By Shinhye Kang and Saeromi Shin
July 13 (Bloomberg) -- Posco, South Korea’s largest steelmaker, raised its 2009 production target, signaling the worst of the global slump in demand may be over after second- quarter profit plunged 71 percent.
Output may be 6.4 percent higher than forecast, Posco said today, after reporting net income of 431 billion won ($328 million). The profit, boosted by a stronger won that cut borrowing costs, beat the median analysts’ estimate of 279.5 billion won.
Posco Chief Financial Officer Lee Dong Hee last month forecast earnings will rebound in the second half on lower material costs, rising production and exports. The company cut output for the first time in its 41-year history in December after the global recession cut sales to builders and automakers.
“The second-quarter is the bottom, and earnings are headed upwards,” said Park Hyoung Ryol, a Seoul-based fund manager at Consus Asset Management Co., which oversees the equivalent of $3 billion in assets. “The thing is how much it will improve.”
Shares of Posco, 5.2 percent owned by Warren Buffett’s Berkshire Hathaway Inc., fell 1.3 percent to close at 430,000 won in Seoul trading. The results came after the market closed.
Posco raised its annual crude steel output target to 29.8 million metric tons from a previous estimate of 28 million tons. Chief Financial Officer Lee had said on June 30 that output will be increased as customers begin to restock.
Sales Dropped
“Fierce competition led to a sharp drop in price and decline in earnings,” Posco said in presentation slides posted on its Web site. Sales for the quarter ended June 30 fell 15 percent to 6.34 trillion won.
Operating profit dropped 91 percent to 170 billion won, similar to estimates of 173.4 billion won. Posco is targeting a 2009 operating income of 2.6 trillion won, down from 6.54 trillion won last year, it said today.
Posco can cut costs by 300 billion won a month from October because of lower raw material costs, Chief Financial Officer Lee said today. Export prices will rise ‘significantly’ after the third quarter as global prices reached the bottom in the second quarter, he also said.
There are no plans to raise local prices yet, Lee added. Posco is in talks for overseas acquisitions, he said without giving details. The company doesn’t think there will be a “big merit” in bidding for a stake in Daewoo Engineering & Construction Co., he also said.
Hit the Bottom
“The market has factored in that the second-quarter result may be ugly on slow demand, lower prices and higher raw material costs,” Moon Jeong Up, an analyst at Daishin Securities Co. in Seoul, said before the results were announced. “Now the focus is on the recovery in third-quarter demand, which hit the bottom in the second quarter.”
The steelmaker, which earns about 60 percent of sales in South Korea, cut local prices for hot-rolled coils by 20 percent in May for the first time since January 2006. Steel demand diminished the most since World War II and output could fall 15 percent this year, the World Steel Association said in April.
A 33 percent plunge in iron ore prices and a drop of almost 60 percent in coal costs since April 1 will shore up Posco’s profit in the second half, spokesman Choi Doo Jin said July 1.
The company will restart the No. 4 furnace in Gwangyang on July 21 after maintenance, Choi said. The 3.1 million ton furnace was shut in February ahead of schedule for an overhaul.
Posco’s global rivals are also reviving production lines. ArcelorMittal, the world’s biggest steelmaker, said last month it may restart two blast furnaces at its Indiana manufacturing facility to take advantage of higher demand.
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