Posco is in a turnaround mode, say analysts

Korea’s biggest steelmaker was reeling at the start of the year, trading at the lowest level in more than a decade and posting its smallest profit ever. Credit default risk was at a four-year high as shrinking demand from Asia weighed on global steel prices.

Two months later, Posco is bouncing back. The company’s shares have rocketed 49 percent since Jan. 21, closing Thursday at their highest since last June, as rising iron ore prices have boosted margins and the company has tweaked its strategy. The outlook has improved to the degree that JPMorgan Chase & Co. and Nomura Holdings have raised their ratings on Posco to the equivalent of a buy.

“I do believe that Posco has entered the up-cycle after experiencing years of downturn in the market,” Kim Mi-song, an analyst at IBK Securities, said by phone. “Posco has been raising selling prices for its steel products this year, while input costs have been falling, which has widened the margin spread.”

China’s steel overcapacity has sent ripples throughout the industry, with the country’s steel exports surging 20 percent in 2015, crushing global steel prices by 25 to 50 percent. Posco has responded to the oversupply by restructuring and focusing on higher value products. It has diversified into trading, engineering and construction as sale prices fall in its main business. Steel accounted for 49 percent of the company’s 2015 revenue, down from 57 percent in 2011.

Posco is also benefiting from rising iron ore prices. The iron ore they are using now to produce steel was bought three months ago, leading to widened margin spread, according to Will Byun, analyst at NH Investment & Securities.

Iron ore has risen 25 percent this year, reaching its peak of $63 per ton on March 7 as data showed China’s home prices climbed in most cities and Chinese policy makers signaled their willingness to curb the overcapacity. China plans to cut crude steel capacity by up to 150 million metric tons within the next five years, which could relieve the global glut, Kenneth Hoffman, a senior analyst with Bloomberg Intelligence, wrote in a report March 10.

As Chinese steel makers raised their selling prices, exports to Korea have been slowed, Park Kwang-Rae, analyst at Shinhan Investment, said in a report Thursday. Posco is expected to raise its average selling price by 16,000 won per ton in the first quarter from the previous quarter, and that trend will continue through the third quarter of this year, said Park.

The company’s default risk has been easing.

BLOOMBERG