Posco Oct 27th, 2019 updated
Posco is a Korean steel producer, the 5th biggest steel producer of the world with a production of about 40 mio. to steel/yr. and revenues of 58 bn$. Posco is focused on special steels as automotive steel to compete against the chinese manufacturer that mostly produce standard steel types. Further business activities are energy coal power plant , LNG, lithium mining and batteries.
A motivation to buy POSCO is the low valuation PE of 7 - 8 based on 2019 estimates.
This is not a recommendation or proposal to do anything. The data written in this article are best guesses and not guarranteed. It is my private personal opinion. I`m not independing as I own a position of Posco shares.
Chances & Risks
The steel market is a very volatile market. The profits of POSCO did fluctuate in the last 6 years between 0.2 and 2.7 bn$ in average 1.3 bn$. The PE of 7 - 8 increases to 15 if the average profit of the last 6 years is applied. Actually profit margins in the steel business are declining due to high iron ore prices.
Steel production declined as well from 9,027 in q2/18 to 8,855 mio. tons in q2/19
POSCO gave up the CTG project. Due to high coal prices and low LNG prices slashed the profitability. A PP&E impairment of 1.1 bn$ is the consequence.
Posco announced a very ambitious investment plan. If it works well the company will produce more steel, battery materials and will be more profitable in a few years. The investment plan if fully realized could eat up the complete EBITDA or incease depth. Any downturn of the steel market will require POSCO to cut its investment programm.
POSCO got unionized now. Korean unions are aggressiv and thus this might mean strikes and labor conflicts and hence might cut into the profits.
2019/06/28 One-quarter of South Korea's blast furnaces are facing 10-day shutdown orders across the country over environmental violations. The impact of a suspension can be astronomical. A blast furnace is designed to operate continuously for decades. Once it is halted and the steel inside hardens, the metal needs to be removed through an explosion or some other painstaking process before the furnace can restart. Getting a furnace back online "would take three to six months," (9). It seems that South Korea came much faster to a destructive green ideology than other developed nations.
2019/06/19 Posco is likely to continue to suffer weak business results in the second quarter of the year due to high iron ore prices and a supply glut. The price of iron ore reached a five-year high surpassing the US$110-per-ton threshold for the first time since April 2014. "Usually, changes in raw material costs are reflected in product prices one or two quarters later,"POSCO might be able to improve its product margin as increased raw material costs will be largely factored into their products starting in the third quarter (8)
2019/04/24 Posco anounced a consolidated operating profit of $1.05 billion in the first quarter, compared with 1.3 bn$ a year earlier. POSCO's first-quarter revenue inceased 1 percent to 14 bn$, while net profit fell 28 percent to 680 mio. $ or about 8.8 $/share.
Main reason for the decrease of profits is the increase of the key raw mat. iron ore that climbed more than 20 percent in the first quarter of the year.(6)
2019/04/08 POSCO decided to pull out of the magnesium business after 13 years of investment. The group has suffered a steady losses. Posco has a history of overinvestment. Posco tries a lot of opportunities and hope to make it a profitable business (5).
2019/02/24 In 2018, capex was 2.4 bn$ on consolidated level. This year it is planned to spend 5.4 bn$ on a consolidated basis. For POSCO capex, as steel peers in China and Japan are strengthening efforts to save cost, POSCO also has allocated on rationalization of steelmaking facility. The steel capex is increased to 2.2 for this year’s steel capex. In materials and energy, 0.9 bn$ is set aside and for all other subsidiaries, 1.6 bn$ is planned particularly in Myanmar gasfield exploration, expansion of POSCO ESM cathode factory. (4)
The SNG (Synthetic Natural Gas) facility was given up. The profitability of SNG was not given as the LNG price has decreased and coal price has risen along with additional capex required. We concluded to end the business in December 2018 and thereby impairment had to be reflected in 4Q. Out of its book value of 1.2 trillion won, we recognized about 800 billion won loss on a consolidated basis. For the remaining 370 billion won, we evaluate that 200 billion won worth asset can be re-used in our steelworks in Gwangyang and 170 billion won worth is planned to be sold. We will have to split those assets for sale and in that case, further impairment from SNG would be less likely (4)
Q3 net profit rose 17 percent from a year earlier on shareholding gains from affiliates. In the third quarter that ended on September 30, net profit jumped to USD 931 million. Operating profit jumped 36 percent to 1.34 bn$. Sales climbed 9.1 percent to 14.4bn$. (2)
...market assumption of POSCO's operating profit for this year stands at 5.5 trillion won. (1) about 4.9 bn$
Posco announced on Sept. 3 a 45 trillion won (40 bn$) investment that means 9 tn/yr! and 20,000-people hiring plan to upgrade its steel and battery capacities by 2023. (1) The 9 trillion won amount is even higher than the company's 2017 earnings before interest, tax, depreciation and amortization (EBITDA) of 7.9 trillion won. (1) POSCO will invest 26 trillion won to expand its steelmaking capacity, 10 trillion won for its battery materials businesses (Li hydroxide, Li carbonate) and 9 trillion won for energy businesses.
