POSCO takes new tack with $4 billion Daewoo shipyard bid
Frustrated in bidding against global rivals over costly iron ore assets, South Korea's POSCO is taking a different approach to diversification -- looking to buy up one of its biggest customers to secure future demand.
This contrarian bet at a time of soaring raw material prices and looming overcapacity in the steel sector risks riling investors, who say the world's No. 4 steelmaker needs to put its $4 billion cash pile to better use.
But with possible mining targets limited and expensive after a multi-year bull market for commodities, POSCO may have little option as it seeks to boost returns.
Cash-rich but resource poor, POSCO is one of at least five bidders circling Daewoo Shipbuilding and Engineering , the world's third largest shipbuilder.
"POSCO needs to be rather more aggressive in buying mining assets but its decision reflects the reality that resource assets are already too expensive and scarce," Hyundai Securities analyst Park Hyun-wook said.
POSCO joined its big peers this year in snapping up mining assets but its investment is dwarfed by heavy spending by its Western and Chinese rivals.
Its iron ore self-sufficiency is less than 20 percent, while top-ranked ArcelorMittal boasts around 50 percent, leaving POSCO vulnerable to recent sharp rises in iron ore and coal prices.
Not that it has been idle -- this year it has bought a 10 percent stake purchase in Australian coal miner Macarthur for $400 million, a $350 million nickel mining and smelting project with a New Caledonia partner and a $200 million stake in a South African manganese mine. "POSCO definitely needs to boost mining assets but adding too much could be negative because when the cycle shifts to downturn, it will be a big burden and drag down performance," said Lee Jong-hyung, a Dongbu Securities analyst.
The need for vertical integration has been highlighted by the world's top miner BHP Billiton's bid to buy rival Rio Tinto , which could spur more mergers in the mining sector and make steelmakers more vulnerable to the increasing concentration among their raw material suppliers.
The top 15 steel firms account for 35 percent of global capacity, while the top 3 iron ore producers, including Rio and BHP, control 70 percent of openly traded iron ore supply.
The top 5 global auto groups, core end users of steel products, have 55 percent of the market, according to Nomura International.
"It (the BHP/RIO deal) fully validates the pursuit of vertical integration strategies... and plays in favor of further international M&A trends in the steel sector," Oddo Securities said in a recent note.
A smaller South Korean producer, Dongkuk Steel Mill , is pursuing a similar route to POSCO, being chosen as the preferred bidder to buy Ssangyong Engineering & Construction 012650.KQ. Analysts say Dongkuk may also show interest in Daewoo.
NOT THE BEST FIT
POSCO hasn't said much about its interest in Daewoo.
"We'll continue to seek mining assets and we are also very keen to add Daewoo," POSCO spokesman Choi Doo-jin said. Some analysts though think that taking on a firm which has no overlap with a steelmaker is not the best fit.
"POSCO is not the most ideal bidder for Daewoo in terms of synergy, because its main business is not shipbuilding and it is already in a secure steel supply deal with Daewoo," Lee Jae-kyu, a Mirae Asset analyst said.
"But if it forms a consortium with other shipbuilders for better management of Daewoo, POSCO will be able to generate synergies, get a stable source of steel demand and protect itself against possible plate oversupply in two to three years."
Global steel plate is in severe short supply due to booming demand for oil carriers and dry bulk carriers, but could go to oversupply after 2011 as steelmakers boost capacity and the shipbuilding sector slows down.
This contrarian bet at a time of soaring raw material prices and looming overcapacity in the steel sector risks riling investors, who say the world's No. 4 steelmaker needs to put its $4 billion cash pile to better use.
But with possible mining targets limited and expensive after a multi-year bull market for commodities, POSCO may have little option as it seeks to boost returns.
Cash-rich but resource poor, POSCO is one of at least five bidders circling Daewoo Shipbuilding and Engineering , the world's third largest shipbuilder.
"POSCO needs to be rather more aggressive in buying mining assets but its decision reflects the reality that resource assets are already too expensive and scarce," Hyundai Securities analyst Park Hyun-wook said.
POSCO joined its big peers this year in snapping up mining assets but its investment is dwarfed by heavy spending by its Western and Chinese rivals.
Its iron ore self-sufficiency is less than 20 percent, while top-ranked ArcelorMittal boasts around 50 percent, leaving POSCO vulnerable to recent sharp rises in iron ore and coal prices.
Not that it has been idle -- this year it has bought a 10 percent stake purchase in Australian coal miner Macarthur for $400 million, a $350 million nickel mining and smelting project with a New Caledonia partner and a $200 million stake in a South African manganese mine. "POSCO definitely needs to boost mining assets but adding too much could be negative because when the cycle shifts to downturn, it will be a big burden and drag down performance," said Lee Jong-hyung, a Dongbu Securities analyst.
The need for vertical integration has been highlighted by the world's top miner BHP Billiton's bid to buy rival Rio Tinto , which could spur more mergers in the mining sector and make steelmakers more vulnerable to the increasing concentration among their raw material suppliers.
The top 15 steel firms account for 35 percent of global capacity, while the top 3 iron ore producers, including Rio and BHP, control 70 percent of openly traded iron ore supply.
The top 5 global auto groups, core end users of steel products, have 55 percent of the market, according to Nomura International.
"It (the BHP/RIO deal) fully validates the pursuit of vertical integration strategies... and plays in favor of further international M&A trends in the steel sector," Oddo Securities said in a recent note.
A smaller South Korean producer, Dongkuk Steel Mill , is pursuing a similar route to POSCO, being chosen as the preferred bidder to buy Ssangyong Engineering & Construction 012650.KQ. Analysts say Dongkuk may also show interest in Daewoo.
NOT THE BEST FIT
POSCO hasn't said much about its interest in Daewoo.
"We'll continue to seek mining assets and we are also very keen to add Daewoo," POSCO spokesman Choi Doo-jin said. Some analysts though think that taking on a firm which has no overlap with a steelmaker is not the best fit.
"POSCO is not the most ideal bidder for Daewoo in terms of synergy, because its main business is not shipbuilding and it is already in a secure steel supply deal with Daewoo," Lee Jae-kyu, a Mirae Asset analyst said.
"But if it forms a consortium with other shipbuilders for better management of Daewoo, POSCO will be able to generate synergies, get a stable source of steel demand and protect itself against possible plate oversupply in two to three years."
Global steel plate is in severe short supply due to booming demand for oil carriers and dry bulk carriers, but could go to oversupply after 2011 as steelmakers boost capacity and the shipbuilding sector slows down.