 60% with Australian suppliers for 2009 contracts.
Shares in Posco closed down 1.3% on Monday ahead of the earnings release, outperforming a 3.5% drop in the broader market.
The cost of buying protection against default by Posco on its debt has fallen in recent months, with its 5-year credit default swap (CDS) spreads tightening to 147 basis points at the end of last week from 419 points in the first week of March, according to CDS data provider Markit.