POSCO Q3 profit jumps to more than 4-year high on steel price gains

By Hyunjoo Jin

SEOUL (Reuters) - South Korean steelmaker POSCO posted its strongest quarterly operating profit in more than four years, but cautioned results could weaken in the current three-month period as high raw material prices bite.

POSCO, the world's fourth-biggest steelmaker in 2015, said on Wednesday that its consolidated operating profit rose to 1.03 trillion won ($908.79 million) in the third quarter, up from 652 billion won a year earlier and its strongest quarterly result since the second quarter of 2012.

The operating profit also beat a consensus forecast of 904 billion won from a Reuters' poll of 15 analysts.

Steel prices in China, the world's biggest consumer and producer, have rallied 50 percent this year as Beijing's efforts to reduce a crippling overcapacity in the sector there have led to lower inventories of the alloy.

POSCO said this year's profit would far exceed earlier forecasts, which would lead to higher-than-planned dividends.

After the earnings announcement, Moody's Investors Service revised POSCO's ratings outlook to stable from negative, citing a recovery in earnings and debt reductions.

Still, Moody's expects that POSCO's operating income will fall moderately in 2017.

"The level of earnings achieved in 3Q 2016 is not sustainable, based on overcapacity issues in China and Korea, as well as sluggish key end-markets in Korea, such as in the shipbuilding and automobile sectors," it said.

POSCO shares fell 0.4 percent on Wednesday prior to the earnings announcement while South Korea's main index declined 1.1 percent.

The steelmaker's shares have rallied 49 percent so far in 2016, tracking China's higher steel prices, bouncing back after falling a sixth straight year in 2015.

COKING COAL PRICES

The outlook for steelmakers has been clouded by a recent rally in coking coal prices that could squeeze profit margins.

As with steel, the pricing surge for coking coal - a key steelmaking material - has been driven by Beijing's efforts to tackle chronic overcapacity.

"We plan to raise steel prices to cover the expected increase in costs, but it will be difficult to cover them fully," said Chon Jung-son, senior vice president.

Raw material costs were expected to rise by 50 percent in the current quarter, Chon said.

In Japan, surging prices for coking coal will likely drive Japan's top two steel producers, Nippon Steel & Sumitomo Metal and JFE Holdings, to miss their earnings forecasts for the year to March 31, adding to the troubles of the companies already reeling from a stronger yen.

South Korean steelmakers are also facing tough export markets - where they are already struggling with competition from Chinese and other producers - after anti-dumping measures were implemented by the United States and India.

The U.S. Commerce Department in August imposed anti-subsidy duties of 3.9 to 11.3 percent against most steelmakers in Brazil, Turkey and South Korea, but slapped POSCO with a 57 percent anti-subsidy measure.

POSCO is considering launching an appeal against the anti-subsidy measure at the World Trade Organization, POSCO executive Jeong Tak said during an earnings conference, calling it an "unfair decision" aimed at "protecting its own industry."

He also said POSCO will try to offset impact of the duties by expanding sales in other regions, including South Korea.

(Reporting by Hyunjoo Jin; Additional reporting by Manolo Serapio in MANILA; Editing by Himani Sarkar and Tom Hogue)