POSCO Q2 profit sags, steel price recovery to help

SEOUL, July 12 (Reuters) South Korea's POSCO reported a 44 percent fall in quarterly profit on Wednesday, but the figure was better than expected and analysts said recovering steel prices should improve earnings over the rest of the year.

POSCO, which slightly raised its 2006 crude steel output estimate, said it expected global steel markets to be solid, helped by demand from Japan and Europe and after major steel makers increased selling prices for the third quarter.

''As demand from China has been rising, the outlook for the steel industry looks good for the medium- and long-term, as does the outlook for POSCO,'' said H.K. Hong, fund manager at Dongbu Investment Trust Management.

POSCO Chief Financial Officer Lee Dong-hee told analysts and reporters that the steel giant also expected an improvement in the second half of the year, adding that the cost of raw materials was unlikely to rise sharply.

However, the company noted that one challenge later this year would be that newly established Chinese steel facilities were set to begin production.

The world's fifth-largest steel maker earned a net profit of 710 billion won (8.4 million) in the three months to June 30, down from 1.26 trillion a year earlier.

But that was a 4.3 percent rise from its first quarter, helped by higher export and stainless steel prices, with a 2.4 percent rise in the won helping lower importing costs of key raw materials.

The result was above a consensus forecast of 681.7 billion won, according to seven analysts surveyed by Reuters.

For the full year 2006, net profit is seen at 2.91 trillion won, down from 4.01 trillion a year ago, according to Reuters Estimates.

This indicates the second-half profit will rise to 1.52 trillion won.

REVIVING STEEL PRICES POSCO slightly raised its 2006 crude steel output estimate to 30.3 million tonnes from 30.1 million.

However, the company kept its forecast for 2006 sales unchanged from an earlier projection of 19-20 trillion won.

Reflecting reviving steel prices and a 19 percent rise in iron ore prices, POSCO said in late June that it would raise the prices of major steel products, including benchmark hot-rolled coil prices which have gone up by 8.3 percent to 520,000 won per tonne starting in July.

Investors are also keen to know how POSCO, which is slated to become the world's fourth-largest once Mittal Steel's takeover of Arcelor is completed, would seek to fend off any potential takeover threat.

POSCO, which has a fragmented, foreign-dominated share ownership, is seen by some as a prime target in the current mood for global consolidation.

POSCO currently ranks fifth among the world's steel makers measured by output after Mittal, Arcelor and Japan's Nippon Steel and JFE Holdings Inc.

Analysts also said POSCO's future price policy would likely depend on whether China's Baoshan Iron and Steel Co. Ltd., the world's six-largest steel maker, will increase prices for the fourth quarter in a planned price announcement in August.

Shares in POSCO, South Korea's fourth-largest company with a market value of about billion, rose 1.6 percent in the second quarter, outperforming a 4.7 percent fall in the broader market.

Before the announcement, the stock closed down 1.02 percent at 243,000 won.

REUTERS PV RS1459