Recently, Pohang Iron and Steel Company (POSCO) released its second-quarter performance of 2015 for production and operation. Meanwhile, POSCO announced that, it would furtherly enhance the competitive edges of its main steel industry by implementing the Innovative POSCO 2.0 (IP2.0) strategy. Affected by the shrinking global demand, POSCO planned to moderately reduce overseas investment in order to avoid risks. On the other hand, by adding new automotive sheet CGL production lines and steel processing center, POSCO would ensure its market share of high value-added products and improve the quality of customer service. Facing the downturn in the global steel demand, the company's sales of the second-quarter totaled 6.576 trillion won, down 11.4% compared with the sales of last year. Despite the sharp decline in steel prices, sales of high value-added POSCO WP (World Premium) products saw a massive increase of 21.3%. Through raising the sales of high value-added products, POSCO's operating profit rose by 7.6 percent to 608 billion won. The operating profit margin increased from 7.6% last year to 9.2%, a rise of 1.6 percentage points.
During the first half of this year, POSCO implemented solution-mode marketing campaign, making the total sales related increased to 970,000 tons, higher than the target of 70,000 tons set at the beginning of this year. Through effective measures such as structural adjustment, in the first half of this year, POSCO obtained 1.5 trillion won income by selling assets. At the end of the second quarter, its total assets reached 83.7 trillion won, with liabilities of 38.9 trillion won, asset-liability ratio of 86.9%, down by 2.9 percentage points compared with the end of the first quarter this year.
The Ambitious IP 2.0 Strategy
Through the IP 2.0 strategy, POSCO plans to increase the proportion of products for solution-mode marketing campaign and WP products from 1.3 million tons and 33% respectively last year, to 2.5 million tons and 50% respectively in 2017. The sales of representatives of high value-added products, the automotive sheets, will be raised from last year's 8.3 million tons to 8.7 million tons this year, an increase of 5%, striving to increase to 9.5 million tons in 2017.
POSCO 's business structure will be gradually adjusted to five major sections including iron and steel, materials, energy, infrastructure and trade. By way of sorting out, selling and merging those loss-suffering enterprises, POSCO will reduce the number of Korean branches from current 42 to 22 by 2017, a cut by 47.6 %. The number of overseas branches will be cut from current 167 to 117, a cut of 30%, and it will strive to save more than 500 billion won in operating expenses annually, among which 300 billion won in Pohang headquarters, 200 billion won in its subsidiaries.
In addition, by implementing the IP 2.0 plan, POSCO will reduce 6.7 trillion won worth of loans in 2017, making income tax, profit before depreciation and amortization (EBITDA) reach 7.5 trillion won. Until 2025, POSCO will continue to develop the independent technologies in steel and other four areas and open up business with good prospects, to ensure the leading position in profitability. To this end, POSCO will vigorously promote TPB strategy (Technology-based Platform Biz) worldwide in 2016 to promote self-developed technologies (which mainly include FINEX, CEM, direct extraction of lithium, nickel smelting complex, fuel cells, etc.), thus creating a profit of 120 billion won.
In the performance report of the second quarter, POSCO has set its sales target for 2015 at 27.7 trillion won, the investment target at 3 trillion won, crude steel production at 37.8 million tons and steel sales at 35.4 million tons.
Large-scale Financial Restructuring Starting off
Due to the blind expansion of earlier business, while at the same time affected by the sluggish steel industry and other factors, POSCO has not delivered its best performance for operating profit in the recent three years. Since Chairman Kwon Jun took office, POSCO has taken decisive measures to strengthen its competitive edges for the principal industry, improve the financial structure, push ahead with new industries and improve business infrastructure. The reform of its financial structure is implemented in line with its actual condition. Through divesting non-core assets, there has been no zone off limits. By the efforts for nearly a year, POSCO has made remarkable achievements and will continue to thrive.
By the end of 2014, in terms of business structural adjustment, POSCO sold the Pohang Special Steel Company to SeAh Besteel, and POSFINE company to Hahn & company, and finished 11 non-core asset disposals including Masan department store, USP equity, SK Telecom, and Postower company, etc. In addition, by recycling unrecovered debt and promoting the circulation of bonds, the financial soundness has been improved. POSCO has reduced its 7 trillion won cash asset into 5 trillion won, obtaining 2 trillion won’s flowing fund, with the debt ratio of 28.2% in 2013 cut to 23.8% in 2014. In 2015, POSCO will continue to sell its businesses of weak synergy and poor sales, liquidate non-core assets to gain non-debt funds, and promote the sale of Busan Central Square, the equity of Australian copper mine Firesand, and other 20 projects.
