POSCO plans to trim steel production by around 10 percent temporarily, its first ever output cut, as inventories rise and demand from auto and home appliance makers tumbles. The move by the world's No 4 steelmaker, which until now had refused to join global peers and slash output, reflects the impact of the deepening global recession on steel-consuming industries.
"The reduction is very small at around 2 percent of its annual output but it is symbolic and suggests that even top-tier companies are facing great difficulties," said Cho In-je, an analyst at KB Investment & Securities. "The move is also likely to give more bargaining power to steelmakers when they meet raw material suppliers for annual talks over iron ore purchases."
POSCO, which produces around 2.75 million tonnes of crude steel a month, will reduce output by 200,000 tonnes in December and by 370,000 tonnes in January, it said in a statement. The cuts average out at around 10 percent of monthly production.
The cuts come just a week after the company said it would nearly double domestic investment to a record $4.3 billion next year to support its long-term expansion plan.
"We have delayed timing of a production cut as long as we can but today's move was made because end-users are planning to halt production during the year-end and falling export prices are also likely to hit profitability," POSCO said in a statement. But analysts said the steelmaker might have to tighten its belt even more and cut production further into next year.
"POSCO may have to follow its rivals and increase production cuts if market conditions continue to deteriorate, but it'll seek a strategy of keeping production plans flexible due to growing market uncertainty," said Kim Hyun-tae, a Hyundai Securities analyst. He added that output cuts across the industry may have to stay in place until the end of the second quarter when prices should stabilise and demand may pick up as consumers replenish depleted steel inventories.
Prices of benchmark hot-rolled steel have more than halved to around $490 a tonne in Asia from a record high of above $1,000 in July and are under further pressure as consumer reduce orders. Steelmakers face tough market conditions in 2009 as auto firms seek lower steel prices as they cope with falling sales.
In South Korea, domestic auto sales are seen declining 8.7 percent next year after dropping 5.7 percent this year, according to an industry group. Domestic auto sales tumbled 27 percent in November and all domestic car makers including the world's No 5 auto group, Hyundai Motor, are cutting production in response to declining consumer demand.
Steel inventories in the country, where POSCO earns 70 percent of its sales, rose to 5.7 million tonnes in November from 4.2 million at the start of the year. POSCO had been the sole major steelmaker in the world refusing to reduce output, partly because it has benefited from a weaker won currency, which makes steel imported into South Korea less price competitive.