[WHY] Posco hopes holding company will help it go green
![The first cast iron pulled from Posco’s first blast furnace in 1973. [POSCO]](https://koreajoongangdaily.joins.com/data/photo/2022/01/23/9a8be313-c0f6-49d5-8dd4-b4245eac239f.jpg)
The first cast iron pulled from Posco’s first blast furnace in 1973. [POSCO]
Half a century ago, Korea was an impoverished postwar country with a gross domestic product per capita below $200. Jump forward to 2022, and people around the world are using Samsung smartphones, watching LG televisions and driving Hyundai Motor vehicles that were shipped across the ocean on Korean-built carriers.
Korea’s development into an industrial powerhouse started with the establishment of a government-backed steel company in 1968, known today as Posco. That stable supply of steel allowed Korea to start developing and manufacturing the products that now lead the country's exports.
Today, Posco is the world’s most competitive steelmaker, according to World Steel Dynamics, and the 12th-largest company on the Kospi by market cap. But as the world shifts toward sustainable growth, Posco is trying to expand its non-steel businesses, saying its reputation as a steelmaker is pulling down its market value.
Posco’s goal in 2022 is to solidify the group’s reputation as a future materials group. To speed up the change, Posco plans to spin off its steel business and become a holding company.
The corporate restructuring scheme is pending approval at an extraordinary shareholders’ meeting scheduled on Jan. 28.
![Former Posco Chairman Park Tae-joon, center, cheers with employees after the first production of crude steel at its Pohang No. 1 blast furnace in 1973. [POSCO]](https://koreajoongangdaily.joins.com/data/photo/2022/01/23/540452bd-82ee-4d1f-b5cc-bb4ba0c01134.jpg)
Former Posco Chairman Park Tae-joon, center, cheers with employees after the first production of crude steel at its Pohang No. 1 blast furnace in 1973. [POSCO]
Q. What does Posco do?
Posco is Korea’s largest steelmaker and the sixth-largest in the world by steel production.
Posco, then named Pohang Iron and Steel, was founded in 1968 by Park Tae-joon, a former army general who was charged with the responsibility by then-President Park Chung Hee, who hoped to foster Korea’s economic growth with a stable supply of steel.
A major challenge following its establishment was a lack of financing and technical skills to build a steel plant because lenders refused to invest in Korea.
Park Tae-joon lobbied officials in Korea and Japan to allocate around $500 million in Japanese reparations for the occupation of Korea (1910-45) to finance the company.
“I tried to convince them, saying that the Japanese ruled Korea for 36 years,” Park said in 1991. “Koreans have been deprived of so many things because of Japan, so the Japanese must compensate Korea materially and psychologically.”
The construction of the steel mill and the blast furnace cost $119.48 million, or 24 percent of total reparations from Japan.
“We are building the integrated steelworks on the blood of our ancestors," Park told his employees at the time. "If we fail, we will be committing a sin that can never be forgiven.”
Posco started the operation of its first blast furnace at Pohang Steel Mill in 1973. The second steel mill was built in Gwangyang, South Jeolla, in 1987. Posco was listed on the New York Stock Exchange in 1994.
Under Park’s leadership, Posco became the world’s No.1 steelmaker by 1998. In recent years, Posco has also expanded into secondary battery materials, trade, food and construction businesses.
Q. Why is Posco pushing for a holding company structure?
Posco decided to create a holding company structure to better drive new businesses with higher growth potential.
Though it has developed into a global company on strong steel sales, Posco now believes its reputation as a steelmaker is undervaluing its new businesses and goal of becoming a sustainable company.
“Despite making progress in new businesses, Posco’s market cap is less than half of what it was when it peaked in 2007,” Posco told shareholders in a statement. “The potential of the new businesses is not properly acknowledged because of the strong belief [that Posco] is a low-growth steel company stock.”
Posco shares traded at around 770,000 won ($650) apiece in 2007. It now trades at less than half that price, at around 300,000 won.
Steel will continue to be important as a crucial engineering and construction material, but its importance has waned over recent years as economic growth in key countries has slowed down, said Kim Yong-jin, a business professor at Sogang University.
The World Steel Association projected in 2020 that the global increase rate for steel demand will be 0.8 percent annually ((+over the next 20 years)), even after the pandemic stabilizes.