Also, adding to investors' concerns is the recent organization of two labor unions at POSCO. The steelmaker has virtually been without a union for the past five decades. Though the union is in its early stage, industry officials point out that management-labor relations at POSCO will face a huge change, affecting the operation of the group. (1)
Numbers. 1$ = 1172 KRW (10/26/2019)
Posco KRX 005490 213.000 KRW about 182$ (25.10.2019)
Q3/2019 Q2/2019 Q1/2019
Revenues bn$ 13.64 13.93 13.66
Operating Profit million $ 887 912 1.03
Net Profit million $ 424 522 632
Net Profit Estimate 2019: 1.9 bn$ -> 25$/share -> PE 7.3
Revenues Outlook 2019: 57 bn$
Capex Outlook 2019: 5.2 bn$ (above operating profit!)
Main issue is the steel business that is hit hard by increasing iron ore prices and low demand.
2018 Numbers (10)
Exchange Rate: 1$ = 1140 KRW April 24th, 2019
Revenues: 54 bn$/17
Net Income: 1.7 bn$/18, Operating Income 4.9 bn$ (high impairement costs!)
Dividend 2018: Depending on the business situation up to 10.000W (9 $/share)
Number of Shares: 77 mio.
Share Price oct. 1, 18: 295000 Won =264 $
Net Income of the last 6 years:
2018 2017 2016 2015 2014 2013 Average
1.7bn$ 2.7bn$ 1.2 bn$ 0.2 bn$ 0.6 bn$ 1.2 bn$ 1.3 bn$
Worldwide steel production: about 1600 mio. to/yr. biggest manufacturer China about 800 mio. to/yr.
Biggest steel manufacturing companies: Arcelor Mittal about 100 mio. to/yr., POSCO No. 5 about 41 mio. to (2016)
World Steel Demand
2016 2017 2018 2019(f) YoY YoY US 91.9 97.7 99.8 2.1% 100.8 1.0% EU 157.9 163.1 168.9 3.6% 166.8 -1.2% China 681.0 773.8 835.0 7.9% 900.1 7.8% India 83.6 88.7 96.7 9.1% 101.6 5.0% ASEAN 75.7 73.5 77.1 4.9% 79.5 3.1% MENA 72.6 71.7 68.9 -4.0% 66.1 -4.0% World 1,520 1,634 1,709 4.6% 1,806 3.9%
ROK Location for Steel Manufacturing
GM put the business location ROK shortly ago in question. High costs aggressive labor unions created a loss of 1.5 bn$ in the last 3 years. A major issue for the steel industry are the energy prices. Due to destructive left politics energy prices might become challenging. Actually three provinces wish to shut down blast furnaces of Posco and Hyundai Steel!(7) It seems that manufacturing in the ROK faces similar challenges as that of other saturated industrial countries. Germany faced similar challenges in the last decades of the last centuries. They outsourced non core activities, established lean structures with plenty of lower paid contractors and lease workers, aggessive purchasing putting more volume to lower cost countries. I hope the POSCO management already smells the napalm.
Business Location ROK
the ROK was one of the poorest countries after the war in 1953. With very hard work and discipline they managed to become a developed country with a similar standard of living as South European countries. For ex. the Samsung Electronics memory chip division passed its international competitors by working 6 - 7 days a week achieving a 1/2 year advantage vs. international competition. One specific point in the ROK were always the veery aggressive labor disputes. Now it seems as the ROK is very saturated like other established industrial nations. The left government elected 2017 seems to do a destructive politics in favor of unions, gender, climate hoax, against nuclear power. High energy prices are a major challenge for the steel industry. The economic growth decreased to the lowest level since 9 yrs. (Q3/18). I hope that the government or at least the potential voters smell the napalm.
(10) 2019/07/25 http://www.koreaherald.com/view.php?ud=20190723000711
(8) 2019/06/19 https://en.yna.co.kr/view/AEN20190618005000320
(4) 2019/02/24 file:///C:/Users/holger/Downloads/2018%20Earnings%20Release%20-%20Q&A%20Script.pdf
(3) 2018/11/22 https://www.stahleisen.de/stahlmarkt/crossmedia/die-grosse-stahlstatistik-2017/
(2) 2018/11/09 https://steelguru.com/steel/posco-q3-net-rises-17pct-yoy/524235#tag
2018/09 (2) https://eu.detroitnews.com/story/business/autos/general-motors/2018/04/12/general-motors-south-korea/33770137/