Posco expects earnings to improve in second half

South Korea's POSCO, Asia's second-biggest steelmaker, expects earnings to improve in the second half as a better global economic outlook allows the company to ask for higher domestic product prices.

"Expectation for recovery in the second half is increasing, led by improving indices in China and the United States,'' Chief Financial Officer Park Ki-hong told reporters on Friday after the company reported a steeper-than-expected slump in first-quarter operating profit.

Asian steelmakers, such as Japan's JFE Holdings, have been struggling with falling profits because of the high cost of key raw materials including iron ore and coking coal.

POSCO last raised prices by as much as 18 per cent in April last year to reflect surging costs, but sluggish steel demand particularly from shipbuilders forced them to sell at a discount.

High costs led POSCO, the world's third-biggest steelmaker, to post a 54 per cent drop in operating profit to 422 billion won on a parent basis, missing a consensus forecast of 439 billion won from Thomson Reuters I/B/E/S.

First-quarter sales rose to 9.46 trillion won from 9.11 trillion won a year earlier. POSCO trails ArcelorMittal and China's Baosteel in steel production.

Shares in POSCO ended down 0.4 per cent to 378,500 won, before the earnings announcement. The benchmark KOSPI fell 1.3 per cent.

"POSCO's earnings will improve from the second quarter," said Park Jung-hoon, a fund manager at HDC Asset Management that owns shares in the steelmaker.

"Given market expectations of that, there would be no problem that shares go up to 400,000 won," he said.

Analysts say the slowing economy in China, the world's largest steel consumer, may curb profit growth for producers of the metal used in cars, ships and construction.

In China, which produces around half of the world's steel, the sector had a loss of about 1 billion yuanin the first quarter compared with a profit of 25.8 billion yuan a year earlier, an official with the China Iron & Steel Association said on Wednesday.

"The biggest risk for POSCO's performance in the long run is whether Chinese demand rises back quickly," said Lee Dong-jin, a fund manager at KTB Asset Management.

POSCO, which relies on domestic sales for 70 per cent of its revenue, cut its full-year sales target on Friday to 37.7 trillion won from its forecast in February of up to 41.2 trillion won.

The company, in which billionaire investor Warren Buffett's Berkshire Hathaway owns a stake of around 5 per cent, also reduced its 2012 capital investment to 4.2 trillion won from up to 5.1 trillion won planned previously.

JFE, the world's No. 5 steelmaker, booked 6.3 billion yen in recurring loss, which is before tax and special items, for January to March, the company said on Friday.

Shares in JFE fell 3.29 per cent, while the broader market closed 0.3 per cent lower.

Copyright @ Thomson Reuters 2012