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Investors who bid up Posco’s shares a record 18 per cent on Monday morning might not qualify for a job in one of its steelworks. Staff there have to judge variations in additives accurately. Bulls appear to have overestimated how much of Posco’s business depends on modish electric vehicle batteries rather than boring old heavy industry.
South Korea’s largest steel producer beat forecasts with second-quarter operating income of Won1.3tn ($1bn) despite a decline over the year. This alone cannot explain the rally in the shares.
The main driver was frenzied buying of stocks linked to the battery supply chain by retail investors. Car manufacturers at present depend heavily on Chinese companies for materials. The east-west trade war means vehicle groups may have to find new suppliers to placate the US.
A probe by Republican lawmakers into Ford Motor’s partnership with Chinese battery maker CATL has fuelled that expectation. One key issue is CATL’s links to Xinjiang Zhicun Lithium, based in a region where there is evidence of forced labour camps.
Some demand is expected to shift to South Korean companies. Smaller battery materials maker L&F signed a $2.9bn supply deal with Tesla in February. Shares of L&F doubled in the first three months of this year. Retail investors have profited even more handsomely from peer Ecopro BM.
Posco is shifting its focus to battery materials. But its core business remains steel, accounting for more than half of total sales. It is therefore vulnerable to weak global demand. The property market slump in China is worsening. Japanese steel exports have become more competitive thanks to the weak yen.
Posco shares trade at 16 times forward earnings, triple their level a year ago. The company will have to invest heavily in battery materials capacity for years before seeing a striking return. L&F shares are already down a third, peak to trough, this year. Fickle retail investors are unlikely to support Posco for the long haul either.