Posco posts weak Q2; sees long-term benefit from China steel reforms

Chinese steel prices have surged around 36% this year, helping many Chinese producers swing to a profit from heavy losses in 2015

South Korean steelmaker POSCO posted a weaker-than-expected quarterly operating profit, but said it was likely to benefit in the longer term as measures to curb overcapacity in top producer China start positively impacting product prices.

China, which is under fire from global rivals for dumping cheap steel exports on to the world market, has said it remains committed to tackling its glut and plans to eliminate 100-150 million tonnes of annual production - more than the United States produces per year - over the next five years.

"We believe restructuring in China will happen in the next four-five years, as China is struggling with trade regulations worldwide and facing pressure from the United States and the European Union," Kim Young-joong, vice president at POSCO, said at an earnings conference call on Thursday. "Restructuring should have a positive impact (on prices) for the long term."

He expects steel prices to hover around $350 per tonne for hot-rolled coil in China in the second half, higher than a year ago but lower than the first half on lingering overcapacity.

Chinese steel prices have surged around 36% this year to 2,350 yuan ($352) per tonne, helping many Chinese producers swing to a profit from heavy losses in 2015.

However, POSCO's consolidated operating profit for the April-June period fell 1%from a year ago to 678.5 billion won ($597.69 million), missing the 725 billion won average estimate of 14 analysts polled by Reuters.

The company's earnings were eroded by a delay in the construction of its joint steel mill in Brazil, which led to higher costs for its construction unit, POSCO Engineering & Construction, according to analysts.

Its revenue dropped 15% to 12.86 trillion won, below analysts' estimate for 13.7 trillion won. The steelmaker, however, said it would pay a quarterly dividend from the second quarter, with the amount to be decided in early August.

POSCO shares ended down 1.4% in the wider market that fell 0.2% prior to the earnings announcement.

The shares, which fell for a sixth straight year in 2015, have jumped almost 30% so far this year, tracking higher steel prices in China - also the top consumer of the commodity.

China is ramping up efforts to tackle its chronic steel overcapacity, earmarking 27.6 billion yuan ($4 billion) in funds to pay for closures in the steel and coal sectors. Its key steelmakers Baosteel Group and Wuhan Iron and Steel Group last month announced restructuring plans.

But worries linger about demand, with the rebound in China's economy showing signs of losing momentum.

POSCO, however, sees Chinese steel demand slowing less than expected this year, helped by "an improvement in auto production and Beijing's economic stimulus effects".