POSCO Inter, Silently Smiling in the Era of Inflation

Q1 Sales of 9.9 Trillion Won 'Surprise Performance'... 40% Increase YoY
Continued Profitability Improvement Expected... Strong Performance Forecast Beyond Q2

As Indonesia abruptly halted crude palm oil exports, the global edible oil market is experiencing turmoil. Indonesia's palm oil supply accounts for more than half of the world's demand. If Indonesia's palm oil export suspension continues for an extended period, not only food companies producing ramen, snacks, and chocolate but also cosmetics, detergent, and biodiesel companies will inevitably face difficulties. There is a high possibility of a chain reaction of price increases across essential goods, not just edible oil prices. Amid soaring raw material prices due to Russia's invasion of Ukraine, the palm oil crisis is expected to accelerate inflation further.

On the 26th (local time), the World Bank warned in a report that the global economy is facing the largest inflation shock in 50 years. It expressed concerns about stagflation, where inflation rises during an economic recession. The report forecasted that Russia's invasion of Ukraine will drive global food and energy price increases for the next three years until the end of 2024. Asia Economy evaluates the growth potential of POSCO International and JC Chemical, companies involved in the palm oil business.

[Asia Economy Reporter Hyungsoo Park] POSCO International achieved a 'surprise performance' in the first quarter of this year. First-quarter sales reached KRW 9.9123 trillion, a 39.8% increase compared to the same period last year. Operating profit rose 70.2% year-on-year to KRW 216 billion. The steel trading division posted its highest quarterly performance ever, and the investment corporation's results were strong due to rising palm oil prices. Based on improved profitability in the energy sector, strong performance is expected to continue beyond the second quarter.

POSCO International operates businesses centered on trading, resource development, production and processing, and infrastructure development and operation. It is divided into three business sectors: trading, energy, and investment, with a total of 35 subsidiaries, including two domestic companies and 33 overseas companies. It maintains a network of about 80 corporations and branches in major overseas regions.

The trading division handles key items such as steel and steel raw materials, component materials, food materials, automotive parts, chemicals, and plants. It continues trading-linked businesses based on its overseas network. The energy division operates the Myanmar gas field, which began production and sales in July 2013, as well as hydrogen and liquefied natural gas (LNG) infrastructure projects. The investment division focuses on domestic and overseas investment subsidiaries, with key businesses including drive motor cores, hotels, cotton yarn, palm oil, mineral resources and energy development, and grain milling and infrastructure.

As of the end of last year, sales composition was 92.6% trading, 3.3% energy, and 4.0% investment. By region, sales were generated in the order of Asia 59.0%, domestic 15.3%, Europe 10.1%, North America 8.2%, and others 7.4%. By major product category, sales composition was steel 67.3%, food and materials 26.2%, energy 3.5%, and others 3.0%.

With raw material prices showing strong momentum daily, expectations for POSCO International's performance improvement are growing. Recently, as the Indonesian government banned palm oil exports, POSCO International's palm plantations have attracted attention. POSCO International started its palm business in Indonesia in 2011. Last year, to strengthen the food business sector through securing new palm plantations and investing in palm oil facilities, it established a holding company in Singapore. This investment reflected the intention to nurture the food business as a key growth driver alongside steel and energy.

Through the holding company, POSCO International is pursuing ▲ securing new palm plantations that create synergies with existing palm businesses ▲ investing in palm oil refining and biofuel plants ▲ expanding eco-friendly value chains such as biofuel investments based on renewable raw materials. Last year, palm oil production reached 164,000 tons, with sales of USD 14.6 million and operating profit of USD 6.6 million. Operating profit increased more than ninefold compared to 2019.

The palm oil produced at POSCO International's Indonesian plantations is sold domestically. Even with the export ban, the short-term impact is expected to be limited. Since supply is insufficient compared to demand, the export restriction is unlikely to stabilize palm oil prices in the short term.

As the Russia-Ukraine war continues for a long time, natural gas prices are also rising daily. In December 2008, POSCO International signed a gas sales and purchase agreement to sell gas produced from three gas fields in Yangon, Myanmar, to China CNUOC. This was a long-term contract including all conditions related to gas production and sales for about 30 years starting from July 2013. To secure additional reserves, exploration and drilling of three blocks were completed, and evaluation drilling was finished last February. The selling price of the Myanmar gas field is steadily rising, and profitability is expected to improve rapidly as the cost recovery ratio increases quarter by quarter.

Lee Sangheon, a researcher at Hi Investment & Securities, said, "The selling price of the Myanmar gas field is linked to the 12-month moving average of crude oil prices." He added, "As the oil price increases from last year and this year are fully reflected in the selling price, the Myanmar gas field's performance will improve quarter by quarter this year." He also said, "the procedure to acquire a 50.1% stake in Senex Energy, an Australian natural gas production and development company, has been completed," adding, "Senex Energy is pursuing production increases, and production is expected to rise to 30 billion cubic feet (ft³) in 2024."

As of the end of the first quarter this year, POSCO International recorded a debt ratio of 236.4% and a net debt dependency of 33.1%. The debt ratio rose by 29.7 percentage points compared to 206.7% at the end of last year. Total assets increased from KRW 10.7707 trillion at the end of last year to KRW 13.3396 trillion.

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