“Not as much steel will be used in the digital era," Kim said, "and the global movement to embrace carbon neutrality is also raising the need for Posco to reduce its reliance on steel.”
In 2019, the United Nations announced that over 60 countries, including the United Kingdom, had committed to carbon neutrality by 2050. Last year, the Korean government pledged to become carbon neutral by that year, a decision followed by domestic companies, including Posco.
The steel industry accounts for 8 percent of CO2 emissions globally, according to a report from consulting firm McKinsey, which predicts that 14 percent of all steel companies could see their value decline unless they reduce carbon emissions.
![Posco proceeds with exploration at Hombre Muerto, a lithium salt lake in Argentina. [POSCO]](https://koreajoongangdaily.joins.com/data/photo/2022/01/23/8be860eb-f194-4036-a7ab-01d63569c33a.jpg)
Posco proceeds with exploration at Hombre Muerto, a lithium salt lake in Argentina. [POSCO]
Q. What businesses will Posco focus on once it becomes Posco Holdings?
Posco’s focus following the split will be steel, battery materials, lithium and nickel, hydrogen, energy, construction and food.
Posco currently produces EV battery materials — cathode active materials and anodes — through its subsidiary Posco Chemical. To expand that production, Posco Chemical is constructing plants in China and North America, two of the largest EV battery markets.
Last month, the company announced that it would establish a cathode active material factory with General Motors in a joint venture in North America. In August, it announced that it would construct a 30,000-ton cathode material and precursor production plant in China and it is seeking to construct another in Europe. Precursors exist before cathodes and are composed of materials, including nickel and cobalt.
Posco Chemical currently has the capacity to produce 45,000 tons of cathode active materials and 69,000 tons of anodes. As of 2020, Posco Chemical globally ranks tenth in the cathode active materials market and fourth in the anodes market, according to the company.
Its goal is to expand anode production capacity to 260,000 tons and cathode production capacity to 400,000 tons by 2030.
To ensure a supply of raw materials to do this, Posco is building plants to produce lithium and nickel, which are the key raw materials for EV battery materials.
Posco is building a plant to produce lithium hydroxide, the raw material for cathodes, in the southern industrial city of Gwangyang, South Jeolla, to open in 2023. It also acquired a 15 percent stake in Black Rock Mining, an Australia-based graphite producer, to secure graphite fines, a raw material for anodes, and Hombre Muerto, a lithium salt lake in Argentina, in 2018. The lake’s has 13.5 million tons of lithium reserves, according to the company.
“Posco Group as a whole is strengthening its grip on the secondary battery materials market through investments in the integration of cathode and anode material value chains,” said Jung Yong-jin, an analyst at Shinhan Investment.
But it may take some time before the market acknowledges that value chain.
“Considering that it will be a while before specific results can be confirmed, it will take some time until the market starts to embrace the hidden values of the company’s new growth engines,” said Moon Kyeong-won, an analyst at Meritz Securities.
Posco has not yet commercialized the production of lithium and nickel, but it aims to be able to produce 220,000 tons of lithium and 140,000 tons of nickel in 2030.
Apart from materials, Posco has also stepped into the vegan meat business through Posco International.
The trading arm of Posco signed an agreement with Gikuin Company and HN Novatech, alternative meat producers, to support the global marketing and product development of their products.
Gikuin Company makes plant-based meat made from brown rice, oats and nuts, while HN Novatech uses molecules extracted from seaweed and fish meat.
Q. So what happens to the steel business?
Steel will continue to be an essential part of Posco’s business model.
But to make steel a sustainable business, Posco is developing technology to produce steel using hydrogen instead of coke, which contains carbon.
With current steelmaking technology, around 0.75 tons of coking coal is required to make one ton of steel, which emits around two tons of carbon dioxide as a byproduct. Steel made with green hydrogen gas will emit zero carbon dioxide once the technology is fully developed and commercialized, according to Posco. The company plans to build a demonstration plant for the technology in 2028 and commercialize it in 2030.
Green hydrogen is the cleanest type of hydrogen made from renewable energies. Other types include grey hydrogen, made from fossil fuels, and blue hydrogen, derived from methane in natural gas.
The key to the success and commercialization of hydrogen-based steelmaking will be the cost of green hydrogen, which is tougher to generate in Korea than in other countries where solar and wind energies are more accessible due to their geographical advantages.
