Shares in Posco, which a year ago appeared to be as stainless as some of the steel it produces, have fallen sharply in the past seven months amid a broad selloff of South Korean stocks by foreign investors and mounting raw-materials costs.
But Posco has a huge amount of untapped earnings power, because it has kept product prices well below those of its competitors. Either the steelmaker will raise them, boosting profits, or keep them down and increase market share.
Investors are eager to see Posco raise prices. And analysts say the company's stock will get some upward momentum if Posco does.
On Tuesday, Posco shares fell 0.4% in Seoul to close at 490,000 won ($491.72) -- well below their October peak of 765,000, though still 25% higher than they were a year ago.
In 4 p.m. composite trading on the New York Stock Exchange, Posco's American depositary shares were down $2.46 to $120.07.
At the current share price, Posco's historic price/earnings ratio is about 10.5, roughly in line with rival Nippon Steel of Japan. But the stock is less expensive than several other South Korean steelmakers, as well as China's Baoshan Iron & Steel at about 18 times and Luxembourg-based ArcelorMittal, the world's biggest steel producer, at 12.
Like its competitors, Posco is seeing the prices it pays for raw materials rise quickly as part of the global commodity boom that is driven in large part by China and India. But Posco has more flexibility than many rivals to decide when it wants to pass on the higher costs it is facing to its customers. For the moment, Posco is trying to hold the line on prices as a way to gain customers and market share.
The company did raise prices on hot-rolled coil by about 12% in February. But at about $600 a ton, Posco is seeking far less than European steelmakers, which are charging about $1,000 a ton.
Meanwhile, the company hasn't raised prices this year on ship plate, the rough steel that is used for building ships.
One of Posco's chief rivals, Dongguk Steel, recently raised its price to $1,000 a ton for ship plate, says Brian Cho, analyst at Citigroup Global Markets in Seoul. Posco's price is about $780 a ton.
Cost-cutting and increased sales of high-value end products -- goods that Posco tailors for customers -- contributed to a 5% increase in first-quarter net income from a year earlier to 1.03 trillion won. Sales rose 6.4% to 6.1 trillion won.
During Posco's first-quarter conference call, Park Ki-hong, senior vice president for finance, said the company's first priority is to lower costs 'to absorb the shock from the high raw-material prices.' If that doesn't work, he added, 'we have some room to increase our prices again.'
'Investors have been disappointed by Posco management's unwillingness to raise prices, even though there is a lot of room to do it,' Citigroup's Mr. Cho says. 'That's the main reason the share price underperforms these days.' Still, he has a 'buy' recommendation on Posco.
In addition to pricing, some investors are closely watching Posco's stated interest in acquiring Daewoo Shipbuilding & Marine Engineering, a builder of ships and offshore facilities. South Korea's government, through its development bank and separate asset-management firm, has owned a majority of DSME since bailing it out in 2000, and now plans to sell that off.
Posco executives say they are interested in DSME because its business in building offshore equipment is attractive at a time when energy prices are rising. In addition, Posco could pick up a captive customer for its ship plate.
Cho In-je, an analyst at KB Investment & Securities Co., says she and other analysts forecast that supplies of ship plate will grow in 2010, likely sending prices lower. As a result, she says, 'it would be good for Posco to have a captive user.' She also has a 'buy' rating on Posco stock.
Evan Ramstad
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