Business News and Articles
StockNewsLine.com

Posco Looks for Solutions to its India Woes

Posco has been one sharp steelmaker. The company, based in Pohang on the Korean peninsula's southeastern tip, has long been a symbol that South Korea's old economy can still be innovative and profitable. After all, it is the one Korean company singled out by as an investment target. His Berkshire Hathaway owns 4.5% of Posco, according to data compiled by Bloomberg.

Then why is Posco (PKX) so high on South Korean President Lee Myung Bak's to-do list during his state visit to India this week? The company has ambitious expansion plans in India, hoping to invest some $19 billion in the country. For instance, five years ago Posco unveiled plans to build India's largest steel mill in the city of Orissa on the Bay of Bengal. Because of local opposition, though, the $12 billion project has suffered extensive delays and Posco hasn't even secured a 4,000-acre property promised for the steel plant.

Lee wants to enlist Prime Minister Manmohan Singh's support in clearing the way for Posco to proceed with its Indian investments. For Lee, a breakthrough in India will give him a major political weapon ahead of local elections in June. Lee, a business icon of South Korea's growth-at-all-costs era in the 1970s and '80s, has pledged to lay the foundation during his five-year term till 2013 to lift the economy into the world's top seven, from the current No. 13. He also has promised to double per-capita income to $40,000 by 2017. A major presence by Korean companies in India, the world's second most-populous market, would help Lee find new avenues of growth for his nation.

Looming Deadline

Indian Prime Minister Manmohan Singh's government has promised help. After meeting delegates of Lee, who attended India's Republic Day celebrations on Jan. 26 as the government's chief guest, Steel Minister Virbhadra Singh told reporters he expected to resolve the issues Posco is facing in Orissa in five months. Posco Chief Executive Chung Joon Yang was among Lee's delegation. A Posco spokesman said the company expected the Indian project to gain momentum after Lee's visit.

The Indian project is crucial for Posco, which has been trying hard to set up an Indian beachhead for its global push. Posco is planning $30 billion of expansion in Asia to stay as a major player in the steel industry. The world's largest steelmaker in the late 1990s is now No. 4. "Posco has got to be obsessed with growth to remain as a shaper in the business, and India appears to be the best bet so far," says Chang In Whan, chief executive at fund manager KTB Asset Management.

So far, though, Posco has had little progress in its overseas adventures. Apart from the Orissa behemoth, Posco has announced plans to build steel mills in the southern Indian state of Karnataka as well as in Vietnam and Indonesia. None of them has gotten off the ground. Posco, which expects 34.4 million tons of crude steel output this year, has also run into a major hurdle in Vietnam. In 2008, the Vietnamese government asked the Korean company to relocate a planned $5 billion factory in south-central Vietnam. The company has yet to find a new site.

Trouble at Home

Steel analysts point out the Indian project is crucial, since it will give Posco access to cheap raw materials and help the company increase its output. "It's extremely difficult for Posco to improve profit margins in Korea in the face of growing competition from local rivals," says steel analyst Park Kee Hyun at brokerage Tong Yang Securities. Industry watchers also note that bigger scale could improve Posco's bargaining power when negotiating terms to buy iron ore and coal.

Posco has managed to rake in enough cash to stay above its rivals in profitability. Among the world's 10 biggest steelmakers, Posco is the only company that has not reported a quarterly loss since the global financial crisis hit in 2008, according to data compiled by Bloomberg. For the quarter ended in December, Posco posted a 77% jump in net income to $1.1 billion from a year earlier, while sales dropped 12% to $6.27 billion.

Last week, Buffett gave his seal of approval for Posco, calling it "a wonderful company." Buffett said after meeting Posco's chief Chung on Jan. 18 that he wished he had purchased more Posco shares when they were cheaper in the past year, though he didn't have plans to buy more. Since hitting a low of $260 on Mar. 2, Posco shares are up 89%.

Regions : Asia

More articles on this topic: