SEOUL, Apr 7: Lower steel prices are set to halve quarterly profits for world number-five steel maker POSCO next week, and its earnings prospects look dim amid an uncertain product-price outlook.
Price cuts were forced on producers worldwide last year, and for 2006, POSCO has slashed the prices of 13 domestic steel products, including hot-rolled coil, by up to 17 percent, and analysts see further industry price falls.
''China's supply glut continues to be a risk to steel makers' profits. This will drive steel prices lower toward the end of the year, pressuring POSCO's profits,'' said Park Hyun-wook of Goodmorning Shinhan Securities.
The firm's April 11 results come as it seeks to head off the perceived threat of a takeover. POSCO is looking at share buy backs and cross-shareholding deals, and said a month ago it might ask Japan's Nippon Steel to buy a stake. Talk of a wave of bids followed a $25 billion approach by Mittal Steel, the world's top producer, for world steel number two Arcelor POSCO, profitable and with a fragmented, foreign-dominated share ownership, is seen by some as a prime target.
The company is forecast to report net profit of about 590 billion won ($616.3 million) for the three months to March. 31, according to the average estimate of seven analysts polled by Reuters.
This is a 55 percent drop from a year ago on lower prices, higher tax, and a loss on the sale of a stake in SK Telecom, but a 55 percent rise from the previous quarter, which was hit by a one-off tax bill.
Sales are expected to have fallen 16 percent to 4.74 trillion won from 5.66 trillion a year earlier.
For the full year 2006, net profit is seen at 3.07 trillion won on sales of 21.01 trillion won, according to Reuters Estimates.
Reflecting tougher business conditions, last month top Chinese steel maker Baoshan Iron and Steel Co. Ltd. reported its first quarterly earnings decline in at least three years for the fourth quarter of 2005, and analyst expect a bigger fall for the first quarter this year.
NO PRICE HIKE
A hesitant price recovery is under way in China, which accounts for about a third of world steel production and about the same proportion of demand. The price of hot-rolled coil there has risen about 20 percent so far this year to $455 per tonne, but they remain well below last year's average of $534.
Analysts said it was unlikely POSCO would be able to raise domestic prices, because at about $500 a tonne for hot-rolled coil they are already higher than Chinese rates.
''It will be difficult for POSCO to raise its domestic prices this year and POSCO's earning will remain relatively weak after a robust performance in the last couple of years,'' said Shin Yoon-sik, an analyst at Meritz Securities.
IRON ORE PRICE
On the raw materials price outlook front, analysts said a rise in iron ore costs should be offset by lower coking coal prices this year.
Iron ore, which account for roughly 19 percent of POSCO's total raw material costs, is expected to cost 10 to 15 percent more, while the price of 2006 coking coal, 23 percent of costs, has been settled 8 percent lower than last year.
Shares in POSCO, South Korea's fourth-largest company with a market value of about $22 billion, surged 24 percent in first quarter, versus a 1.4 percent fall in the broader market, partly boosted by takeover speculation.
POSCO ranks fifth among the world's steel makers measured by output after Mittal, Arcelor and Japan's top two, Nippon Steel and JFE Holdings Inc.
POSCO shares trade at 7.7 times estimated 2006 earnings, against Nippon Steel's 9 times and Baoshan's 7.8.