POSCO Holdings Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

POSCO Holdings Inc., formerly known as POSCO, is a South Korean steel manufacturer, with a rapidly expanding presence in lithium, battery materials, trading, and construction.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

POSCO Holdings Inc. operates through four main segments:

  • Steel: This segment encompasses the production and sale of a wide range of steel products, including hot-rolled, cold-rolled, stainless steel, and other steel items, catering to diverse industries such as construction, automotive, and shipbuilding. It primarily serves the domestic and international steel markets.

POSCO is the largest fully integrated steel producer in Korea and one of the largest steel producers in the world.

  • Green Infrastructure: This segment is involved in construction and engineering for a broad variety of infrastructure projects.
  • Trading: POSCO International acts as a global general trading company for a diversified range of products, including steel products, raw materials, agro-products, and a wide variety of other items. It is also involved in the exploration, development, and marketing of natural resources.

Trading segment’s revenues are significantly impacted by commodity price changes, currency fluctuations, trade disputes, and demand volatility.

  • Green Materials and Energy: This segment includes the production of lithium hydroxide, lithium brine, and cathode materials, which are key components of EV batteries. The company is increasingly focused on this segment.

POSCO aims to become one of the world’s top lithium producers with an annual capacity of 420,000 tons by 2030.

POSCO’s overall operations are primarily located in Korea, with an increasingly large international presence including facilities in China, Indonesia, Australia, and Latin America. It is heavily involved in projects related to raw materials exploration and battery production across multiple geographies.

Competitive Landscape

POSCO operates in several competitive industries:

  • Steel: The steel industry is highly competitive with well-established competitors, both globally and in Korea. POSCO faces fierce competition from Chinese steel makers, who are rapidly increasing their production capacity and pose a potential threat to POSCO’s dominance.

There’s a global trend towards consolidation in the steel industry, which is resulting in fewer but larger global competitors.

  • Trading: POSCO International faces competition from multiple trading companies, both domestic and international. Strong relationships, global networks, and timely information are important factors to compete effectively in this space.
  • Lithium and Battery Materials: The lithium and battery material market is growing rapidly. POSCO faces stiff competition from companies specializing in battery material and mining. Given the importance of lithium in EV batteries, new technologies and the prices of lithium are very volatile.

POSCO is a new player in the lithium and battery materials space, and is seeking to compete with already-established players.

Moat Analysis: 2/5

POSCO has a narrow moat, owing to several factors which limit its competitive advantages:

  • Strong Relationships POSCO has long lasting relationship with its key suppliers and customers. The most part of it is government related such as POSCO Steel, and some new technology such as POSCO Lithium Solution. These two have an advantage of better pricing and stronger relationship which helps them stay afloat with the demand.
  • Scale Advantages in Some Segments: POSCO’s large scale in its steel operations gives it a cost advantage in some areas, however this moat is threatened by new entrants coming from countries like China.
  • Intangible Assets: POSCO’s brands in the steel sector are well established, and its long history does generate a kind of customer loyalty and preference, although the steel sector is pretty price sensitive. POSCO is also building proprietary battery material technologies which can be a moat in the future.
  • Regulatory Advantages: There are some barriers to entering the steel market in Korea, which provide POSCO a regulatory advantage, however this advantage is not sufficient by itself to be a wide moat. Some parts of POSCO’s operations are subject to favorable government contracts or regulations that are not as attractive for other businesses.

While POSCO does have some competitive advantages, it also faces significant competition, making a wide moat designation difficult.

  • Limited Differentiation: The company’s main line of business is steel and raw material trading, where products can be replaced easily and there is little product differentiation.
  • Commoditized Products: Its steel products, trading activities, and lithium operations are all prone to price fluctuations which further diminish potential moats.

    Risks to the Moat and Business Resilience

    Several risks can potentially harm POSCO’s moat and resilience:

  • Geopolitical Risks and International Trade Disputes:
  • POSCO’s global operations make it susceptible to changes in international relations, trade policies, and geopolitical tensions. The trade war between the US and China and new trade tensions between South Korea and Japan can affect the company’s performance negatively.
  • Commodity Price Fluctuations and Volatility: POSCO’s profitability and earnings are tied closely to the prices of steel, raw materials such as iron ore and lithium, and energy. Price volatility for those raw materials and for steel products may affect the company negatively.
  • Reliance on Imports: POSCO is reliant on imports of iron ore and other materials, increasing its vulnerability to supply-chain risks.
  • Competition: As Chinese companies gain technological expertise, they can start to compete with more advanced steel products. Furthermore, in the lithium space, other more established companies and new entrants are developing new batteries and reducing the importance of lithium.
  • Regulation: Government policies such as trade regulations and regulatory approvals can affect sales and profitability. Changes in environmental laws can be especially difficult.
  • Integration Risks: The transition into batteries and other green materials has inherent risks and may be difficult for the company to execute. The company also needs to compete with more well-established players in the sector.
  • Economic Slowdowns: As a materials provider, demand for steel is highly dependent on macroeconomic circumstances. Slowdowns in key markets such as China and South Korea can negatively impact POSCO’s performance.
  • Technological Innovation: Technological changes in steel making and battery production may render some of POSCO’s businesses uncompetitive. If they cannot adapt to changes in the market quickly enough, their competitive advantage might lessen.

