Posco chief warns strong dollar is dragging down profits

Posco, one of the world’s largest steelmakers, has warned that a strong dollar and weak Korean won are inflating the cost of imported raw materials and dragging down profitability, at the same time the company is grappling with subdued steel demand from the global economic slowdown.

The dollar’s surge to a 20-year high has raised concerns about depressed global economic growth. Despite rallying in recent weeks, South Korea’s currency has depreciated nearly 10 per cent against the dollar in 2022. A property market downturn in China, the world’s biggest steel market, has also weighed on Posco’s earnings.

“The exchange rate is having a big impact on us as we have to purchase raw materials in dollars,” said Kim Hag-dong, the company’s chief executive, during an interview at the company’s sprawling headquarters in Pohang on South Korea’s south-east coast.

“Our margin has been squeezed as energy prices go up, but we can’t raise our product prices because of weak market conditions.”

The operating profit margin of the world’s sixth-largest steelmaker dropped to 3.6 per cent in the third quarter of 2022 from 20.3 per cent a year earlier, hit by lower steel prices and one-off losses from flood damage at its domestic plant following a typhoon in September.

“In the past, when the exchange rates rose, our export competitiveness was boosted. But now interest rates are also rising, so this hampers business activities, slashing demand,” said Kim. “Higher raw material prices are also causing concern to us, along with the sluggish economy.”

The 63-year-old chief is an industry veteran who has spent more than 30 years between the company’s two main steelworks and is now in charge of leading its green transition.

Kim said he was worried that global steel demand was not picking up, predicting a 1 per cent increase next year, mostly in India and south-east Asia. He expected the steel industry cycle to recover in the second half of next year after hitting the bottom in the first half.

“We hope that the Chinese market situation will improve as lockdowns are likely to ease now that Xi’s third term has begun,” he said. “The Chinese property market downturn will have a big impact on us if the market deteriorates, but it is hard to predict how much worse the market will be.”

The cautious optimism comes as Posco, South Korea’s largest corporate emitter of carbon, accelerates its efforts to decarbonise in response to tougher regulations and customer demands.

Posco became Asia’s first steelmaker to declare its ambition to go carbon neutral by 2050. It is working to use hydrogen instead of coking coal to melt iron ore and remove oxygen for steelmaking.

Kim said the use of green hydrogen for steelmaking could increase steel prices by as much as 40 per cent.

“I think low-carbon steelmaking will be possible in the long term,” said Kim. “But production costs will rise in the process, so a consensus should be reached from investors and governments to end-use customers like automakers and shipbuilders to share the cost and responsibilities in order to make the transition possible.”

Kim said the green transition was necessary to expand its market share in Europe, where steelmakers are more actively developing low-carbon technologies to meet tougher environmental regulations, while its US exports are restricted by import quotas.

“We’ve almost given up hope for US exports but we need to retain our foothold in the European market,” he said. “If we don’t reduce carbon emissions, we can’t expand into Europe.”

Kim added that Posco needed to build its presence in the US for its “many US customers like automakers” as Washington’s regulation against steel imports is likely to become stronger.

“In order to retain our customers, we are thinking of setting up joint ventures there and are contacting many companies for this,” he said. “It is getting harder to export steel to US automakers unless we produce it in North America.”