POSCO Ups Stake in Pilbara

Korean steel producer, POSCO (PKX - Analyst Report) recently announced that the company will acquire a 15% stake in the Roy Hill Holdings, located in one of the richest iron ore belts in Australia, the Pilbara region.

The deal was signed for approximately KRW 1.779 trillion or US$1.6 billion. The stake acquisition will elevate POSCO to a position that would enable the company to counter the rising raw material prices that are used in steel construction. Moreover, it will help POSCO combat rising competitive pressure from its Asian counterparts.  

Also, of late, the company secured a major contract involving complete supply of rolled steel required for the construction of Lotte World Tower.

The tower project entails construction of the second tallest building in the world with 123 floors above and six floors below the ground. The construction is expected to be complete by 2015, using approximately 40,000 tons of rolled steel.  

We believe POSCO is very well placed to benefit from its wide regional diversifications, higher proportion of value-added products in its product mix and new facility additions over the longer term. Moreover, the company’s focus on expansion in fast growing markets like graphene and synthetic natural gas and investments in raw materials will eventually be extremely rewarding for POSCO.  

According to the World Steel Association, the world steel demand will increase by 6.5% in 2011 and roughly by 5.4% in 2012. However, impediments in the form of financial crisis in the European region, political unrest in other parts of the world, the Japan earthquakes and economic uncertainty in China are very likely to restrict demand growth.

In the recently reported financial results, POSCO’s net income plummeted 78.5% year over year, primarily due to KRW 1.08 trillion foreign currency translation losses while revenue showed a 51.6% increase. To add to the peril, competition is increasing manifold for the company, especially from its peers like Arcelor Mittal (MT - Analyst Report) and Nippon Steel Corp. (NISTY.PK).

The current Zacks Consensus Estimate for the fiscal years 2011 and 2012 are $8.87 and $10.27, reflecting a year-over-year decline of 27.35% and growth of 15.78%, respectively.

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