Korean steel producer POSCO (PKX) recently announced to have started construction of a Continuous Galvanizing Line (CGL) factory in the City of Focal, Guangdong Province, China.
The factory with an annual production capacity of 450,000 tons is due to be completed in January 2012 and will secure input materials from Gwangyang Steelworks, etc. The company’s prime focus will be on production of high-end automobile steel plates to cater to the needs of the Chinese automobile market.
Automobile industry in China has advanced in rapid strides over time, becoming the largest automobile producer surpassing U.S. in 2009. Since then the industry has been growing continuously with the development of Chinese economy and rising investment scale.
POSCO’s relentless focus on regional diversification, self-sufficiency in raw materials and higher proportion of value-added products in its product mix are encouraging attributes. Recently, the company’s much awaited $12 billion Orissa project, involving an integrated steel plant with 12 billion tons of annual capacity and a port in Orissa, received conditional approval.
For fiscal year 2011, POSCO expects consolidated revenue of around KRW 66 trillion while the company’s revenue is targeted to reach KRW 36 trillion. It is anticipated that product sales would amount to a total 34 of million tons and crude steel production would yield 36 million tons. Consolidated investments are likely to be KRW 9.8 trillion with the company’s investments totaling KRW 7.3 trillion. The company targets to save costs amounting to KRW 800 billion.
However, rising competition and higher raw material costs remain the prime causes of concern. The company faces stiff competition from Arcelor Mittal (MT) and Nippon Steel Corp.
We currently maintain a Neutral recommendation on the stock.
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