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South Korea's Posco rides wave of higher steel prices

China's production cuts help boost Asian makers' profits

Posco Chairman and CEO Kwon Oh-joon puts fire into the steelmaker's new furnace in Pohang last year. (Photo provided by Posco)

SEOUL -- Posco posted the best earnings in five years for 2017, thanks to a rising steel price driven by China's move to cut steel production as part of its environment policy, the company and analysts said on Wednesday.

South Korea's largest steelmaker said revenue reached 60.6 trillion won ($57 billion) last year, up from 53 trillion won a year ago. Operating profit jumped 63% to 4.6 trillion won during the same period, while net profit attributable to shareholders doubled to 2.79 trillion won.

The company said this was largely due to improved profitability in steelmaking, construction and the energy sector. Posco and its overseas steelmaking subsidiaries posted a combined 3.6 trillion won of operating profit in 2017, up 677.6 billion won year-on-year.

"Our operating profit had increased drastically in 2017 on the back of mill margin, which increased by 237.2 billion won," said Yoon Deok-il, head of the company's financial bureau, in a conference call. "The Chinese government is cutting its excessive capacity, lowering its retail stocks to the lowest level."

Analysts say Posco will enjoy high steel prices in the Chinese market at least to the second quarter, as tight supply there is expected to continue. In response to repeated calls from Japan, the U.S. and European countries for China to end its excess steel output, the Chinese government became serious about cuts in 2016. By June 2017, it had fully eliminated exports of inferior-quality, illegally produced steel products.

"Posco's earnings increased significantly in 2017 mainly as a result of improved industry fundamentals following cuts in China's large-scale steel capacity, and due to the company's increasing sales of value-added products," said Gloria Tsuen, a Moody's senior analyst, in a note on Wednesday. "We expect such favorable industry conditions to continue in 2018, allowing Posco to maintain its robust profitability and further improve its financial leverage," added Tsuen. Moody's maintained a Baa2 senior unsecured rating and a positive rating outlook.

Han Yoo-keon, an analyst at IBK Securities in Seoul, agreed. "Steel stocks in China's five key regions dropped 15% year-on-year to 3 million tons in December, boosting its prices sharply," he said. "Such a trend will continue to the second quarter, a seasonal peak time, along with China's policy stance earlier this year." 

Posco's Japanese rival Nippon Steel & Sumitomo Metal is in a similar situation. The largest steelmaker in Japan is roaring toward 72% pre-tax profit growth for the fiscal year ending this March, expecting to log 300 billion yen ($2.64 billion). It is producing most of its steel products at full capacity, and prices of hot-rolled sheet -- widely used in manufacturing -- and other products are rising.

Much of Nippon Steel's recovery is due to the fact that Chinese steelmakers -- which account for half the world's crude steel production -- ceased exports of cut-rate products. "The end of China's excess production will favorably affect our industry," Nippon Steel President Kosei Shindo said.

Shindo commended the Chinese government's efforts to cut more than 200 million tons of capacity, saying: "They have lived up to the expectations of the world." He believes that current trends will "remain stable," as the Chinese economy is controlled by the government.

Hyundai Steel, Posco's smaller local rival, said it would announce fourth quarter earnings on Friday. The steelmaker had suffered from poor performance last year as its parent and key customer Hyundai Motor saw sales fall sharply in China, hit by political tensions between South Korea and China.

Shares of Posco rose 1.84% to 387,000 won on Wednesday, hitting a fresh five-year high. The benchmark Kospi edged up 0.06% to 2,538.00. Hyundai Steel shares climbed 0.17% to 60,000 won.

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