POSCO’S COMPETITIVE ADVANTAGE IN THE GLOBAL STEEL

INDUSTRY
“As far as efficiency is concerned, Posco stands taller than any other steelmaker in the world.”

-Yang Ki In, analyst at Daewood Securities Co., in 20041

“While steelmaking is and will remain our core business for the foreseeable future, ongoing industry
restructuring and consolidation as well as rising competition from China and other global markers have
made it prudent for us to explore our options for diversification beyond steel.”

-Posco annual report 20042

POSCO INTRODUCES NEW TECHNOLOGY

Posco, one of the leading producers of steel in the world, announced in August 2004, that it had begun
construction on a new plant, which would be the first steel plant in the world to use the revolutionary
Finex technology3. The plant, which was being constructed at the company’s steelworks in Pohang (a port
town on the southeastern coast of South Korea) at an estimated cost of $1.1 billion, would have an annual
capacity of 1.5 million tons. The plant was expected to be operational by the end of 2006.

Finex was more efficient than the traditional blast furnaces that were used to manufacture steel, and was
expected to lower Posco’s production costs by 17 per cent. It was also more environment friendly, and
gave off 90 per cent less toxic emissions (like sulphur oxides, nitrogen oxides, and dust) than traditional
blast furnaces.

Posco had invested $362 million in the research of Finex technology since 1992. The company was
expected to commercialize the technology by the end of 2005, and all the retiring blast furnaces at the
Ponhang Works were to be replaced by Finex over time. “The commercialization of Finex will be a major
turning point for global steel production technology,” said a statement released by the company.4

In the early 2000s, Posco was the most efficient manufacturer of steel in the world and had costs that
were considerably lower than that of its competitors. It was also the fifth largest producer of crude steel
and had a capacity of a little below 29 million metric tons (mmt). In 2003, Posco emerged as the most
profitable company in the problem ridden global steel industry, with profits of over $1.6 billion, which
was much higher than any of its competitors’ (Refer Exhibits I, II, III and IV).

1
Brian Bremner, Moon Ihlwan, Dexter Roberts, “Posco: One Sharp Steelmaker”, Business Week, August 30, 2004
2
www.posco.co.kr.
3
Finex produced molten iron directly using iron ore fines and non-coking coal rather than processing through
sintering and coke making which were used traditionally. Steelmakers used highly polluting ovens to turn powdery
coal and iron ore into chunks called coke and sinter, which were melted with superheated air to make iron. With
Finex, coal and ore are turned into iron without coking and sintering.
4
“South Korea’s POSCO starts construction of next-generation plant”, biz.yahoo.com, August 17, 2004.
BACKGROUND

Before the 1960s, South Korea was primarily an agrarian economy. In an attempt to industrialize the
country, the South Korean government decided to build a steel manufacturing facility at par with the best
in the world. Phang was chosen as the ideal location for the steelworks. Pohang had a deep-water harbor,
which would enable container ships to unload raw materials directly at the plant from deposit rich sources
across the world. (The single biggest cost in the manufacture of steel is the purchasing and shipping of
raw materials, although cheap labor and energy resources are also important).

Posco, then known as the Pohang Iron and Steel Company, was sent up in April 1968, with a $296
million investment by the South Korean government and technical and financial assistance from Japan.
(Japan’s assistance included $73.7 million in government grants and loans, $50 million in credit from the
Japan Export-Import Bank, and technical assistance from Nippon Steel Corp (Nippon) and other
corporations.)

The plant was constructed in four phases and Posco began production in 1972. Initially, the objective was
to improve self-sufficiency in steel in South Korea and strengthen international competitiveness.
Therefore, the company made special efforts to supply high quality iron and steel to domestic companies
at a price that was lower than the export price.

In 1986, Posco entered into a 50/50 joint venture with the US Steel Corporation, a major steel company
based in Pittsburg, USA. The joint venture was called USS-Posco and offered significant benefits to both
partners. Posco gained access to the US markets and US Steel got a high quality and low cost supplier of
raw material for its steel finishing plant.

By the late-1980s, Posco had an annual production capacity of 12 mmt and was the fifth largest steel
company in the non-communist world. In 1988, Posco was listed on the Korea Stock Exchange. In a bid
to increase its capacity further, Posco began constructing a second steelworks at Kwangyang (also known
as Gwangyang, a port on the southern coastline). By the time the Kwangyang plant’s fourth phase was
completed in 1990, Posco’s annual capacity was 20.8 mmt. In 1995, Posco’s ADRs were listed on the
London Stock Exchange.

