[Great Transformation POSCO]③ Flood Recovery Costs 300 Billion Won More... Steel Industry Outlook Bleak for Next Year

Pohang Steelworks Shutdown Causes 71% Drop in Operating Profit
"Compensation Through Non-Operating Income Upon Insurance Settlement Completion"
Steel Industry Affected by Tightening, Expected Improvement in Second Half of Next Year

Editor's NoteThe global steel company POSCO Group is facing a major turning point. In line with the carbon-neutral era, it stands at an inflection point to shift towards new growth engines of 'green steel' and 'eco-friendly future materials.' After several years of a brief steel market boom, recent downturns are expected to accelerate these movements. Despite poor performance, the group is actively investing, especially in the secondary battery materials sector, maintaining its momentum for innovation. Reviewing the current status of continuous investments, business expansions, and mergers and acquisitions (M&A) offers a glimpse into the blueprint of POSCO Group's envisioned major transformation.

Flood damage by region at Pohang Steelworks. Photo by POSCO

[Asia Economy Reporters Oh Hyung-gil and Choi Seo-yoon] POSCO Holdings received a bleak performance report due to flooding damage caused by Typhoon 'Hinnamnor.' Steel demand weakness amid global economic recession concerns is expected to continue until the first half of next year but is projected to improve from the second half onward.

According to the industry on the 25th, POSCO Holdings saw its operating profit drop to one-third of the same period last year as the Pohang Steelworks halted operations for the first time in 49 years.

POSCO Holdings' third-quarter operating profit was 920 billion KRW, down 71% compared to the same period last year. This represents an 'earnings shock,' falling 39% below market expectations. Sales increased by 2.9% to 21.2 trillion KRW during the same period, but net profit plummeted 77.2% to 592 billion KRW.

The poor performance was largely due to production suspension caused by flooding at the Pohang Steelworks from Typhoon 'Hinnamnor.' Operating losses and one-time costs approached 440 billion KRW. This includes 222.1 billion KRW from production stoppage and sales decline at Pohang Steelworks, 186 billion KRW in one-time inventory losses, and 27.4 billion KRW from partial equipment damage at other Pohang area business units.

In particular, an additional 300 billion KRW in production facility restoration costs is expected in the fourth quarter, indicating that poor performance will likely continue for some time. The amount spent on restoring production facilities, including labor and consumables due to flood damage, reached 91.6 billion KRW last month alone.

However, POSCO Holdings explained, "We subscribed to comprehensive property insurance for all tangible assets in 2021," adding, "Most of the impairment of tangible assets and part of the restoration costs are expected to be compensated as non-operating income once insurance settlements are completed."

The recovery status of Pohang Steelworks currently has six plants?1 Hot Rolling, 1 Wire Rod, 1 Cold Rolling, 2 Electrical Steel, 3 Electrical Steel, and 3 Plate?resuming operations. Next month, 2 Plate, 3 Wire Rod, 4 Wire Rod, and Electro-Galvanizing will be restarted, and in December, 2 Hot Rolling, 2 Cold Rolling, 2 Wire Rod, and Stainless Steel 2 Cold Rolling will be operated to resume full product production within the year.

Additionally, the Gwangyang Steelworks plans to maximize production increases to promptly respond to customer demands, minimizing the impact on domestic steel supply and demand.

However, poor performance is inevitable until production normalization, expected early next year. Um Ki-chun, head of POSCO Marketing Strategy Office, said in a conference call yesterday, "Steel demand is expected to continue next year due to various economic variables such as tightening policies," adding, "Demand is expected to improve from the second half when tightening policies somewhat ease."

Regarding the domestic steel market outlook for next year, he said, "In 2023, tightening policies are expected to continue globally, especially in the U.S., inevitably affecting steel demand industries," and "Global steel demand is expected to grow by about 1%, while Korea is expected to remain at this year's level."

He also mentioned ongoing negotiations for Q4 shipbuilding plate prices with domestic shipbuilders, noting that sales prices may be slightly reduced by about 50,000 KRW compared to the previous quarter.

Um evaluated, "In the automotive industry, global car production is expected to increase by 5.3% to about 86 million units compared to this year," and "For the shipbuilding industry, despite strong orders over the past two years, how supply chain recovery and labor shortages?collapsed during the downturn?are resolved will be key to the rebound in shipbuilding demand next year."