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POSCO Profit Beats Estimates, Lifts Earnings Target

South Korea's POSCO, the world's No.4 steelmaker, posted a forecast-beating 34-percent rise in quarterly profit and lifted earnings targets to reflect a sharp rise in its benchmark steel prices.

POSCO raised its 2008 sales target by 11 percent to 31 trillion won ($31 billion) -- its second revision in three months -- and hiked its operating profit target by 19 percent to 5.7 trillion won.

Despite strong demand from a booming shipbuilding sector, POSCO, which depends heavily on imports of raw materials, faces a tough second half after contract prices for Australian iron ore almost doubled and imported coal prices trebled.

"Steel prices are likely to show sustained strength in the second half and boost our sales, but the operating profit outlook is uncertain because recently agreed raw material deals are starting to have a full impact on earnings," POSCO said in a statement on Friday.

Analysts still expect POSCO to outperform its rivals in the coming quarters on the back of three rounds of price hikes that have boosted the company's prices by a total of 63 percent so far this year.

In contrast, Japanese rivals such as Nippon Steel and JFE have yet to reach similar deals with key customers such as auto firms.

"The earnings are strong," said Oh Hyun-seok, an analyst at Samsung Securities. "There are still uncertainties about whether POSCO will be able to raise prices further in the second half, as the global economy is slowing, but they need to reflect higher raw material costs," he added.

POSCO, which is the world's No.4 steelmaker by output and the second-largest by market value, reported a record quarterly net profit of 1.49 trillion won ($1.49 billion) in the three months to June 30, compared with 1.1 trillion a year earlier and 1.0 trillion in the January-March period.

The result beat a forecast for 1.26 trillion won from 12 analysts polled by Reuters Estimates.

Revenue rose to a record 7.5 trillion won, up 28 percent from a year ago, driven by strong sales of auto sheet and high-end hot-rolled steel products.

POSCO also said it would raise its 2008 cost-saving target to 861 billion won from 751 billion.

Defending Margins

POSCO, which earns two-thirds of its revenue in the domestic market, said export price growth topped the domestic rise, boosting overseas sales by 35 percent to 2.3 trillion won.

Its revised earnings target indicates 2008 operating profit margin will fall to 18 percent this year, from the second quarter's 25 percent.

The recent steel price rally reflects a booming Asian market at a time when developed countries are seeing slowing demand.

Reduced exports from China and soaring global freight costs have created tight supplies, which will allow South Korean and Japanese firms to raise their export prices.

Led by China, the world's largest steel exporter and consumer, Asia's steel consumption in 2008 is forecast to grow 8.6 percent, outpacing the global growth rate of 6.7 percent, according to the International Iron & Steel Institute.

Shares in POSCO, South Korea's second-largest firm with a market value of about $41 billion, closed up 2.2 percent at 511,000 won before the results were announced.

Its shares rose 14 percent in the second quarter, comfortably outperforming the 1.7 percent loss in the broader market.