Posco Q1 profit misses forecast as higher costs hurt

Posco Q1 profit misses forecast as higher costs hurt

Seoul: Posco’s earnings might remain under pressure due to fragile demand and a jump in coking coal and iron ore prices after the world’s No. 3 steelmaker missed expectations with a 36% fall in quarterly profit.

The global steel sector, seen as a barometer of the broader economy’s health, is facing a margin squeeze on record output from China and raw material costs that remain high partly due to Chinese demand and persistent rains in Australia delaying production recovery.

Japan’s devastating earthquake is also dimming overall demand prospects from key consumers such as carmakers and shipbuilders as they struggle to normalise production.

Posco counts billionaire investor Warren Buffett’s Berkshire Hathaway as a major shareholder.

“Profits are seen improving gradually, but I don’t expect booming demand ahead. Therefore there will be no strong upward momentum for (Posco’s) shares," said Cha Kyung-jin, a fund manager at Golden Bridge Asset Management.

“Also, there isn’t any clear signs of growth in the Chinese construction market, which may weigh on further demand," Cha said on Friday.

Toyota Motor Corp said on Friday it could take until the end of the year before production fully recovers to levels before the massive earthquake and tsunami on March 11.

Climbing costs

The South Korean firm raised domestic steel prices by a higher than expected 16-18% this week in its first increase since July last year to reflect surging iron ore and coking coal costs. Spot iron ore prices have jumped more than 30% since July.

Posco, which trails ArcelorMittal and Baosteel , reported January-March operating profit of 921 billion won ($852 million), below the consensus forecast of 1.1 trillion won by Thomson Reuters .

The profit compares with 1.44 trillion won a year ago and 519 billion won in the previous quarter, Posco said.

The disappointing result comes after the World Steel Association forecast this week that growth in apparent global steel use this year will slow to 5.9% from last year’s 13% due to uncertainties in Europe, the Middle East and Japan.

Posco said on Friday it had agreed to pay a quarter more for iron ore purchases in the second quarter from the previous quarter and 47% more for hard coking coal.

“The iron ore market is likely to continue to remain tight in the second half due to strong demand from China, while coking coal prices may fall slightly as supply disruptions from Australia will ease," Posco said in a statement.

The company increased its sales target for 2011 by 11% to 40 trillion won following the price increase and expected earnings would improve from the second quarter, as it aims at 1 trillion won in cost savings.

JFE Holdings , the world’s No. 5 steelmaker, reported a 67% fall in quarterly profit on Thursday after the March 11 earthquake curtailed shipments, and provided no outlook for the current financial year. [ID:nL3E7FL0OH]

Shares in Posco have traded flat so far this year, underperforming the broader market, , which hit lifetime highs this week.

Home rival Hyundai Steel’s shares have jumped 18%.