Posco at the Turning Point of Restructuring, Faces Risk of Losing Momentum Amid 'Corona Cold Shower'

Steel Prices Fall and Demand Plunge
US and EU Protectionism Obstacles
Concerns Over Halt in Financial Improvement Amid Investment Resumption
Full Effort to Overcome Internal and External Crises

POSCO Chairman Choi Jung-woo is attending the '2019 POSCO Forum' held last November at the POSCO Human Resources Creation Center in Songdo, Incheon, providing a review.

[Asia Economy Reporter Lim Jeong-su] The restructuring led by POSCO Chairman Choi Jeong-woo was successful. By disposing of non-core subsidiaries in distress and repaying borrowings, the financial structure improved. The external environment also benefited from China's steel industry restructuring.

However, numerous adverse factors loom ahead for POSCO as it prepares for a new leap forward. With steel demand declining, the problem of oversupply is resurfacing. Trade disputes such as iron ore tariffs and trade safeguards are also exacerbating performance deterioration. The novel coronavirus disease (COVID-19) has dampened market recovery expectations. The construction industry has begun to enter a recession, and sales of finished vehicles, a key upstream industry, are expected to plummet.

◆Steel Price Hike Off the Table= The decline in steel prices shocked POSCO's performance in the fourth quarter of last year. The sales margins for carbon steel and stainless steel (STS) fell to 50,000 KRW and 70,000 KRW per ton, respectively. Sales and operating profits fell significantly short of market consensus. Due to worsening market conditions in the second half, consolidated sales for last year were 64.3668 trillion KRW, and operating profit was 3.8689 trillion KRW. While sales decreased by only 0.9% year-on-year, operating profit dropped by 30.2% due to deteriorating steel profitability.

The outlook for this year's performance is even bleaker, as steel demand is expected to plummet due to the COVID-19 crisis. China accounts for 65% of global iron ore demand and is the world's largest steel consumer. With steel demand sharply declining globally, including in China, it has become difficult to expect margin improvements.

Steel price hikes also appear to be effectively off the table. Since November last year, as market conditions recovered, there was talk of possible steel supply price increases. However, due to COVID-19, instead of price hikes, concerns about price declines have emerged. Kim Yoon-sang, a researcher at Hi Investment & Securities, expressed concern, saying, "An external environment has been created where it is difficult to raise steel sales prices."

The downturn in upstream industries is also worsening steel market conditions. As demand for automotive steel sheets, a core revenue source, decreases, sales and profitability are expected to be negatively impacted. Securities firms are continuously lowering POSCO's earnings forecasts. Sales forecasts have dropped to around 63 trillion KRW, and operating profit forecasts have fallen to 3.7 trillion KRW. Recently, operating profit forecasts have even fallen to the 3 trillion KRW level.

◆'Sandwiched' Between Reduced US/EU Imports and Increased Chinese Production= The spread of protectionism due to the prolonged US-China trade dispute is another threat. Steel tariffs that did not exist before have been imposed, and trade safeguards have been activated. Since May 2018, Korean steel products exported to the US have been limited to 70% of the average export volume from 2015 to 2017. The European Union (EU) has also decided to implement safeguards, unable to resist the US measures. The EU imports 105% of the average import volume from 2015 to 2017 tariff-free, and imposes a 25% tariff on volumes exceeding that.

This poses a significant risk to POSCO, which exports large volumes of automotive steel sheets to the US and Europe. An automotive industry official said, "Hyundai Steel supplies automotive steel sheets to Hyundai Motor Group and has some domestic demand support, but POSCO has a large export ratio," adding, "POSCO will be heavily affected by the safeguards."

China's increase in crude steel production is also problematic. If the Chinese steel industry increases low-priced steel production, it becomes difficult to raise steel prices, negatively impacting the domestic steel industry's performance. According to the World Steel Association, China's cumulative crude steel production last year was 996 million tons, an 8.3% increase compared to the previous year. In December last year, crude steel production reached 84.27 million tons, a 12% increase over the same period.

The Chinese government had been reducing crude steel production since 2015 by restructuring insolvent companies due to falling steel prices. However, with the prolonged economic downturn caused by trade disputes, construction investment and crude steel production have started to increase again, fueling steel price declines. Due to the COVID-19 crisis, inventories have piled up, and as of the end of February, China's steel distribution inventory reached 23.74 million tons, the highest level in 14 years since 2006.

◆Concerns Over Suspension of Financial Improvement as 'Investment Clock Restarts'= There are also concerns that the trend of financial improvement may be difficult to maintain as POSCO moves out of the restructuring phase and increases investments.

POSCO improved its financial structure through painful restructuring, minimizing investments and selling overseas distressed assets. As of the third quarter consolidated financial statements, net borrowings (borrowings minus cash equivalents) stood at 10 trillion KRW, down to less than half from 22 trillion KRW at the end of 2014.

However, POSCO's investment execution is expected to accelerate from this year. POSCO announced plans to invest 45 trillion KRW over five years from 2019 to 2023 in steel business advancement, new growth businesses, and eco-friendly energy and infrastructure projects. It will invest 26 trillion KRW in smartifying the No. 3 blast furnace at Gwangyang Steelworks, expanding dedicated production facilities for Giga Steel, and installing by-product gas power generation facilities to improve energy efficiency at steelworks. It will also spend 10 trillion KRW on future new growth businesses such as secondary battery materials and 9 trillion KRW on energy and infrastructure projects.

A credit rating agency official said, "Due to past experiences with insolvency, POSCO will not increase investments to the extent that financial stability is compromised," but added, "If planned investments are executed amid worsening cash flow, the financial structure could deteriorate again."

This content was produced with the assistance of AI translation services.