Posco impresses no one with recovery strategy

A turnaround plan from Posco failed to earn early approval from investors, as shares in Korea’s biggest steelmaker sank to a nine-year low after the company reported a slump in profit and vowed to focus anew on its main business.

The stock declined as much as 3.8 percent to 201,000 won ($175) on Thursday, the lowest level since January 2006, and closed at 203,500 won in Seoul, as the benchmark Kospi index was 0.72 percent higher. The shares have dropped for the past five years and retreated a further 26 percent in 2015.

A flood of cheap exports from China, where steel demand is faltering after decades of growth, pushed prices to the lowest level in more than a decade, eroding profits at mills across Asia. CEO Kwon Oh-joon, who has steered the company since March 2014, said on Wednesday that he would quit noncore operations to focus on Posco’s mainstay, steel. Second quarter profits sank 61 percent, worse than analysts expected.

“I don’t expect much from Posco’s plan to restructure,” Kang Tae-hyun, an analyst at KTB Investment & Securities, said on Thursday. “It was just a reiteration of what it has always been saying, and it lacked details about how it’s going to do it.”

Under Kwon, Pohang-based Posco plans to reduce the number of local units from 42 to 22 by 2017, while cutting overseas businesses from 167 to 117. He did not say how many staff would lose their jobs. The company, which has operations from Argentina to Mongolia, earned almost half its revenue from steel in 2014, 33 percent from trading and 12 percent from construction, according to its stock exchange filing.

Chinese mills are pushing more cargoes of steel overseas amid a property-led slowdown at home. Exports of steel products surged 28 percent to 52.4 million tons in the first six months of 2015, China’s customs agency figures showed on Monday. That’s about 8.7 million tons a month.

“China slowing down is not directly the issue; China’s export rate is the issue as they haven’t cut production,” Tim Huff, an analyst at RBC Capital Markets in London said on Wednesday. “As soon as it goes over 5 million tons a month you have an issue, and it becomes an incredibly large issue when they’re exporting 10 million tons per month.”

Group net income, excluding minority interests, tumbled to 198.5 billion won in the quarter from a year earlier, missing the 365.1 billion won average of 14 analyst estimates compiled by Bloomberg. Sales sank 9.1 percent. Kwon said the company will aggressively shed noncore operations.

“The large chunk of its problems and challenges are related to the weakening steel fundamentals in Asia,” Chris Park, a senior vice president at Moody’s Corp. in Hong Kong, said in an e-mail. “Posco is better positioned to tackle the challenges than many players, given its large scale and advanced technology. The persistently weak steel margins should lead to continued restructuring, exits and consolidation of the steel sector.”

Nomura Holdings cut its rating on Posco shares to neutral, saying it remains unconvinced that the global steel industry will see a meaningful recovery.

Bloomberg