POSCO Upgraded to Outperform - Analyst Blog

We recently upgraded our rating for the South Korean steelmaker, POSCO (PKX), from Neutral to Outperform.

POSCO is the world's third largest steelmaker on the basis of output. The company primarily manufactures steel for the shipping and construction industries and operates through its two steel production facilities, the Pohang Works and the Gwangyang Works.

We believe, over the long term, POSCO will remain well positioned to benefit from wide regional diversification with its growing presence in the international markets through investments in Australia, China, India, Indonesia and Brazil. In addition, higher proportion of value-added products (such as cold-rolled steel, automotive steel plates and electric steel sheets) in the company's product mix is a boost to revenue and earnings growth as these products attract better realizations and margins over commodity hot-rolled coils.

POSCO has a coal self-sufficiency ratio of 36% (up from 30%), with roughly 1.3 million tons of annual capacity added to the acquisition of a 70% stake in Australia`s Sutton Forest Mine. It is anticipated that the mine would be fully operational by 2016.

For iron ore, the company's self-sufficiency has gone up from 18% to 34% with a 24.5% stake acquisition in API (Australian Premium Iron) Iron Ore Mine. The mine is expected to be fully operational in 2014 and will add roughly 9.8 million tons of annual capacity. Following POSCO's investments, roughly 50% of the API mine will be owned by Aquila and 25.5% by American Metal and Coal International (AMCI).

According to Korean Iron & Steel Association, steel production in the country is likely to reach a record high of 70 million tons in 2011, an increase of 5.8% year over year. The higher expectation reflects improved productivity from new facilities and rising demand from the steel consuming sectors. Exports from the country would get a boost, satisfying demands from emerging economies like India, while imports will be restricted. 

Moreover, POSCO's joint venture with Krakatau Steel, new processing facility in China and stake acquisition in Australia's iron ore and coal mines will prove to be the prime share-driving catalysts. Growth might get restricted due to higher raw material prices that led to disappointing third quarter financial results.

Overall, anticiptaing positive growth momentum and outperformance compared with the matket, we upgrade POSCO to an Outperform recommendation.