Korean steel producer, POSCO (PKX) recently signed an agreement to acquire shares of a Pakistani steelmaker in an effort to establish a position for itself in the country. The company will soon be acquiring about 15.34% interest in Pakistan’s sole sponge iron producer, Tuwairqi Steel Mill (TSML).
The mill is owned by Al Tuwairqi Holding and has annual production capacity of 1.28 million tons of sponge iron. Commercial production at the mill is expected to begin by January 2012. Sponge iron is used as an alternative material to iron scraps in the steelmaking process.
Future prospects for the steel companies around the world seem promising with the constant growth witnessed in the global demand for steel. According to the World Steel Association, steel demand worldwide is likely to rise by 6% in both 2011 and 2012 because of sustained growth in demand from the emerging markets.
We believe POSCO stands well positioned to leverage from the growth momentum experienced in the global steel market. The company’s wide regional diversification, self-sufficiency in raw materials and higher proportion of value-added products represent an added advantage.
Moreover, POSCO’s entry into the Pakistani steel industry demonstrates the company’s efforts in expanding worlwide. Pakistan, the sixth populous country in the world, is expected to show roughly 71% increase in steel demand between 2010 and 2020.
Also, recently, POSCO P&S’ local subsidiary POS-GSFC joined hands in the construction of an oil storage tank in Abu Dhabi. The project, known as IRP-2 (Inter Refinery Pipelines-Phase2 PKG2) project, was ordered by Abu Dhabi National Oil Company’s subsidiary Takreer, and includes EPC contractor GS Construction. POSCO’s subsidiary will provide steel plates for storage tanks to be installed at key locations.
The current Zacks Consensus Estimate for the fiscal years 2011 and 2012 are $11.19 and $12.65, reflecting a year-over-year decline of 8.39% and growth of 13.05%, respectively.
We currently maintain a Neutral recommendation on the stock, expecting it to perform in line with the market.
