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Korean steelmaker POSCO (PKX) reported its first quarter 2011 financial results on April 22, 2011. Net income jumped 71.3% sequentially to KRW 1,098 billion or KRW 12,585 per share (US$2.82 per ADR). Compared with the year-ago quarter net income fell 20.6%.

Revenue

POSCO reported consolidated revenue of KRW 16,251 billion (US$14.5 billion) in the first quarter, an increase of 66.2% year over year and only a 0.7% modest increase sequentially.

Crude steel production jumped 8.7% year over year and 0.3% sequentially to 8.9 million tons. Finished product sales plummeted 2.7% sequentially to 8.2 million tons, while increasing 9.6% year over year. Export ratio in the quarter was 35.7%.

The year-over-year sales growth was driven by solid finished products sales across all product categories, especially Plate (up 27.5%), STS (up 5.1%), Hot Rolled (up 9.8%), Electrical Steel (up 1.5%) and others (up 14.1%). Sequentially, Hot Rolled sales were down 10.9%, Cold Rolled by 1.4% and STS by 5.5%.

Margins

As a percentage of revenue, consolidated cost of goods sold declined to 86.6% compared with 89.3% in the previous quarter but increased in comparison with 79.1% in the year-ago quarter.

Operating margin increased from 4.2% to 8.3% in the quarter and fell from 15.9% in the first quarter of 2010. Sequential growth in margins was mainly due to an increase in export prices.

During the quarter, the company raised its domestic product prices by KRW 160 thousand per ton to account for a rise in global prices and raw material costs. Cost savings in the quarter was approximately KRW 317.7 billion (US$0.28 billion).

Balance Sheet

Exiting the first quarter, POSCO had cash and cash equivalents of approximately KRW 6,924 billion (US$6.3 billion), registering a sequential decline of 12.4%. Long-term debt of the company grew 10.8% sequentially to KRW 13,949 billion (US$12.5 billion).

Outlook

For fiscal year 2011, management increased its revenue and sales target due to new facility addition and full capacity operations. Consolidated revenue is expected to be approximately KRW 67.8 trillion compared with KRW 66 trillion expected earlier.

POSCO’s revenue is targeted to reach KRW 40 trillion versus KRW 36 trillion anticipated earlier.  Product sales are expected to be roughly 34.7 million tons compared with the prior expectation of 34 million tons; crude steel production estimate, on the other hand, has increased from 36 million tons to 37.1 million tons.

Consolidated investments are likely to be approximately KRW 9.8 trillion with the company’s investments totaling KRW 7.3 trillion. The company targets to save costs amounting to KRW 1 trillion, up from KRW 800 billion expected earlier.

POSCO is the largest fully integrated steel producer in Korea, and one of the premier steel producers in the world. Prime competitors of the company are Arcelor Mittal (MT) and privately-held Hyundai Steel Company. We currently maintain a Neutral recommendation on the stock.

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