Largest Korean steelmaker POSCO (PKX) and Kazakhstan-based ZAMAN Group entered into an agreement to build a ferro-silicon aluminum (FeSiAl) plant in Ekibastuz, Kazakhstan.
The memorandum of agreement signed requires the formation of a joint venture with POSCO’s materials unit Samjung P&A which will hold 60% interest, while the Zaman Group will hold the rest 40%. Construction of the plant is expected to consummate in 2011 and commercial production should begin by 2012. Staring with 45,000 tons per year, the plant will eventually have an annual production capacity of 0.4 million tons of ferro-silicon aluminum products in the year ahead.
Ferro-silicon aluminum is used as a deoxidizer of molten steel and is an important ingredient for making high-quality steel. Through this venture, POSCO aims at securing a stable ferro-silicon aluminum supply, thus curtailing its heavy reliance on imports from China.
We believe POSCO is well positioned to leverage from its expansion into the fast-growing markets over the long run. Its joint venture with Krakatau Steel, acquistion of Daewoo International, and stake acquisition in Australia’s iron ore and coal mines will be prime growth drivers.
With the global economy reviving from the recent crisis, demand for steel is seen to be escalating. POSCO anticipates that steel demand would grow in 2010 to 13% worldwide, with an expected 22% increase for the domestic market.
Also, the future of the world steel market depends substantially on the Chinese market, as the country’s demand alone accounts for approximately 45% of the global demand. However, the ongoing restructuring (restriction on power consumption and shut down of old plants) in the Chinese steel industry has raised hopes for other steel makers.
We currently maintain a Neutral recommendation on POSCO for the long term. For the short term, the company has a Zacks #3 Rank (Hold).
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