By Hyunjoo Jin
Continue Reading Below
The outlook from POSCO, which kicks off the earnings reporting season for major Asian steelmakers such as Baosteel <600019.SS> and Nippon Steel <5401.T>, bodes ill for the sector.
Although prices of raw materials such as iron ore and coking coal are softening, weakness in developed economies and tight credit conditions in China are expected to weigh on steel prices.
"Unless the global economy gets better and sparks demand, POSCO's steel business will stagger for at least two to three years, pressured by low-end Chinese products, global oversupply and its domestic rival Hyundai Steel growing fast," said Kim Se-hoon, a fund manager at Assetplus Investment Management, which owns POSCO shares.
The company, which trails ArcelorMittal <ISPA.AS> and Baosteel <600019.SS>, said on Friday its July-September operating profit was 1.09 trillion won ($951.8 million), compared with an average 1.15 trillion won forecast from analysts, according to Thomson Reuters I/B/E/S.
The profit was up from 1.03 trillion won a year ago, thanks to higher sales volume and prices, but down from 1.5 trillion won in the previous quarter because of higher raw material costs, POSCO said.
POSCO said it expected global steel prices to remain weak because of an oversupply, while demand growth is seen slowing because of sluggish economies in advanced countries and China tightening.
"At home market, Korea turned into a net steel exporter because volume growth outpaced steel consumption growth...Demand decline is expected to continue in the second half because of sluggishness in major industries," POSCO said in a statement.
The weak won is also set to increase costs of imported raw materials for South Korean steelmakers in the fourth quarter.
The won, one of the region's most vulnerable currencies to global turmoil, lost more than 9 percent against the dollar in the third quarter and is widely expected to remain under pressure over the coming months as global economic jitters dampen investor appetite for riskier assets.
POSCO said it had slashed its 2011 investment plan to 6 trillion won from the previous 7.3 trillion won. It also raised its cost-cutting target to 1.4 trillion won for this year, from the previous 1 trillion won.
"We expect the business environment to remain uncertain in the fourth quarter," POSCO said in a statement.
Shares of POSCO, in which Buffett's Berkshire Hathaway <BRKa.N> <BRKb.N> owns an around 5 percent stake, have fallen 26 percent this year, compared with a 10 percent drop in the broader market <.KS11>.
POSCO shares ended up 0.3 percent in a broader market <.KS11> that was up 1.8 percent on Friday.
($1 = 1145.200 Korean Won)
(Additional reporting by Ju-min Park; Editing by Jonathan Hopfner and Muralikumar Anantharaman)