POSCO: Share Price to Rise on Steel Price Expansion

China’s steel prices have risen sharply since the Chinese Lunar New Year holiday. We attribute the increase to economic recovery, high iron ore prices, inventory re-stocking, and seasonal demand expectations. Going forward, POSCO’s share price should pick up on ASP hikes and earnings growth.

Thanks to steel price increase, earnings to continue improving through 2Q21

We maintain a Buy rating and TP of W350,000 on POSCO. Our TP equates to a 2021E P/B of 0.65x, and we estimate 2021 DY (based on the Feb 25 closing price) at 3.2% (DPS of W9,000).

Thanks to steel price increase, POSCO’s carbon steel ASP (non-consolidated basis) is expected to rise from W679,000/ton in 4Q20 to W733,000/ton in 1Q21 and W770,000/ton in 2Q21. As a result, consolidated 1Q21 OP should reach W1.08tn (+53.7% y-y, +25.6% q-q), climbing to W1.0tn for the first time in five quarters, and 2Q21 OP should further expand to W1.2tn (+601.1% y-y, +8.5% q-q).

China’s steel prices rebounding quickly; share price rise to follow

In China’s retail market, as of Feb 24, the price of HR stood at RMB4,904/ton, up 7.1% versus the day before the Lunar New Year holiday (Feb 11~17). Before rebounding, the HR price had fallen in the lead-up to the holiday period from a high of RMB5,058/ton on Dec 22, 2020. Over the same period, the prices of CR, plate, and rebar widened 4.6%, 7.1%, and 7.1%, respectively. Meanwhile, the price of Australian iron ore (Chinese import, 61.5% Fe, CFR) came to US$171.8/ton on Feb 24, nearing the Dec 21, 2020, high of US$175.2/ton.

Recently, the shares of major global steel companies have largely risen together. This year, shares of China’s Baoshan Steel have climbed 26.7%, Europe’s Arcelormittal 18.5%, US’s Nucor 18.4%, and Japan’s Nippon Steel 18.4%. However, with POSCO’s share price having upped only 0.7% over the same period, share price expansion is anticipated moving ahead on steel price growth and earnings improvement.

Being signs of a real economic recovery, inflation and rising interest rates are positives for the steel industry. With 10yr US TB yield picking up as of late, we note that the steel industry typically performs well during periods of interest rate hike. In addition, rising copper prices (an important economic indicator) and strengthening oil prices also bode well for steel company share prices.

Elsewhere, while the Chinese government has said that crude steel production will be cut in China this year in order to reduce carbon emissions, seeing minimal chances that such policy will be fully implemented in reality, we believe that any related impact on steel prices will be limited.
Source: Business Korea