POSCO Results Disappoint

POSCO (PKX - Analyst Report) saw a 22.3% decline in third-quarter revenues to KRW6,851 billion from KRW8,813 billion in the corresponding quarter last year. Operating income declined 48.7% year over year, while net profit was down 6.3%.
 
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 for the quarter was down 8.5%, compared to the year-ago quarter.
 
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 has 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.
 
Back in May this year, POSCO implemented price cuts for its steel products in order to strengthen its customer base. The company 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 revenues 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. Revenues for the year are forecasted at KRW25.8 trillion, compared to KRW30.6 trillion in 2008. This represents a 16% decline in revenues, compared to last year. 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.