Initiative I: To adjust subsidiaries’ repetitive business
On August 8, 2014, POSCO held a regular council meeting and made the following adjustment plans: POSCO’s P&S Company integrates steel distribution and processing; POSMATE Company integrates B2B business (business-to-business). This was the first time for POSCO to carry out organizational adjustment to improve its operational efficiency. Specifically, POSCO will make substantial investment in P&S with 100% of AST equity and 34.2% of TMC equity; 32.2% of eNtoB equity will be substantially invested in POSMATE. Therefrom, the original three major subsidiaries, POSCO’s AST, TMC and eNtoB, will be integrated as affiliated companies under POSCO’s P&S and POSMATE.
In October 2014, POSCO gained 3,185,136 shares (worth 113.6 billion won) from POSCO’s P&S Company, 96,628 shares (worth 10.3 billion won) from POSMATE Company. Accordingly, POSCO’s share in these two subsidiaries will be increased from previous 95.3% and 54.5% to 96.0% and 57.3%, respectively. POSCO’s P&S Company obtained 17,386,952 shares from POSCO’S AST and 2,034,560 shares from POSCO’s TMC, with the worth of 95.2 billion won and 18.4 billion won, respectively. The equity of the two companies held by POSCO P&S reached 100% and 67.8%, respectively. While POSMATE gained 1.03 million shares from eNtoB, with a stock worth of 10.3 billion won, thereby gaining 32.2% equity in the company.
The main businesses of the three subsidiaries, P&S, AST and TMC, are in the production, processing and marketing of carbon steel, stainless steel and electrical steel in motors, respectively. Due to the depression in the industry, the integration of subsidiaries of this kind could avoid business duplication and reduce indirect cost to the minimum level. ENtoB serves as a B2B e-commerce platform for purchasing MRO (Maintenance Repair Operations) supplies, jointly funded and established by POSCO, Hanjin, KCC and other two major groups. On the other hand, POSMATE serves as a supporting management company of POSCO. Acquiring eNtoB as a subsidiary, POSMATE would also serve as independent supplier of MRO materials, in addition to the existing businesses including real estate leasing and management, facilities maintenance and overhaul, health management and insurance agents, and other services. It maximizes synergies through unified management, which is in favor of the rapid development of B2B business in POSCO.
Two initiatives: To promote the sale of non-core and loss-suffering businesses
To sell the equity of POSCO Specialty Steel. In December 2014, POSCO and SeAH Besteel signed an agreement on equity acquisition. POSCO sold 52.1% of its affiliated POSCO Specialty Steel to SeAH at the price of 1.084 trillion won (US $ 1 billion). In March this year, SeAH Besteel officially acquired the equity of POSCO Specialty Steel, and would continue to acquire its additional 20% equity, which is currently owned by financial investors and employees. It will eventually hold 72% of POSCO Specialty Steels’ equity.
To sell the equity of POSCO’s United Spiral Pipe Company. Founded in 2007, POSCO’s United Spiral Pipe Company (USP) has a total investment of $ 129 million, with 35% of the fund coming from POSCO, 30% from SeAH Steel and 35% from United States Steel Corporation. It is located inPittsburgh,California, with an annual output of 270,000 tons. The plant was put into production at the time of the financial crisis, with a sluggish market and inadequate orders. Therefore it suffered a loss consecutively in the past few years. In order to improve its financial structure, POSCO decided to sell the equity of USP. Russia’s Evraz Group eventually determined to acquire USP so as to expand its own strength rapidly. In February of this year, USP’s equity was officially sold to the Evraz Group.
To sell the urban mining business in POSCO’s Materials and Technology Company. Urban mining focuses on recycling precious metals and rare metals out of wastes from plants and life. POSCO’s Materials and Technology Company acquired the 9-Digit Company in 2010 and the Recall Metal Company in 2011, from which POSCO obtained the technology of metal hydrometallurgy, waste recycling and primary processing. Since POSCO’s Materials and Technology Company launched its urban mining business, losses began to appear. In 2013, the operating loss of urban mining sector reached up to 9.6 billion won, while the company's operating loss amounted to 5.1 billion won and the net loss arrived at 10.6 billion won. In February 2015, POSCO’s Materials and Technology Company officially released the announcement “The Termination of Urban Mining Business”, and continued to promote the sale of urban mining business, at a price of about 2.44 billion won.
