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POSCO Shares Fall on Outlook Worries

Shares in South Korean steel maker POSCO dropped 5 percent on Monday, hit by worries that its strong earnings growth may slow later this year due to rising costs.

Factory, Anshan, China
AP
Factory, Anshan, China

After Friday's close, POSCO reported a forecast-beating 5-percent increase in its first-quarter net profit and raised its 2008 sales target by 17 percent.

But the world's fourth-largest steel maker kept its operating profit forecast unchanged, indicating its margin of profit will fall to 17 percent this year, from 19.4 percent last year and 21 percent in the first quarter.

Shares of POSCO, the second-largest company in South Korea, were trading at 469,500 won in morning trade, down 4.1 percent from Friday's close and underperforming a 1.5 percent fall in the wider market.

"POSCO's Q1 results were strong, but we are not convinced that the earnings momentum will be sustained, especially into the second half," Nomura analyst Cindy Park said in a note.

"The company faces higher input costs while it opted to keep domestic price hikes minimal in pursuit of amicable relationships with customers. This is what we had feared."

POSCO, which has lagged rivals in raising prices, increased steel prices by up to 21 percent last week, on top of an 11.5-percent rise in February, to absorb rising costs.

Still its products are as much as $230 a tonne cheaper than those made by rivals and imported goods, even after last week's price increase.

POSCO said on Friday it would keep prices stable and did not plan to raise them again unless it faces a sharp rise in raw material costs.

Last week's price increase comes after POSCO in February agreed to pay 65 percent more for iron ore supplied by Brazilian mining firm Vale from April. It also last week agreed to treble what it pays an Australian miner for coking coal.

Steel makers worldwide are raising prices to cash in on booming demand, but higher raw material costs are eating into profits.

Asian steel mills have been hit particularly hard because, unlike western rivals such as ArcelorMittal and U.S. Steel, they do not own large mining assets.

POSCO, which is actively seeking overseas expansion to include mining assets, said on Friday the delayed construction of its $12 billion steel plant in India would start in late September.

The proposed plant has been left hanging for more than two years due to stiff opposition from local farmers angry over losing their land for the project.