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POSCO chases acquisitions to shore up growth

SEOUL (Reuters) - POSCO 005490.KS unveiled a record $8.3 billion investment plan around the Asia-Pacific that underscores the determination of the world's No.4 steelmaker to close the gap on Chinese steel mills snapping up assets along the supply chain.

POSCO, which makes 60 percent of its sales at home in South Korea and has no history of successful overseas acquisitions, expects to close a deal to buy Thai stainless steel producer Thainox INOX.BK by the end of the month.

It is also very interested in buying trading and energy development company Daewoo International 047050.KS, Chief Executive Chung Joon-yang told analysts after POSCO reported its strongest operating profit in five quarters on Thursday.

The company also flagged it could buy up to 15 percent of an iron ore project in Western Australia, Roy Hill, owned by Australia’s richest woman, Gina Rinehart, for an undisclosed sum.

POSCO forecast a strong increase in steel production, but analysts have warned that the unwinding of worldwide stimulus policies and a potentially disappointing pace of economic recovery could limit its earnings growth this year.

“The key risk for POSCO earnings for this quarter would be moves by global governments toward monetary tightening and exit strategies,” said Chung Young-Hoon, head of research at Hanwha Securities.”

INVESTMENT PUSH

Cashed up and looking to defend margins, POSCO is on a drive to expand through the supply chain, from raw materials to specialty products, following China’s steelmakers in a push offshore.

China's steel mills are far ahead in snapping up stakes in Australian iron ore prospectors to trim dependence on the big suppliers, Rio Tinto RIO.AXRIO.L and BHP Billiton

BHP.AXBLT.L.

POSCO plans to nearly double its investment spending this year to a record 9.3 trillion won ($8.3 billion), and has earmarked 3 trillion won, or less than half its cash hoard, for acquisitions.

Its top priority is to buy the 68 percent stake, worth 2.4 trillion won, up for sale in Daewoo International, followed by majority stakes in Daewoo Shipbuilding 042660.KS and Daewoo Engineering & Construction 047040.KS together worth 4 trillion won, Chief Financial Officer Lee Dong-hee told reporters.

The company expects to increase crude steel production by 17 percent to 34.4 million tonnes this year, but steelmakers face a sharp rise in iron ore and coking coal prices later this year.

Analysts said that would force POSCO to raise steel product prices in the second quarter after a shock 20-percent cut last May, but a rise is not guaranteed to hold.

“Going forward, (POSCO) won’t be immune to China’s tightening. Further implementation of those policies will hurt prices of steel and chemicals, as we’ve seen in the past,” said Im Hyun-Su, a fund manager at IBK-SG Asset Management.

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MEETS EXPECTATIONS

The first major Asian steelmaker to report results for the October-December quarter, POSCO posted an operating profit of 1.6 trillion won, meeting its own and analysts’ forecasts, up from 1.4 trillion won a year earlier.

It benefited from a drop in iron ore and coking coal contract prices, set to continue through the second quarter of this year.

Fourth-quarter revenue at POSCO, which ranks behind ArcelorMittal ISPA.AS, Japan's Nippon Steel 5401.T and China's Baosteel 600019.SS in world steel production, fell 12 percent to 7.3 trillion won.

Quarterly net profit rose 77 percent to 1.3 trillion won from a year earlier.

Its operating profit margin jumped to 21.8 percent in the fourth quarter, far outperforming ArcelorMittal’s 1.9 percent operating profit margin for the third quarter.

Shares in POSCO fell 0.7 percent on Thursday, lagging a 0.9 percent rise in the Seoul benchmark index ahead of the result. However the stock has risen 58 percent over the past 12 months, outperforming a 41 percent rise in the KOSPI.

“Concerns about whether steel mills will be able to pass on higher raw materials costs to customers will also mount and cap share price rises as they start talks with miners on iron ore and coal prices for the next business year,” said Atsushi Osa, a fund manager at Toyoto Asset Management in Tokyo.

($1=1121.3 Won)

Additional reporting by Seo Eun-kyung in SEOUL and Yuko Inoue in TOKYO; Editing by Lincoln Feast and Jonathan Hopfner

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