POSCO Details Investment Plans - Analyst Blog

Korean steel producer POSCO (PKX) provided details of its investment plans in South Korea, announced earlier at a board meeting held on November 19. The company will invest approximately KRW1.6 trillion (roughly US$1.4 billion) to develop, construct and operate a hot-rolled steel coil production line at its Gwangyang steelworks.

The facility, Gwangyang's No.4 hot-rolling mill, will enable POSCO to enhance its production capacity in the country and also tap the rising demand for high quality steel products. In addition, imports of high quality steel products from countries like Japan will be reduced.

The output from the mill will include automobile steel plates, oil steel pipes, high-strength steel, and wide strip steel. Slabs, the major input for hot-rolled mills, will be supplied from Gwangyang steelworks by reinforcing its steelmaking and casting capabilities.

The construction is expected to commence in September 2011 and end by January 2014. With an annual production capacity of 3.3 million tons of hot-rolled steel products, the mill will increase POSCO's annual hot-rolled coil production capacity from 23.54 million tons to 26.84 million.

We find POSCO well positioned to leverage from its expansion into the fast-growing markets in the long run.  Its recent joint ventures (Krakatau Steel), acquistions (Daewoo International), and increasing independency in raw material procurement (stake acquisition in Australia's iron ore and coal mines) are very likely to 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 would probably face 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 Zacks #3 Rank (Hold).

 
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