POSCO faces increased short selling amid battery stock volatility

POSCO Holdings Co. office building. [Photo by Lee Chung-woo]

The severe fluctuations observed in Korean lithium battery stocks appear to be calming momentarily, but investors are still uneasy about the possibility of a market shake-up. POSCO Holdings Co. has achieved an all-time high in its short-selling balance, while EcoPro Co. has experienced a sharp decline in its short-selling balance.

According to the Korea Exchange on Thursday, EcoPro’s short-selling balance has rapidly decreased to 650,000 shares by the end of July, down from its peak of nearly 1.8 million shares in late May. Analysts attribute this decrease in short selling to a short squeeze caused by foreign and institutional investors, coupled with a surge in its stock price. Consequently, the share of short-selling transactions in the company has also dropped to 4 to 5 percent from a previous high of 20 percent.

Meanwhile, POSCO Holdings’ short-selling balance is rapidly increasing due to a recent sell report on the company by Morgan Stanley & Co. The report labeled the Korean steelmaker as the “most expensive lithium stock in the world,” projecting a decline in the company’s stock prices, contrary to the recent increase in target stock prices by domestic securities firms.

Even before the Morgan Stanley report, there were already some overvaluation opinions circulating in the market regarding POSCO Holdings, leading to an increase in short-selling for the company. The short-selling balance for the steelmaker has more than quadrupled, reaching 1.9 million shares by the end of July, up from 440,000 shares at the end of June. Additionally, the prepared short-selling balance has also more than doubled to 5.7 million shares as of Wednesday, up from 2.9 million shares at the end of June.

Short-selling balances, along with margin loan balances, contribute to market volatility, affecting stock prices and indices. A sharp rise in stock price on top of a high short-selling balance can trigger a short squeeze, leading to further significant increases in stock prices. Conversely, a high margin loan balance and a sharp drop in stock prices can lead to forced selling, causing stock prices to decline further.

EcoPro’s margin loan balance has recently fallen to the 300,000 shares range from the earlier 400,000 to 500,000 shares range. On the other hand, POSCO Holdings’ margin loan balance surpassed 1 million shares in April and increased to 1.65 million shares by July. Currently, it stands at 1.54 million shares.

The trend is noticeable at their subsidiaries, EcoPro BM Co. and POSCO Future M Co., as well. EcoPro BM’s short-selling balance sharply decreased to 2 million shares by the end of July from more than 5 million shares earlier. On the other hand, the figure at POSCO Future M remains steady at over 1.5 million shares since July.

Analysts have a mixed view on the potential short squeeze in the POSCO Group stocks. “The likelihood of a short squeeze regarding POSCO Holdings is deemed relatively low even with any stock price surge as it saw a significant increase in the prepared short-selling balance recently,” said one unnamed private equity fund head.

On Thursday, EcoPro announced its second-quarter performance, with 2.17 trillion won in sales and 170.3 billion won in operating profits. Although sales showed a slight decrease compared to the previous quarter, they remained in the 2 trillion won range. Operating profits decreased by 6.6 percent compared to the previous quarter’s 182.4 billion won, attributed to the decline in lithium prices. EcoPro BM reported 1.9 trillion won in sales and 114.7 billion won in operating profits in the second quarter. While sales decreased by 5.2 percent compared to the previous quarter, operating profit increased by 6.9 percent.