POSCO identifies key steps to increase profits in 2015

POSCO is a large steel manufacturer headquartered in South Korea. In contrast to the weak forecasts for US GDP, the estimate for the South Korean economy predicts 3.8-4.0 percent growth for both 2015 and 2016. Under these conditions, POSCO is well positioned given its deep-rooted position in the domestic steel market, where the company controls nearly half of all steel sold in the country and generates half of its revenue.

The geographic location of the country enables the company to deliver steel products to other areas where there is high demand, including Southeast Asia, India, Thailand, Malaysia and Vietnam. In addition, the proximity to Australia and Russia provides raw material advantages such as direct ownership and shares of mines that produce the elements the company needs.

POSCO is not an ideal company and is not without its problems. Last year, its profits fell and now the company is faced with the task of preventing a repeat of 2014. Like many large companies that got caught up in the vertical diversification of production, POSCO got too many directions and lost focus. Fortunately, the company is undergoing a major restructuring, ditching non-core business lines and focusing on leveraging its technological strengths to produce specialty steels and other high quality steel products.

Last year alone, POSCO announced the sale of 73 percent of POSCO shares to SK Telecom, and recently signed a preliminary agreement to sell its 38 percent stake in the POSCO Engineering & Construction construction business. There is still a lot of fat the company can shed, so the leadership is focused on key business areas such as the energy subsidiary POSCO.

The department decided to cut capital expenditures by $ 1.2 trillion. won in 2015 (22 percent). This will free up operating cash flow for debt repayment, along with an overall reduction in administrative expenses and continued sale of non-core assets. All of this is aimed at freeing up capital to reduce operating leverage, with the result that a large leverage should bring the debt /EBITDA ratio back into something more manageable.

This is just the beginning of the company's plans. Capital expenditures and debt /EBITDA are planned to be reduced by 2016. Lower interest expenses and projected increases in EBITDA in 2016 should help the company rise in the global steelmaker rankings, provided there are no other unpleasant surprises such as violations or further problems with the Korean tax authorities.