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We currently maintain a Neutral recommendation on Korean steel producer POSCO (PKX - Analyst Report), the world’s third largest steelmaker on the basis of output.

Why Neutral?

POSCO since its inception in 1968, has produced the best quality steel and steel products and currently operates through a total of 202 companies across the world.

Long-term growth prospects are bright for the steel industry as concerns related to the Eurozone crisis and instability in the U.S. and China are abating gradually creating more room for growth. This in turn requires better infrastructure and modernized farming techniques and thus boosts demand for steel. According to the World Steel Association’s projection in Apr 2013, estimated global consumption of steel is likely to grow 2.9% in 2013 and 3.2% in 2014.

Talking of POSCO, the company stands at an advantageous position to leverage benefits of the growing steel market worldwide. High proportion of value-added products, like cold-rolled steel, automotive steel plates and electric steel sheets work well in the company’s favour. Also, POSCO’s expansionary efforts in the domestic market as well as in the international arena, especially the fast growing and emerging markets worldwide, are quite remarkable.

Despite the favorable long-term growth prospects, POSCO’s weak financial results in the past two quarters have marred the near-term outlook. Net income in the first quarter 2013 fell primarily due to revenue decline of 10.6% as non-steel sector performance was more than offset by weakness in the steel sector. Borrowings were high and led to higher liability to equity ratio while return on equity plummeted in the quarter.

Moreover, concerns arising out of rising international exposure, increasing costs, competitive forces and rising debt-to-equity ratio raise our concern.

Other Stocks to Consider

POSCO currently has a market capitalization of $5.7 billion. Other stocks to watch out for in the industry are Nippon Steel & Sumitomo Metal Corporation , with a Zacks Rank #1 (Strong Buy) while Angang Steel Company Limited (ANGGY) and Ternium S.A. (TX - Snapshot Report), each have a Zacks Rank #2 (Buy).

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