In 1998, the South Korean government announced its plans to privatize Posco. This was a part of a larger
plan to withdraw restrictions on individual and foreign investment in South Korea. The government
announced that it would sell its entire 26.7 per cent stake in Posco, which was at that time, the world’s
second-largest steel producer after Nippon. The announcement shocked the company’s workers as well as
analysts. “It’s a small revolution. We hardly expected that,” said Lee Jong Sung, an assistant manager at
the company.5

Posco’s privatization process was complete by October 2000 and the company became the largest steel
producer in the industry for a brief time, with a capacity of 28 mmt (It was overtaken in 2002 by Arcelor,
a merger of three European manufacturers Arbed, Arceralia, and Usinor, with a capacity of 45 million
tonnes.) (Refer Exhibit V for a profile of Posco’s main competitors). In March 2002, the company
formally changed its name to Posco (until then ‘Posco’ was used as an abbreviation of the longer
version). In the financial year 2003, Posco had sales of $14 billion and made a profit of $1.69 billion,
establishing itself as the most profitable company in the global steel industry.

5
Don Kirk, “South Korea to Sell Off Stakes in 11 Companies”, International Herald Tribune, July 4, 1998.

2
ADVANTAGE POSCO

Posco’s profitability in an industry that was burdened by a number of problems was the subject of much
discussion among analysts. At a time when many of the majors of the steel industry, especially those in
developed areas like the US and Europe, were going bankrupt, Posco’s profitability was found
remarkable. Analysts attributed Posco’s profitability to its low production costs and innovative
management.

Low Production Costs

Compared to steel manufacturers in western countries, Posco had relatively low production costs. Several
factors contributed to making Posco the most efficient manufacturer in the steel industry. First, Posco had
the advantage of location. The steel works were situated at Pohang, which had a deep harbor that enabled
container ships to unload the raw materials directly at the plant from iron ore rich deposit sources in
Australia, Brazil and South Africa. This saved the company the unnecessary expenditure of having to ship
raw materials by road from the harbor to the plant.

Proximity to the harbor was also a major advantage in the sense that, as South Korea did not have any
significant deposits of iron ore or coal, which were the basic raw materials for the manufacture of steel,
almost all the raw material supply had to be imported. Transporting such huge quantities of materials by
road would have increased Posco’s costs considerably. “Their harbor facilities give them a tremendous
advantage”, said Frank Koelble (Koelble), associate director of the Industrial Economic Research
Institute at Fordham University, who did considerable research on Posco.6

In contrast, in the US, most of the steel manufacturing units were located inland (except Bethlehem Steel
in Maryland, which had a limited port capacity). This would account for the high cost of production that
most US companies incurred. In the early 2000s, it was estimated that Posco paid $25 per ton for delivery
of its iron ore (most of which came from Australia), while US companies paid about $50 a ton. This
difference in cost gave Posco a competitive advantage over Western companies.

Second, Posco was set up as a government enterprise. Therefore, it received major subsidies from the
government and did not have to incur costs like purchase of land and licenses. This gave it an initial
advantage. The company also had tremendous support from the government in all its operations, enabling
it to obtain loans to lower interest rates from banks and use government built port facilities.

Third, as in most Asian countries, South Korea had an abundant supply of cheap skilled and semi skilled
labor, which helped keep the production cost down. The company was able to compete internationally in
the initial years by using low cost mass production as its competitive advantage.

Positive Labor Relations

Posco was one of the biggest companies in South Korea and the leader in the country’s steel industry.
One of the major advantages of Posco was the harmonious relationship it had with its employees. Until
1988, Posco was completely non-union and analysts described the management style as ‘patriarchal
company welfarism’ where the company expected complete loyalty from employees in return for a
guarantee of lifetime employment. Since the late-1980s, however, the company began to make more
effort to decentralize authority. In 1988, the first labor union was formed to represent the interests of the
workers.

6
“Posco: The Next Big Steel”, Baseline magazine, June 2002.

3
Despite unionization, the relations remained harmonious with both the unions and the management
showing greater inclination towards consultation in resolving issues rather than aggression. Posco was
also not subject to constant strike and work disruptions like in Western countries, where unions were
more active and aggressive, and this helped increase productivity. (The union, however, did not survive
very long and was replaced by an ‘employee association’ in the early-1990s.)

Posco also made efforts to conduct regular training and development programs for its employees to help
enhance their skills and consequently, the productivity. In 2003, the company announced a program that
would focus on improvement activities, including Six-Sigma activities, of its staff and operate an
improvement task force to effectively deal with strategic issues.

Analysts said that Posco’s main advantage was its low cost of labor. In the US and Europe, steel
companies paid higher wages to their workers and had to incur great costs in providing health, pension
and other benefits than in developing Asian countries like South Korea. According to a report by World
Steel Dynamics, a steel-consulting and research firm based in the US, on an average, wages and benefits
cost Posco about $13 an hour (in the-2000s), compared with $38 an hour for integrated steel mills 7 in the
US. Posco was one of the top-paying employers in South Korea, with an average wage of $29,000.

