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Top steelmaker misses forecast on high costs

SEOUL: POSCO’s annual earnings may remain under pressure due to fragile demand and high raw materials costs after the world’s No. 3 steelmaker missed expectations with a 36 percent fall in quarterly profit.

The global steel sector, seen as a barometer of the broader economy’s health, is facing a margin squeeze on record output from China and stubbornly high prices of iron ore and coaking coal.

China’s tightening is also weighing on steel demand and Japan’s devastating earthquake has dimmed overall demand prospects from key consumers such as carmakers and shipbuilders as they struggle to normalize production.

“Profits are seen improving gradually, but I don’t expect booming demand ahead. Therefore there will be no strong upward momentum for (POSCO’s) shares,” said Cha Kyung-jin, a fund manager at Golden Bridge Asset Management, which owns POSCO shares.

“Also, there isn’t any clear signs of growth in the Chinese construction market, which may weigh on further demand,” Cha said on Friday.

Shares in POSCO, which counts billionaire investor Warren Buffett’s Berkshire Hathaway as a major shareholder, have underperformed this year in a broader market up seven percent.

JFE Holdings, the world’s No. 5 steelmaker, reported a 67 percent fall in quarterly profit on Thursday after the March 11 earthquake curtailed shipments. The firm provided no outlook for the current financial year.

 Toyota Motor said on Friday it could take until the end of the year before production fully recovers to levels before the massive earthquake and tsunami on March 11.

POSCO CFO Choi Jong-tae said the company’s annual operating profit is expected to be higher than last year, helped by price hikes. But he did not provide any profit target.

This week, POSCO raised domestic steel prices by a higher-than-expected 16-18 percent in its first increase since July last year to reflect surging iron ore and coking coal costs. Spot iron ore prices have jumped more than 30 percent since July.

The company increased its sales target for 2011 by 11 percent to 40 trillion won following the price increase and expected earnings would improve from the second quarter, as it aims at 1 trillion won in cost savings. 

POSCO, which trails ArcelorMittal and Baosteel, reported January-March operating profit of 921 billion won ($852 million), below the consensus forecast of 1.1 trillion won by Thomson Reuters I/B/E/S.

The profit compares with 1.44 trillion won a year ago and 519 billion won in the previous quarter, POSCO said.

The disappointing result comes after the World Steel Association forecast this week that growth in apparent global steel use this year will slow to 5.9 percent from last year’s 13 percent due to uncertainties in Europe, the Middle East and Japan.

POSCO said it had agreed to pay a quarter more for iron ore purchases in the second quarter from the previous quarter and 47 percent more for hard coking coal.

“The iron ore market is likely to continue to remain tight in the second half due to strong demand from China, while coking coal prices may fall slightly as supply disruptions from Australia will ease,” it said.

Home rival Hyundai Steel’s shares have jumped 18 percent.

Ahead of the result, POSCO shares closed up 0.5 percent in a flat market.

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