Shares of POSCO Group units surge on earnings outlook in steel sector

POSCO Future M Co. logo [Courtesy of POSCO Future M]

Shares of POSCO Group are rising on expectations that earnings at its affiliates will improve as China adjusts steel production to ease concerns of an oversupply. At the same time, analysts are voicing caution the shares have already risen excessively on expectations related to batteries.

According to the Korea Exchange, POSCO Group shares rose on Monday. POSCO Holdings Inc., parent of Korea’s biggest steelmaker POSCO, rose 1.8 percent to 423,500 won ($321.15), while POSCO Future M Co., a manufacturer of cathode materials for batteries, gained 12 percent to 384,500 won. POSCO M-TECH CO., a producer of steel raw materials and packing materials, was up 15 percent, POSCO International Corp., the trading arm of the group, up 14 percent and POSCO DX Co., which provides information and technology services, up 30 percent. Shares in the units has climbed as much as 327 percent this year.

The main factor behind stock gains over the past week is attributed to expectations for an improvement in the steel industry, which is the main business of POSCO Group. Until now, the global steel industry had seen a limited rise due to concerns of oversupply and falling demand, but has been largely dispelled as China has reduced steel production since the first half of 2021.

The stocks were also boosted by Bloomberg News on Monday that the Chinese government is planning to curb this year’s steel production below last year’s level, citing a local source. POSCO M-TECH and POSCO Steeleon Co. stocks, which are closely related to the steel industry, rose 15 percent and 30 percent, respectively. POSCO Steelion produces coated, aluminized and color coated steel sheets.

[Photo provided by POSCO]

The steel sector accounts for a significant portion of POSCO Group’s corporate value. Last year, POSCO separated into a holding company, POSCO Holdings, and its steel making business into a new unlisted entity. Yuanta Securities Korea Co. estimated the share of the steel sector in the fair value of POSCO Holdings to be 60 percent and Hana Securities Co. also saw it as around 50 percent. However, the lithium business sector is about one-tenth of the steel sector’s sales, but the multiple, which refers to a company’s price-to-earnings ratio, is about twice as high.

Market insiders projected the earnings of the steel sector to show an improvement this year and increase in earnest next year. According to market tracker FnGuide, five securities firms, including Hana Securities, Korea Investment & Securities Co. and Samsung Securities Co., predicted that the steel sector would achieve 15.41 trillion won in sales in the fourth quarter of this year, which is 9 percent higher than the 14.09 trillion won expected in the first quarter. They also expected the steel sector to generate 63.74 trillion won in sales next year, up 3 percent from this year’s estimate of 61.79 trillion won.

Until early this month, POSCO Group shares had risen amid favorable news related to the battery value chain. POSCO Future M shares rose to reflect the value of its lithium business in Argentina and its nickel business in Indonesia. Boosted by the soaring stock, POSCO Future M’s market capitalization exceeded 29 trillion won, beating 28.75 trillion won of EcoPro BM Co., the No. 1 market cap in the secondary Kosdaq market.

There are concerns, however, about the short-term surge in POSCO Group shares. Kyobo Securities Co. recently downgraded POSCO Holdings shares to neutral from buy as the stock has risen excessively on the battery theme and a supply-demand bias rather than expectations of earnings improvement.

“It is unreasonable to give an additional multiple to the sharp rise in stocks caused by a supply-demand bias,” said an analyst at Kyobo Securities. “It is also questionable whether it is appropriate to invest excessively in the future value of a holding company that does not contribute to dividends.”

POSCO Holdings is receiving dividends from its listed subsidiaries, POSCO International, POSCO Future M and POSCO DX.