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Posco`s operating profit highest in 6 years, you might be missing out on a strong cue

Posco`s operating profit highest in 6 years, you might be missing out on a strong cue


News is brought to you by Mr. Shailesh Karia


Published on 16th February, 2018


NEW DELHI: Want to add zing to your equity portfolio? Consider metals. A financial result posted by South Korean steel giant Posco showed good times ahead for global steel makers.

Posco’s annual sales touched 60 trillion won for the first time in three years in 2017, with 4.62 trillion won in operating profit, the biggest gain in the past six years. The company expects top line to rise further in 2018 as Chinese steel prices should remain strong early this year, thanks to Beijing`s efforts to scale down production.

On an aggregate basis, metal majors on the BSE Metal index reported a 43 per cent drop in bottom line in 2016-17 compared with 2010-11. Ajay Jaiswal, President - Strategies & Head of Research at Stewart & Mackertich, said, “Posco is not a bellwether, but its results indicate a trend in Asian steel companies. Financial results of the company suggested good performance from other steel companies as well and it also indicates that a cyclical uptrend in the industry has begun.”


“Posco`s earnings increased significantly in 2017 mainly as a result of improved industry fundamentals following cuts in China`s large-scale steel capacity and due to the company`s increasing sales of value-added products," said Gloria Tsuen, Moody`s Vice-President and Senior Analyst, in a release.

Listed metal players on Dalal Street have been doing a good job since 2016. Take this: the BSE metal index soared 137 per cent to 15,788.74 on January 23, from 6,661.68 on January 22, 2016.

Vedanta climbed the most by 430 per cent during the same period. The scrip jumped to Rs 342.90, from Rs 64.75 earlier. Vedanta scaled a fresh life high of Rs 494.30 on April 8, 2010.


Other metal stocks that doubled money during the period included Jindal Steel and Power (up 341 per cent), HindalcoBSE -1.57 % Industries (up 266 per cent), Tata Steel (216 per cent), National AluminiumBSE -6.98 % (128 per cent), SAILBSE -4.38 % (124 per cent) and Hindustan Zinc (104 per cent). NMDCBSE -3.04 % gained 86 per cent in the past two years.

Despite the rally, these stocks are trading up to 74 per cent lower than their all-time highs. NMDC hit its all-time high of Rs 571.80 on January 19, 2010 while Jindal Steel is 62 per cent down from its life time high of Rs 778.

Brokerage firm Motilal Oswal in a research report said, “Steel sector outlook has turned positive, with growth in industrial production across the world and supply-side discipline, despite slowing fixed asset investment. Steel mills’ spreads are at new highs.”


According to market experts, Indian long product prices have spiked in the last few months, bridging the gap with flat products, driven by improvement in domestic demand and tightening of iron ore supply.

Margins of domestic steel mills are on the uptick. Analysts expect domestic steel mills to report very strong numbers in Q4 FY18.

“We are raising our EBITDA estimates by 10-15 per cent for FY19 and rolling over our target price to FY20E earnings. JSPL and NMDC are our top picks. We continue to like JSW Steel,” Motilal Oswal said.

The brokerage house added that flat product prices moved up all through CY16-17, in line with the international trend. However, long product prices underperformed flat products by around $100 per tonne due to sluggish construction. Large mills with high share of flat products in the mix – JSW Steel (JSTL), Tata Steel (TATA), Essar Steel and Bhushan Steel – witnessed significant margin expansion, but steel producers with large share of long products and plates in the mix benefited only marginally.

Bhushan Steel soared 73 per cent to Rs 63.80 on January 23, from Rs 36.85 on January 22, 2016. However, it is still trading 88 per cent lower than its all-time high of Rs 536.93, reached on October 22, 2010.


Anish Damania, Head-Institutional Equities, IDFC Securities, believes that metal stocks will continue to beat markets. “We like all the frontline metals companies, including Hindalco, Tata Steel, Vedanta. Asset heavy plays will rule the roost and given the global economic recovery, we feel that metals will continue to outperform the market,” he said in an interaction with ET Now.    


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