POSCO Steps into SNG Business - Analyst Blog

Korean steelmaker, POSCO (PKX) signed an agreement with Jeollanam-do and Gwangyang-si, according to which the company will invest in establishing a Synthetic Natural Gas (SNG) manufacturing factory in Gwangyang-si.

The factory will be built on a 415,000m2 site within the Jeonnam Gwangyang National Industrial Complex and will possess an annual production capacity of 500,000 tons of SNG with coal. Both Jeollanam-do and Gwangyang-si have agreed to provide the administrative help for making the project a success.

The project has full support from the Korean government, which aims at replacing Liquid Natural Gas (LNG) with SNG and thereby, minimizing its imports of LNG worth KRW 200 billion. Apart from creating more than 0.45 million jobs, the project will increase competitiveness of the Korean steel producers.

Unlike LNG, SNG manufacturing process involves gasification of coal at high temperature and pressure to produce gas, which is refined and synthesized before use.

As distinct from coal power plants, which generate energy by burning coal, SNG gasifies coal at a high temperature and pressure, refines and synthesizes it to create gas. SNG is a clean fuel which can replace LNG. Currently, there is only 1 commercial plant in the U.S. which is in operation globally, while there are other plants in commercialization stage in China and Japan.

In addition to the factory establishment, POSCO will also engage in developing coal SNG process design technology, SNG synthesizing process, and catalysts.

We believe POSCO is well positioned to leverage from its expansion into the fast-growing markets in the long run. Also, the outlook for global steel market is promising with an expected surge in demand by 13.1% in 2010 and 5.3% in 2011, according to the World Steel Association.

Despite these positive factors, POSCO's performance in the quarters ahead are expected to be restricted with possible headwinds from rival steel manufacturers worldwide, including Arcelor Mittal (MT), Nippon Steel Corp. (NISTY.PK) and privately held Hyundai Steel Company.

We currently maintain a Neutral recommendation on POSCO.

 
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