By Taras Berezowsky
While the ink on the brand-new US-South Korea Free Trade Agreement has barely had time to cool (to say nothing of President Obama’s and President Lee Myung-bak’s mutual courtship), Korea’s domestic 800-pound-gorilla of a steelmaker – POSCO (NYSE:PKX) – has been having some problems lately.
For one thing, POSCO’s profits have been, shall we say, less desirable than expected. Turns out, the global No. 3 steel producer’s bottom line suffered most from currency depreciation. As the Wall Street Journal reported, “currency-translation losses” in the third quarter hit POSCO hard – they lost 1.08 trillion won ($941 million). Comparatively, in the same quarter last year, they gained 208 billion won ($181.2 million).
How does this seemingly huge swing happen, you might ask? The answer lies in how South Korea’s steel companies invest in the US dollar. According to the Journal, POSCO and others “are susceptible to sharp movements in the won, as most have a largely unhedged net-short position in the dollar. That’s because their import costs, such as for iron ore and coal, exceed their export revenue.” In essence, it takes more Korean won (1,178.10 to $1 at the end of September, compared to 1067.70 back in June) to buy the raw materials they need from other countries.
Although POSCO’s senior vice president Jeon Woo-sig was quoted as saying that POSCO will set their long-term sights on foreign raw materials companies and steel mills to merge with and/or acquire to remedy their growth problems, in the short term, the loss affects POSCO’s capex habits. Iron ore and energy producers, among others, must be raking it in, because raw materials costs are causing POSCO to cut spending 18 percent for the year, according to Bloomberg. Arcelor will also be cutting expenses by $1 billion by idling European mills and opting for cost-cutting alternatives.
As if a sorely underwhelming quarterly earnings report isn’t bad enough, POSCO is making moves to improve its distribution operations, which according to this article, are in “desperate need of a new growth engine.” The company will now sell its entire product line through its sales outlets, regardless of steel form or type. It’s a classic case of rationalizing one’s supply base – customers want to be able to one-stop shop, not having to go to two separate outlets for hot-rolled and cold-rolled products, thereby strengthening their “purchase efficiency.” Why this hasn’t happened yet, well, who knows.
Adding insult to injury, all POSCO wants to do is build some steel plants in Dhinkia, Nuagaon and Gadakujang, India – but it’s running into local opposition. NHRC teams are investigating alleged human rights abuses on the proposed sites, according to this New India Express dispatch. Villagers claim that the land rights belong to them, under the Forest Rights Act, since their forefathers have lived there since 1930.
Looks like trying times for the Korean steel market’s biggest player.