As of 2019, the cost of generating solar energy in Korea was 163 won per kWh, which is 10 times more expensive than in the Middle East. This makes hydrogen generated in Korea less price competitive.
So Posco is relying on overseas partnerships.
Last year, Posco teamed up with Origin Energy, Australia’s largest electricity and gas supplier, to introduce the ammonia necessary for green hydrogen use in Korea. In 2020, it signed an agreement with Fortescue Metal Group (FMG), an Australian iron ore supplier, to participate in green hydrogen production. The plan is to introduce green hydrogen to Korea.
Posco’s goal is to have the production capacity for 6.3 million tons of green hydrogen in 2050.
![A view of the Ravensthorpe nickel mine in western Australia. Posco owns a 30 percent stake in the nickel operation. [POSCO]](https://koreajoongangdaily.joins.com/data/photo/2022/01/23/d31ca038-a299-4158-98a7-41608e69a991.jpg)
A view of the Ravensthorpe nickel mine in western Australia. Posco owns a 30 percent stake in the nickel operation. [POSCO]
Q. When did Posco first start to expand beyond steel?
Posco’s expansion into non-steel businesses started more than a decade ago.
The effort began after the appointment of Chung Joon-yang as Posco Chairman in 2009. Chung actively pushed the acquisition of non-steel businesses, like Daewoo International in 2010. The number of Posco affiliates has increased from 36 in 2009 to around 70 in 2012.
In 2010, Chung invested more than a trillion won on a Roy Hill project to develop an iron ore mine. Roy Hill is the developer of Australia’s largest single iron ore mine. In 2013, Posco agreed to take a 15 percent stake in a Canadian iron ore mine owned by ArcelorMittal with China Steel for $1.1 billion.
Kwon Oh-joon, who assumed the Posco chairmanship in 2014, placed the company’s focus back on steel to recover the reduced growth triggered by Chung's aggressive investments. Major assets sold during his term include a 38 percent stake in Posco Engineering and Construction to Saudi Arabia’s Public Investment Fund for 1.24 trillion won in 2015.
But in his second term, Kwon pledged to strengthen non-steel business, especially advanced materials, like lithium, nickel, magnesium and titanium.
Choi Jeong-woo, who became Posco Chairman in July 2018, has followed in the footsteps of his predecessors and restructured the organization to expand non-steel businesses.
Under his leadership, Posco ESM and Posco ChemTech merged into Posco Chemical in 2019. To raise production capacity of battery materials, 1.27 trillion won of new shares was issued for Posco Chemical last year, the largest ever for Posco Group.
In a new year address on Jan. 3, Choi said that Posco will “solidify the group’s identity as an environmentally friendly future materials group.”
“Posco’s efforts to expand into non-steel businesses began years ago before Choi,” said Kim Tai-gi, a former economics professor at Dankook University. “While the previous chairmen set the direction for the adjusted business models focused on the new growth engines, Choi has been taking actions aggressively to actually bring changes to Posco Group’s portfolio.”
Q. How will the holding company structure affect Posco’s corporate value and its stock?
Analysts say the holding company structure does not affect Posco fundamentals, though many shareholders strongly argue otherwise.
“The split should not be seen excessively critically on Posco’s stock price,” said Lee Jong-hyeong, an analyst at Kiwoom Securities. “Battery companies whose stock prices slid following a recent split partially sold their stock to secure proceeds to build major production facilities. This inevitably weakened [the parent company’s] control over the split company. But Posco does not need massive investment for its steel business, so there is no need for the company to sell its shares."
Posco promised not to list the split company nor its future subsidiaries.
Regardless, shareholders are very frustrated about Posco’s decision because they don’t entirely trust the company’s promise.
“As the sole shareholder [of the split company], Posco Holdings will be able to freely make changes to the articles of association,” said Solidarity for Economic Reform, a Seoul-based non-governmental organization, arguing that Posco “did not propose policies that prevent listing of its subsidiaries.”
Posco is trying to soothe the shareholders, promising to up the dividend to at least 10,000 won apiece and retire some of its treasury stocks this year to reduce the number of outstanding shares. Posco’s annual dividend for those who held shares in 2020 was 8,000 won.
BY JIM MIN-JI [jin.minji@joongang.co.kr]
with the Korea JoongAng Daily
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