Corporate Jul 25, 2013
Seoul: Some investors in South Korean steelmaker Posco are starting to sour on a long-delayed $12 billion project for a steel mill in Odisha that was once hailed as a profit driver.
The investment is part of a global expansion spree led by Posco Group Chairman and Chief Executive Chung Joon-yang, a nearly decade-long strategy that was intended to capitalise on rapid emerging economy growth and help reduce the company's reliance on its domestic market.
But a series of acquisitions left Posco with a debt burden that has more than doubled over the past three years, while slowing growth in major markets such as China has hurt steel prices and margins. Last week, the steelmaker said it will bow out of a $5.3 billion steel mill development in Karnataka.
"The steel market is not in good shape, and we share investors' concerns about the overall market conditions," a Posco executive told Reuters, speaking on condition of anonymity because he was not authorised to talk to the media. "The Odisha investment would be a burden to us."
The official, however, confirmed Posco was sticking with its Odisha plan, noting that it would be years before the mill starts production and market conditions may improve by then.
Posco, which reports its June quarter earnings on Thursday, is expected to show a nearly 40 percent drop in year-on-year profits. Its operating margin slumped to 7.8 percent last year. In 2005, when it first announced the Odisha investment, Posco's operating margin was 27.2 percent.
"Question marks are growing over whether Posco's Indian investment would be valid. Posco does not have enough money to finance the project," said Choi Moon-sun, an analyst at Korea Investment & Securities.
Reuters spoke with three large Posco shareholders, who also raised concerns about diminishing potential returns from the Odisha investment. The sources declined to be named because they were not authorized to speak to the media.
Posco's total debt has more than doubled to 39.6 trillion Korean won on a consolidated basis at the end of March 2013, from 18.2 trillion won at the start of 2010, according to its regulatory filings.
In 2005, when Posco agreed to the Odisha deal, its debt-to-equity ratio was 15.7 percent, the lowest among the world's top 10 listed steel companies, according to Thomson Reuters data. In 2012, that ratio stood at 63.3 percent, putting it middle of the pack. The company had 4.2 trillion won in cash and cashable assets at the end of March. Fitch Ratings and Moody's Investors Service cut their credit ratings on POSCO in 2012 and left the outlook "negative".
STEEL PRICES SAG
Steel prices in China, the world's biggest steel consumer, have slumped about a third over the past four years, while Posco's share price has fallen by about the same amount.
The company's stock rallied 9.4 percent this month, however, with Chinese steel prices rebounding on restocking demand, sparking hopes of a market recovery.
Posco's Odisha agreement is India's largest foreign direct investment deal. The plan envisions a 12 million tonne steel mill, and Posco initially expected the first phase to be completed in 2010. But protests, environmental worries and litigation over an iron ore mining concession have delayed the project.
ArcelorMittal SA, the world's top steelmaker, announced on July 17 that it would scrap a planned steel plant in Odisha.
Posco is keen on overseas expansion to reduce its reliance on the South Korean market where it generates nearly 60 percent of its sales volume and is losing market share to smaller rival Hyundai Steel Co, backed by automaker Hyundai Motor Co.
The company plans to start production at its 3-million tonne steel mill in Indonesia by the end of this year, while in Brazil, the steelmaker is partnering with Vale SA(VALE5.SA) and Dongkuk Steel Mill Co Ltd for a 3-million-tonne mill to produce slabs starting 2015.
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