UPDATE 2-POSCO raises steel prices, but shares sag

(Updates shares, details)

By Miyoung Kim

SEOUL, April 10 (Reuters) - South Korea's POSCO (005490.KS), the world's fourth-biggest steelmaker, raised its prices by as much as a fifth on Thursday as it seeks to pass on soaring raw material costs, but its shares fell as the market had expected a bigger price increase.

The increase, just two months after POSCO last put up prices, comes after the company agreed to pay Brazilian miner Vale (VALE5.SA) 65 percent more for its iron ore and agreed to treble what it pays an Australian supplier for coking coal.

Rising raw material costs are pushing up inflationary pressure across Asia, adding to soaring food and energy bills, and hitting steel mills hard as they do not own large mining assets, compared with western rivals such as ArcelorMittal (ISPA.AS) and U.S. Steel Corp (X.N).

POSCO, which sells three-quarters of its products at home and depends heavily on imported raw materials, said it would raise domestic prices of its hot-rolled steel to 700,000 won ($717.4) a tonne from April 17, up 20.7 percent. Cold-rolled steel and shipbuilding plate will cost 785,000 won a tonne, up 18 percent.

Analysts had expected a slightly bigger price increase as POSCO has lagged rivals in raising prices and as iron ore and coking coal prices, which account for more than a fifth of production costs, have soared this year.

"The price hike is slightly less than we expected but the increase will help absorb rising raw material costs and put it on track to meet its 2008 target of 4.8 trillion won in operating profit," said Jung Ji-yun, analyst at CJ Investment & Securities.

NO BIG INCREASE

Shares in POSCO, the second-largest company in South Korea with a market value of $45 billion, closed down 2.2 percent at 489,500 won, underperforming the broader market's .KS11 0.6 percent gain.

Even after the price increases, POSCO's products are still as much as $230 a tonne cheaper than those made by rivals and imported goods -- a price discrepancy that has created tight supply in the South Korean market and prompted some distributors to sell more to overseas destinations such as China, which enjoys strong demand and firmer prices.

Taiwan's China Steel Corp (2002.TW) said last month it would raise its domestic steel prices by 19 percent in the second quarter and China's Baoshan Iron and Steel (600019.SS) hiked its product prices by a higher-than-expected 17-20 percent.

Despite price increases and strong demand, steel makers face ballooning costs as tight coal supply is forcing them to turn to the spot market, where prices are about triple those in term contracts, while other cost pressures stemming from freight, scrap prices and alloy-iron prices mount.

Nippon Steel (5401.T), the world's No.2 steelmaker, cut its full-year profit forecast by a bigger-than-expected 6.7 percent last month due to higher costs of freight and raw materials, and predicted its first earnings drop in six years.

"A price rise was inevitable because of rising cost pressure and it continues to remain difficult to secure raw material supplies as mining firms are lukewarm on negotiations, despite soaring prices," POSCO said in a statement.

The term price of iron ore has risen fivefold since 2001, while coal prices have surged this year because of strong demand from China and supply disruptions in Australia caused by port conditions and poor weather.

POSCO, due to report first-quarter results on Friday, faces an uphill battle in fully passing on higher raw material costs, as South Korea's new government tries to curb inflation. [ID:nSEO204678]. (Editing by Keiron Henderson & Ian Geoghegan)