We recently downgraded our recommendation on the South Korean steelmaker POSCO (PKX), from Neutral to Underperform.
The company, considered to be the third largest steelmaker on the basis of output, failed to impress the market which witnessed a fall in the company’s ADR prices, post the release of the fiscal year 2011 financial results.
The company posted roughly a 12% decline in its net earnings in 2011, despite registering revenue growth of 44%. Its margins weakened as higher raw material costs were not fully reflected in the sales price. Further, in 2012, coking coal spot prices are expected to remain flat while limited increase is likely in iron ore prices.
Considering the broader perspective, we believe POSCO remains in an advantageous position to leverage benefits from the growing steel demand both in the global and domestic markets. Also, efforts are being made to expand operations in the fast growing markets and industries.
In 2011, facility expansion and sales increase led to a 2% growth in the company’s domestic market share to 41%. Moreover, POSCO’s investment in a graphene making company and development of new steel for electric vehicles would probably open up new avenues of growth for POSCO.
However, the outlook for the steel industry gets marred by the cautiously optimistic view of the World Steel Association. According to WSA, world steel demand will increase roughly 5.4% in 2012. Financial crisis in the European region, political unrest in other parts of the world and economic uncertainties in China, seem to restrict demand growth.
Moreover, rising competition from global steel manufacturers with an expanded production capacity could result in significant price competition. POSCO faces stiff competition from steel giants including Arcelor Mittal (MT) and Nippon Steel Corp.
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