Management acknowledges the global economic outlook for the near future remains uncertain and they are sensitive to geopolitical tensions, supply chain disruptions, and potential market oversupply.

Despite these risks, POSCO does have some resilience because of its established businesses and diverse customer and geographical base.

Financial Analysis

POSCO’s financials reveal a company in transition, balancing between legacy steel production and new green growth initiatives:

  • Revenues:
  • POSCO’s revenue for the fiscal year ended December 31st, 2023 was 72,667 billion Korean Won (KRW), down 11.4% from 82,039 billion KRW the year before. The steel segment remains the largest revenue driver for the company. However, over the last year all segments experienced a dip in revenue. The trading segment revenues also saw decline due to a drop in export revenues.

  • The revenue mix reflects the company’s strategic initiatives, such as expanding the Green Materials and Energy segment, as well as the impact of external factors, such as commodity prices and market demand volatility in its major areas of operations.

  • Profitability: POSCO’s profitability is down when compared to last year. Although the company’s gross profit increased to 9.4% of sales in 2023, from 9.2% in 2022, operating profit and pre-tax income are down when compared to last year. This reflects a combination of increased revenue, rising operational costs and impairment losses.
  • The operating profit margin came in at 3.4% for 2023 compared to 6.7% the year before.
  • Return on Invested Capital (ROIC), excluding goodwill, has declined sharply from 24.5% in 2007 to 11.9% in 2008, indicating a decline in the economic power of the company. * Adjusted ROIC has also declined from 29.0% to 16.3% in the same period, however it still indicates good performance by the company.

Although ROIC is declining, POSCO still shows consistent profitability when compared to the rest of the market.

  • Balance Sheet:
    • POSCO’s total assets at the end of 2023 came in at 66,808 billion KRW, which is up when compared to the total assets of 62,278 billion KRW the year before.
    • POSCO has high level of debt, with a total of 32,449 billion KRW in total liabilities. Their debt-to-equity ratio is at 71.3% which is much higher than its peers.
    • They are making a serious effort to reduce their debt. They have decreased their long-term borrowings by 28.5%, going from 18,119 billion KRW at the end of 2022 to 12,946 billion KRW at the end of 2023. They have also decreased their short term borrowings by around 5 percent.

POSCO’s balance sheet has been impacted by currency fluctuations in past years, which is a point of risk that management has to address through hedging and other means of risk management.

  • Cash Flow: As of Dec 31, 2023, POSCO recorded negative free cash flow of 5,855 billion KRW when calculating operating cash flow using traditional accounting methods. This figure is affected by large investments the company is making. However, the company was still able to pay 3,254.3 billion KRW in dividends in 2023.

In spite of negative free cash flow, POSCO’s cash position remains satisfactory, and is backed by its ability to raise funds in debt markets as well as having long term contracts to stabilize prices for its products.

  • Recent Earnings Call: In the latest earnings call, management has stated the company will reduce costs related to raw material imports by diversifying suppliers. Further, they mentioned they will have increased focus on more sustainable steel products in the future. The management also addressed the slowdown in demand by diversifying its markets, focusing on India, and leveraging its trading segment.

Management is focusing on the production and supply of high-strength and high-value-added products to meet specific market needs. They are also trying to improve sales through long-term contracts.

Understandability: 3 / 5

POSCO is somewhat complex to understand, because of the diverse nature of its operations, from steel production and trading to its ambitious entry into the lithium market. While the basics of each operation are simple, their interplay, and the company’s financial statements, are a little more nuanced than simple. They also have subsidiaries in different countries making the financials somewhat more complicated.

Balance Sheet Health: 3 / 5

POSCO’s balance sheet is moderately healthy, showing a high debt to equity ratio. The decrease in long-term debt and positive cash balance is an encouraging trend. Given the cyclical nature of steel, and the large investments needed for the green materials business, the company is required to have a strong balance sheet. For the long term the financial stability of the company would be crucial for its survival.

Overall Summary

POSCO is a company in transition from traditional steel manufacturing to new areas such as lithium production, which is both a risk and opportunity for investors. They are facing tough competition, volatile commodity prices, and are at risk of management making errors due to a relatively new business area of lithium and battery production. The high debt is something that needs to be closely observed. However, the company is making strong efforts in diversifying revenues, reducing costs, and building moats by creating new proprietary technology for battery production, and expanding into different geographic locations. Furthermore, its historical performance and position as a large, integrated steel company give it some stability.