Profit Warnings

POSCO Profit Slumps, Warns of 10% Cut in 2013 Sales

POSCO headquarters in Seoul, South Korea.
Park Ji-Hwan | AFP | Getty Images

POSCO, the world's No.5 steelmaker by output, reported a 51 percent slump in quarterly operating profit as tepid demand and falling prices offset lower raw material costs helped by a firmer local currency.

The South Korean steelmaker on Tuesday forecast its 2013 sales may drop 10 percent to 32 trillion won ($29.3 billion), but said it would raise investment 11 percent to 4 trillion won this year to stay competitive.

POSCO, backed by billionaire investor Warren Buffett, said that its operating profit for October to December fell 51 percent to 379 billion won ($346.7 million) on a parent basis that does not reflect earnings of affiliates from a year earlier, below a consensus forecast of 490 billion won in a Reuters' poll of 25 analysts.

The fourth-quarter result compared with a 771 billion won operating profit a year earlier. Fourth-quarter sales fell 20 percent to 8.07 trillion won, compared with a consensus forecast of 8.35 trillion won.

POSCO has been posting higher margins than its bigger peers ArcelorMittal, Nippon Steel & Sumitomo Metal Corp, backed by its dominant position in the domestic market and its cost efficiency.

(Read More: ArcelorMittal Sells $1 Billion Iron Ore Unit Stake to POSCO)

POSCO has not been immune to a prolonged industry downturn as the weak global economy has hurt demand and prices for the alloy used in the automobile, shipbuilding, construction and home appliance sectors.

Recent economic data from China points to the recovery of the world's top steel consumer this year after the economy grew at the weakest pace in 13 years last year. But the rebound would be a tepid 8.1 percent, with Europe's debt crisis and a slow U.S. recovery weighing on exports, a Reuters poll showed last week.

"The global race for survival will be fiercer than ever this year," POSCO CEO Chung Joon-yang said in a statement, adding he expects the global economy to remain sluggish despite moderate recovery in China and the United States.

Shares in POSCO, 5 percent owned by Warren Buffett's Berkshire Hathaway, ended down 0.1 percent prior to the results, after rebounding since late November on hopes China's economy will recover.

Stronger Won: Bad Or Good?

Byun Jong-man, an analyst at Woori Investment & Securities, said the appreciation of the South Korean won helped reduce POSCO's import costs of iron ore and coking coal in the fourth quarter.

POSCO's costs of iron ore and coking coal declined by nearly a third to 357,000 Korean won per tonne in the fourth quarter from 519,000 won, according to estimates by Mirae Asset Securities.

The stronger South Korean won would do more good than harm for the steelmaker in the near term, "given its bigger raw material imports than steel product exports," according to Sinn Min-seok, an analyst at Credit Suisse. POSCO's exports accounted for 42 percent of its sales volume in the third quarter of last year.

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The South Korean won rose almost 8 percent against the U.S. dollar last year, its fastest pace since 2009 and Credit Suisse estimated the appreciation of every 10 won against a dollar would increase POSCO's annual operating profit by 40 billion won.

But the stronger won threatens to hurt steel demand from automakers and other exporters for the longer term, the brokerage said.

Appetite for M&A

POSCO's CEO Chung has spearheaded major investments and acquisitions, including the purchase of trading and resources firm Daewoo International for 3.37 trillion won in 2010, leaving the steel giant with heavy debts and leading to a series of rating cuts by Moody's, S&P and Fitch last year.

POSCO has been struggling to cut debt by selling assets of its affiliates, but in a setback, its unit POSCO Specialty Steel, canceled a plan to list shares worth up to $424 million on the stock market because of tepid demand from investors.

(Read More: BHP Digs Deeper for More Ore to Feed China Steel Mills)

POSCO is continuing its efforts to snap up overseas resources to secure stable supplies of iron ore and coking coal.

A consortium including POSCO and Taiwan-listed China Steel agreed to buy a 15 percent stake in ArcelorMittal Mines Canada for $1.1 billion.

Another group including POSCO was also open to resuming $1.2 billion bid talks with Australian mining firm Arrium, a source told Reuters early November, after the consortium, which also includes Noble Group, had dropped the bid on price differences.