To sell POS-HiAL. In September 2014, POSCO’s Materials and Technology Company disclosed that, following the formal decision to sell its urban mining assets, they were discussing to sell 51% of its stake in its subsidiary, the POS-HiAL. Although it has not yet entered the selling schedule, the restructuring team, affiliated with POSCO’s value operating section, is working on details concerning selling the stake of POS-HiAL.
POSCO holds 48.85% of Materials and Technology Company’s equity while the latter holds 51% of POS-HiAL’s equity. In January 2012, POS-HiAL was jointly funded by POSCO’s Materials and Technology Company, KC and Samsung C&T, which own 51%, 44% and 5% of the total share, respectively. The company is dedicated to producing high-purity alumina. But in 2012 it suffered from an operating loss of 1.2 billion won, and 2.5 billion won in 2013. Regardless of the fact that sales increased to 1.4 billion won in 2014, the net loss has reached 11.8 billion won, thus it becomes the object of structural adjustment naturally.
To sell the equity of the NAMISA, a Brazilian mining company. In November 2014, POSCO decided to sell part of its shares of NAMISA and approved to sell 6.48% of the stake (30,784,625 million shares) on the Council by the end of November last year, at the price of about 500 to 600 billion won. It will be transferred to Brazilian CSN (Companhia Siderurgica Nacional), which holds 60% equity of NAMISA.
In October 2008, POSCO, along with Japan’s Itochu Corporation and other steel companies, formulated a global consortium, with an investment of 4 trillion won. It gained 40% shares of NAMISA (Nacional Minerios SA) from the Brazilian state-owned steel company CSN, achieving diversified overseas sourcing of iron ore. Although POSCO did not disclose any reason for the sale of NAMISA equity, people from the industry believe that the move is not to simply withdraw from the mine field area, nor to ensure the financial liquidity or improve their financial status. Because the existing 6.48% stake in the firm last year valued 517.2 billion won, 150 billion won lower than the acquisition cost.
To sell the equity of Newaltec, an aluminum manufacturing company. POSCO P&S’s Board of Directors officially decided to sell Newaltec’s equity to the original equity holder, Daechang Steel Company, planning to recover its investment through paid capital reduction. The acquisition is scheduled to close in around May this year.
Newaltec centers its business on aluminum rolling and processing, as well as manufacturing and sales of relevant cold-rolled products. In 2011, P&S invested 65 billion won to acquire 60.1% of the stake, while the original shareholder, Daechang Steel, only holds 29.67% of the total stake.
The sale was possible mainly because of the poor management of Newtec. In 2010, the company’s sales totaled 95.1 billion won, with an operating profit of 7.1 billion won. After the acquisition, the sales fell to 81.3 billion won in 2013, a loss of 1.7 billion won. In 2014, the sales reduced to 72.1 billion won, a loss of 1.5 billion won. Considering improving its financial structure, POSCO classified it as a restructuring object.
In addition, at the end of last year, POSCO sold its 69.23% stake in POSFINE, planning to sell Gwangyang LNG terminal in the first half of this year. It has determined to sell part of its stake in the subsidiary, POSCO Engineering & Construction, to Saudi Public Investment Fund (PIF) and to sell its stake in Sandfire, an Australian copper company. In May this year, it sold its 15.2% stake in Sandfire, with about 23.75 million shares.
Initiatives III: To reduce interest costs by issuing bonds
This year, POSCO will continue to accelerate its pace to improve the financial structure, and strive to gain a capital of 1 trillion won, while at the same time, improve the soundness of its financial structure. Through the issuance of the inexpensive Samurai bonds with an interest rate around 7%, the company will repay the maturing global bond of $ 700 million, thereby reducing a 57 billion won worth of interest cost for the year, meanwhile stopping new investments for the one-sided pursuit of volume growth. Subsidiaries in the group, which are met with the listing requirements, will hold public offering (IPO) or sell its holding share at an appropriate time to maximize its solvency. Through business restructuring, POSCO strives to achieve its objective of 8.5 trillion won worth of profitability indicators, EBITDA, (profits before tax, interest, depreciation and amortization), with credit rating restored to A.
Through the liquidation, sale and merger of the loss-suffering enterprises and non-core assets, the business structure of POSCO will also be gradually adjusted to the following five major sections, steel, materials, energy, infrastructure and trade.
From: China Steel News