Korean steel producer, POSCO (PKX) joined hands with Brazil’s Vale S.A. (VALE) and Dongkuk Steel Mill for the construction of a steel plant in the state of Ceara, Brazil. Vale will hold a 50% stake in the plant with POSCO holding 30% and Dongkuk Steel Mill the remaining 20%.
As per the memorandum of association signed, the three companies will begin construction of the plant early in 2011 with a view to having an initial production capacity of 3 million tons of steel slabs. For the second phase of the development, the companies have set the production capacity target at 6 million tons.
Vale is one of the world’s largest producers and exporters of iron ore and pellets. The company reported excellent results in the third quarter of 2010 with EPADS of $1.13; exceeding the Zacks Consensus Estimate of $1.03 and 31 cents in the year-ago quarter.
Recovery in the global economy boosted demand and prices of steel which impacted both the top line and bottom line positively. Future prospects of Vale are also bright and the company is all set to spend roughly $24 billion in 2011.
Dongkuk Steel Mill is a steel company based in the city of Seoul, South Korea. The company primarily manufactures steel plates, beams, sections and bars. The company registered a 96.3% year-over-year and 94.2% sequential decline in the second quarter of 2010. The company will soon be releasing its third quarter results.
We believe that demand for steel will be escalating in the quarters ahead as the economy revives gradually from the recent crisis. According to the World Steel Association, demand for steel will increase by 13.1% in 2010 and 5.3% in 2011 globally.
POSCO seems well positioned to leverage from its expansion into the fast-growing markets in the long run. Its recent joint ventures (Krakatau Steel), acquistions (Daewoo International) and independency in raw material procurement (stake acquisition in Australia’s iron ore and coal mines) will be the company’s prime growth drivers.
POSCO posted rather disappointing third quarter results as revenue increases were more than offset by higher raw material costs. Growth in the quarters ahead will be restricted as the company is likely to face headwinds emanating from its rival steel manufacturers worldwide.
We currently maintain a Neutral recommendation on POSCO, also supported by Zacks #3 Rank (Hold).
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