POSCO, the world’s third-biggest steelmaker by output, and its units raised their cost-cutting target for this year by 20 percent to sustain profits amid rising iron ore and coal prices.

The group aims to cut overall costs by 2.4 trillion won ($2.2 billion) this year from a previous target of 2 trillion won in an effort to “Improve competitiveness,” Chung Jae-woong, a spokesman for Pohang, Korea-based POSCO, said by phone today, confirming an earlier Korea Economic Daily report.

“That’s part of POSCO’s efforts to sustain stable profits given that raw material costs are rising, while it’s not easy for them to pass on cost gains to customers,” said Kim Gyung-jung, an analyst with Eugene Investment & Securities Co. in Seoul.

POSCO, which underperformed the local benchmark stock index last year, in January reported a worse-than-expected drop in fourth-quarter profit after raw material costs gained and demand from builders and home-appliance makers waned. Japan’s Nippon Steel Corp. and Sumitomo Metal Industries Ltd. said Feb. 3 they plan to combine to cut costs.

POSCO, Asia’s biggest steelmaker by market value followed by Nippon Steel, declined 21 percent last year, compared with a 22 percent gain in the benchmark KOSPI index. The stock is almost unchanged this year, while ArcelorMittal, the world’s biggest maker of the metal, rose 3.1 percent and Nippon Steel gained 4.5 percent. POSCO shares fell 0.3 percent to 486,500 won at 9:39 a.m. in Seoul trading, while KOSPI was up 0.7 percent.

Iron ore prices almost doubled from the first quarter to the end of 2010, while coking-coal costs gained 38 percent, HSBC Holdings Plc said. Coal has risen since floods disrupted mining in the northeast of Australia, the biggest exporter.

The price of iron ore will average 21 percent higher this year and may jump to a record should anticipated supply growth be curbed, according to Credit Suisse Group AG on Jan. 7. Iron ore and coking coal are the two main ingredients for making steel.

POSCO’s operating profit margin dropped to 7.1 percent in the fourth quarter ended Dec. 31 from 13 percent in the third quarter and 23 percent in the second quarter, according to POSCO’s presentation material on 2010 earnings on Jan. 13. 

(Bloomberg)