We currently maintained our Neutral recommendation on South Korean steelmaker POSCO (PKX).
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.
POSCO is in a position to reap the benefits from its wide regional diversification, self-sufficiency in raw materials and higher proportion of value-added products in its product mix over the longer term. According to the World Steel Association, global steel demand will grow by 6% in both 2011 and 2012 due to continued growth in demand from the emerging markets.
The company is also branching off into fast-growing industries like graphene and synthetic natural gas. Recently, POSCO announced that it will soon acquire a 20% stake in XG Sciences, US-based graphene producer. The material is used in electronics, especially monitor, touch screen handsets and TVs. The application area of graphene is wide, including solar cells, light panels, gas sensors, flexible electronics, satellite and aircraft technology. Moreover, POSCO will produce synthetic natural gas (SNG), going forward, an effective replacement for Liquid Natural Gas (LNG).
For the fiscal year 2011, management aims at investing approximately KRW 9.8 trillion and has increased its revenue and sales target due to new facility addition and full capacity operations. Consolidated revenue is expected to be approximately KRW 67.8 trillion compared with KRW 66 trillion expected earlier. The company also proposes to save costs amounting to KRW 1 trillion, up from KRW 800 billion expected earlier.
Despite all the positives, higher raw material costs are expected to aggravate price competition and impact margins and revenues. To add to the peril, competition is increasing manifold impeding growth. The company faces stiff competition from Arcelor Mittal (MT) and Nippon Steel Corp.
Thus, we currently maintain a Neutral recommendation on the stock.
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