April 14, 2008 / 8:18 AM / 9 years ago

POSCO drops over 6 percent on steel margin concerns

4 IN. DI LETTURA

SEOUL (Reuters) - Shares in POSCO (005490.KS), the world's fourth-largest steel maker, fell more than 6 percent to a 3-week low on Monday, as rising cost pressure and U.S. recession jitters fanned worries over future profits and steel demand.

Other Asian steel stocks also dropped after POSCO said on Friday it planned no further price rises unless it faces a sharp rise in raw material costs, heightening concerns about industry margins.

The South Korean company reported a forecast-beating 5 percent rise in January-March net profit and raised its 2008 sales target by 17 percent to 28 trillion won ($28.7 billion) to reflect its second increase in major steel product prices this year.

But the group kept its operating profit forecast unchanged at 4.8 trillion, indicating its profit margin may fall to 17 percent this year, from 19.4 percent last year and 21 percent in the first quarter.

"POSCO's Q1 results were strong, but we are not convinced that the earnings momentum will be sustained, especially into the second half," Nomura analyst Cindy Park said in a note.

"The company faces higher input costs while it opted to keep domestic price hikes minimal in pursuit of amicable relationships with customers. This is what we had feared."

Shares of POSCO, the world's second-largest steel maker by value, closed down 6.5 percent to 457,500 won, its biggest percentage fall in six months and under-performing a 1.8 percent fall in the wider market.

Its decline sent the sector lower across Asia, with Dongkuk Steel (001230.KS) down 5 percent, Hyundai Steel (004020.KS) down 4.7 percent and China's Baoshan Iron and Steel (600019.SS) off 5.9 percent.

Revived worries over U.S. recession also kept the shares down, as it may lower demand for South Korean exports of steel-based products. POSCO sells three quarters of its products in Korea, home to the world's largest shipbuilder Hyundai Heavy (009540.KS) and No.6 auto maker Hyundai Motor Group (005380.KS).

Low Price Policy

POSCO, which has lagged rivals in raising prices, increased steel prices by up to 21 percent last week, on top of an 11.5 percent rise in February.

The price increases come after POSCO agreed to pay 65 percent more for iron ore supplied by Brazilian mining firm Vale (VALE5.SA) from April. It also last week agreed to treble what it pays an Australian miner for coking coal.

Its policy to keep prices relatively low disappointed some analysts who had been expecting more price hikes later this year to catch up with rivals, who charge up to $230 a tonne more.

"Its price plan is somewhat disappointing, given that it has not fully passed on input cost gains to steel prices, despite favorable market conditions to implement aggressive price hikes," Dongbu Securities analyst Lee Jong-hyung said, cutting his POSCO target price by 4.7 percent to 627,000 won.

"The decision is good for (manufacturers in) the country but not for POSCO shareholders."

Editing by Keiron Henderson and Lincoln Feast

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