POSCO Results Disappoint

POSCO (PKX - Analyst Report) reported results for the second quarter of 2009 yesterday that saw a 15% decline in revenue to KRW6,344 billion from KRW7,458 billion in the corresponding quarter last year. Operating income declined 91% year-over-year, while net profit was down 71% in the quarter.

The decline in the company’s profit was primarily driven by lower production and a drop in selling prices. The company’s global crude steel production in the quarter was down 15%, compared to the second quarter of 2008.
 
Starting from the second half of 2008, global economies have been experiencing a significant slowdown and steel prices have dropped sharply. All the major mills are cutting production in an effort to stabilize prices and market.

The business environment deteriorated so sharply that POSCO was forced to cut production in December 2008, for the first time in its history. The company is expected to cut production by approximately 2 million tons in 2009.
 
Further, in May 2009, POSCO implemented price cuts for its steel products in order to strengthen its customer base. The company has stated that the price cuts would reduce its sales by KRW2.7 trillion in 2009.
 
The company expects improvements in global steel markets in the second-half of the year. The company forecasts a 24% increase in production and 2% in revenue for the second half of the year, compared to the first six months.
 
For 2009, POSCO expects crude steel production of 29.8 million tons and sales volume of about 28.1 million tons. Revenue for the year is forecasted at KRW25.8 trillion, compared to KRW30.6 trillion in 2008. This represents a revenue decline of 16% compared to 2008. Operating income for the year is expected to be down 60%.
 
We believe that the market weakness will continue for the remainder of 2009. We maintain our Hold recommendation on the stock.