POSCO Joins Forces with Mechel - Analyst Blog

Korean steel producer POSCO (PKX), according to a recently signed memorandum of agreement with Russian steel maker Mechel, will invest for development of resources in Siberia and distribution routes in the Far East.

Prime areas of focus will be resource exploitation and joint investments, modernization of port and infrastructure construction, review of construction of a steel mill to produce semi products in mid/long-term, and promotion of products.

Terms of the agreement require POSCO to start with upgradation of ports (Posyet and Vanino) owned by Mechel and then use its technology and expertise to develop resources in China, Mongolia and Europe.

POSCO, through this investment, aims at securing a stable supply of raw materials for steel production. Incidentally, Russia has the biggest iron ore deposit and ranks second in coal deposits. Mechel owns coal fields like Yakut and Elga located in the Far East-Siberian region. The Elga coal field is estimated to have roughly 2.2 billion tons of coal deposit. Production is expected to commence by the end of 2010.

We believe POSCO is well positioned to leverage its expansion into the fast-growing markets in the long run.  Its recent joint ventures (Krakatau Steel), acquistions (Daewoo International), and increasing independence in raw material procurement (stake acquisition in Australia's iron ore and coal mines) will be the company's prime growth drivers.

With the gradual recovery in the global economy, demand for steel is expected to escalate and grow 13.1% in 2010 and 5.3% in 2011, according to the World Steel Association. Despite these positive factors, growth in the quarters ahead will be restricted as the company faces headwinds emanating from its rival steel manufacturers worldwide including Arcelor Mittal (MT), Nippon Steel Corp. and privately held Hyundai Steel Company.

We currently maintain a Neutral recommendation on POSCO, also supported by a Zacks #3 Rank (Hold).

 
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