Korean steel producer, POSCO (PKX) recently expressed its intention to raise funds from the Chinese market by listing its Chinese stainless steel joint venture in either Hong Kong or Shanghai. The initial public offering is expected to take place by 2013.
The joint venture, Zhangjiagang POSCO Stainless Steel (ZPSS), was formed in 1997 as a result of collaboration between POSCO and Jiangsu Shagang Group. The former currently holds an 82.5% stake while the latter owns 17.5% in the venture.
The joint venture recently completed a 2-year expansion project that increased its annual production capacity from 800,000 to 1 million tons. The project was initiated in 2009 and was worth $300 million. This capacity expansion raises POSCO’s worldwide stainless steel capacity to 3 million tons, securing the second position along with Taiyuan Iron & Steel.
POSCO is the world’s third largest steelmaker on the basis of output. The company primarily manufactures steel for the shipping and construction industries and operates through its two steel production facilities, the Pohang Works and the Gwangyang Works.
We believe that POSCO’s relentless focus on regional diversification, self-sufficiency in raw materials and higher proportion of value-added products in its product mix are encouraging attributes.
The company’s presence in China dates back to 1991 and from that time onwards it has been expanding its presence in the country. Steel demand from China is on the rise; according to the World Steel Association, steel demand in the country is expected to soar by 5% in 2011 and will account for about 44.5% of the global demand.
Rising competition and higher raw material costs, however, are factors that cause a great deal of worry. The company faces stiff competition from Arcelor Mittal (MT) and Nippon Steel Corp.
We currently maintain a Neutral recommendation on the stock.
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