Seoul: South Korean steel giant Posco will raise domestic steel prices by 16-18% this week, industry sources said, the first hike in 10 months and higher than the market expected.

Clients including shipbuilders, auto makers and electronics manufacturers, under pressure from a government struggling to curb inflation, are likely to find it hard to pass on price hikes to customers.

While Posco officials declined to comment on the long-awaited price increases, industry sources said the country’s top steelmaker will raise prices of hot-rolled, cold-rolled and thick plates by 160,000 won ($147) a tonne each for orders coming from 22 April.

Iron ore indexes, based on China spot deals and which global miners use to compute supply contract prices, have surged more than 30% since July last year.

Posco’s earlier failure to raise prices to cover surging costs hit its earnings and it failed to meet its annual profit target last year.

It is expected to post another decline in profits for the January to March period from a year ago when it reports results on Friday.

“The hike was bigger than the market expected," said Kim Hyun-tae, a Hyundai Securities analyst. “The market forecast was smaller because a planned hike was delayed and there was some pressure to cooperate with the government working to stem inflation."

Asia’s fourth-largest economy, heavily dependent on energy and other commodity imports, is trying to tame inflation partially fuelled by multi-year high prices for raw materials such as crude, grains, metals, coal and iron ore. South Korea’s regional neighbours are also fighting inflation.

Privately-owned crude oil refiners earlier this month were forced to make their first coordinated price cut since the sector was liberalized in 1997. That saddled them with a bill as high as 700 billion Korean won ($643 million).

South Korea’s annual producer inflation rose to a 28-month high in March, boding ill for the consumer inflation outlook.

Posco share flat, shipbuilders hit

Posco’s price hikes, the first since June 2010, initially buoyed shares of the world’s third-largest steelmaker by more than 2% before all the gains were shaved on the view that global steel demand, led by China, may cool.

Shares of shipbuilders lost as much as 4% on news of Posco’s price hikes as it accounts for more than 30% of steel plates for Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering.

“The scale of the price hike was comparatively big...of course, it will have an impact and be tough to deal with, but it is up in the air if (the steel price increase) can be passed onto the vessel rates because the overall market situation needs to be considered," said a shipbuilding industry source, who declined to be identified because of the sensitivity of the issue.

Han Changhee, LG Electronic’s vice president of marketing strategy for the company’s home appliance division, said in a separate meeting with reporters on Tuesday that raw material costs keep rising and have risen more than 20% so far this year, led by steel and copper. It is inevitable product prices will have to be raised Han said.

Jun Min-kyoo, an analyst at Korea Investment & Securities, said: “I expect companies will be unable to raise prices much because of the sluggish consumption, which may reduce their profits."

Weigh on global demand outlook

While analysts think the price increase will improve Posco’s earnings in the second quarter from the previous quarter, some suggest Japan’s earthquake and China’s tightening may keep its earnings under pressure.

Japan’s earthquake and tsunami on 11 March disrupted production in Asia’s top steel exporter, raising expectations of higher demand for South Korean products.

Yet hopes for a recovery in the steel market have been dashed by China, the world’s biggest producer, which raised banks’ required reserves on Sunday for the fourth time this year to keep inflation in check.

A weaker-than-expected market has forced many Asian mills to put off price increases or even to cut prices. China’s major steelmaker, Angang, will join its peer Baoshan Iron & Steel Co Ltd in cutting main steel product prices for May bookings.

Hwang Eun-yeon, executive vice president at Posco, said he expects Japanese steelmakers to temporarily increase exports following the quake to offset slumping demand in the domestic market.

Posco previously said it would be more flexible in pricing steel products from the second quarter of this year, dropping its quarterly pricing scheme.

Shares of Posco closed flat in a broader market down 0.70% on Tuesday.