Posted on 22 Sep 2016
POSCO and Hyundai Steel are facing growing calls to merge to remain competitive in an increasingly fierce global steel market, according to analysts, Wednesday.
Mergers by top steelmakers in China and Japan are placing greater pressure on Korea's two largest steel producers to follow suit to cope with the prolonged world supply glut.
Many merger advocates say POSCO and Hyundai Steel should consider becoming one unit to more effectively compete with foreign rivals.
They argue that once merged, the new entity would be able to buy iron ore and other resources at lower prices, invest more to develop value-added steel products and more effectively deal with market changes.
But some opponents express concerns that the merger will create a monopoly, adding that POSCO and Hyundai Steel have remained profitable, unlike most of their Chinese and Japanese counterparts.
The Export-Import Bank of Korea (Eximbank) reignited debate over the future course of Korea's steel industry, Tuesday, by issuing a report suggesting that POSCO and Hyundai Steel be combined to deal better with rapidly changing market conditions.
The bank said reducing production volumes to cope with the global oversupply is only a short-term solution, stressing that the domestic steel industry should undergo fundamental changes through mergers and acquisitions (M&As).
On Tuesday, Baosteel Group, China's second-largest steelmaker, said it will merge with Wuhan Iron and Steel Group, creating the world's second-largest steel producer after ArcelorMittal.
"It is important for the steel industry to have an economy of scale to be price-competitive," Eximbank said. "Nippon Steel & Sumitomo Metal Corp was able to save 2.2 trillion won in costs since 2012 when Nippon Steel and Sumitomo Metal were integrated. If POSCO and Hyundai are merged, the new entity, which will become the world's third-largest steelmaker, can do the same."
Korea consumes about 56 million tons of steel a year, which is projected to fall due to slower industrial activity, according to the bank.
Industry analysts echoed the bank's views, saying local steelmakers should jump on the bandwagon.
"Now is the time for Korea to seriously review the course of its steel industry," said a Seoul-based analyst, who declined to be named. "The global market will likely be saddled with a supply glut for the foreseeable future because of China's overcapacity. To tide over unfavorable market conditions, many global steelmakers have opted to merge to achieve greater economy of scale. Korean firms should also do the same."
She said the merger between POSCO and Hyundai Steel should strengthen the global competitiveness of the Korean steel industry, adding that the newly created entity would be in a better position to source materials at cheaper prices, and develop innovative, value-added products.
But some argue the merger would create an absolute monopoly.
"Hyundai Steel broke POSCO's monopoly of the local steel market when it began operating a blast furnace in 2010," said another analyst, who declined to be named. "Since then, the two have grown into some of the world's most profitable steelmakers through competition. But merging the two means that Korea would return to the old days when POSCO exerted monopolistic power. This would again create a range of side effects."
He said POSCO and Hyundai are different from their counterparts in Japan and China. "The two Korean firms have been generating handsome profits, despite the global slump. But many Chinese and Japanese steelmakers have incurred huge losses. So, we cannot apply the same logic to POSCO and Hyundai."