Posco’s workers also worked longer hours than their counterparts in the US. The average workweek for a
Posco worker was 48 hours, including a half day shift on Saturdays. In contrast, steel workers in western
countries worked five days a week, with a workweek of between 40 to 45 hours.

Another point favoring Posco was that, because of its relatively young age, the company did not have to
bear the burden of legacy costs like pension and retiree benefits, which ate into the revenues of many of
the older companies (some of the oldest steel mills in the US were set up on in the early 1900s). For
instance, in the early-2000s, US Steel (set up in 1901) incurred $66 per ton more on labor costs than
Posco. Part of the cost was attributable to the high cost of union labor. However, $30-40 of the amount
was incurred on legacy cost for healthcare benefits of retirees.

Retirement benefits in South Korea were quite different from those in developed countries. Companies
had a contributory fund, where workers and their companies contributed to a national pension fund that
began paying out when the worker turned sixty. When workers retired at Posco, they received a sum
equaling one month’s pay for each year worked. Once the worker retired, the company was no longer
responsible for medical coverage.

Operational Efficiency

Posco’s plants were laid out in such a manner as to make the manufacturing as simple as possible. The
Pohang steelworks were laid in the form of a two-mile long ‘U’. Freighter ships with 250,000-ton
capacities fed raw materials at one end of the U and picked up finished steel products at the other. The
Kwangyang operation was also laid out like a big assembly line, with barges transporting raw materials
on one end and finished steel at the other end. All the operations in the manufacturing process were under
one roof, unlike in some older US companies where they were dispersed in different buildings. Capacity
in the blast furnaces also matched capacity in the rolling mills down the line, which eliminated waiting
time and made the process more efficient.

7
The iron and steel industry involves iron ore mining, pig-iron production, steel making and steel rolling. An
integrated company is one that operates in all four areas. Mini mills, on the other hand melted steel scrap to produce
commodity products.

4
Analysts said that, because Posco was a relatively new company, it got the opportunity to integrate its
manufacturing process completely. The company was able to layout it plants in the most efficient way
possible and fit them with the latest technology. “They were able to start fresh, so they could tightly
interconnect every process, from the delivery of coke and ore, to the blast furnace, and on through casting
and rolling. They’ve been able to wring out every inefficiency, because one piece of the puzzle is so
closely connected to the next,” said Koelble.8 This eliminated wastages and made the processes more
efficient. On the other hand, steel makers in the US had to demolish or renovate old buildings and
machinery to install the latest technology. This involved a massive investment, which many of them could
not make very easily.

Posco was committed to improving its products and processes. The company spent millions of dollars
every year on research and development. In May 2002, Posco launched a Six Sigma program that was
implemented at the company in three phases. The first two phases enabled people to become acquainted
with the concept and familiarize themselves with the various tools and methodologies. By the end of the
third phase, Six Sigma had pervaded all parts of the organization and became an important tool in the
execution of the business strategy (Refer Exhibit VI for the steel making process at Posco).

Tech Savvy

According to analysts, Posco was one of the most technology savvy companies in the steel industry. “This
company has a track record of consistently improving productivity,” said Park Kyung Min, the CEO of an
investment management company in South Korea9 Extensive use of technology helped Posco improve
many of its processes and obtain savings through elimination of work duplication.

In 1999, Posco began a ‘process innovation initiative,’ the objective of which was to streamline all the
operations of the company from the sourcing of raw materials to production. All the processes, from the
making of iron ore to the final steel production lines were interconnected. The initiative helped Posco cut
down its costs and increase profits. By the early-2000s, the company had invested over $160 million in
the initiative and generated almost $250 million in savings.

In the early 2000s, Posco launched a new customer oriented digital management system called Pospia,
and used an extra large server called super-dom and Oracle’s ERP solution to develop a system that
monitored all of Posco’s processes.

Under Pospia, Posco networked its 81 plants in Korea, so that customers could place orders online.
Besides proving advantageous to customers, Pospia also helped Posco obtain valuable data on the status
of production, orders, and delivery, and made it easier for the company to coordinate these functions.
From data obtained through Pospia, steel slabs were pressed to a specified weight and width depending on
customers’ needs at the mill level itself and kept ready for delivery. This reduced delivery times by half
and slashed inventories by almost 60 per cent. Korean customers could receive hot-rolled coils in just 14
days, compared with 30 days before. The inventories of wire rods also fell from 12 days to five days.
Pospia reduced budget lead-time from 110 days to 30 days. Posco’s on time deliveries rose from 74 per
cent to 97 per cent. Implementation of Pospia helped Posco save costs by $17 per ton.

Posco also launched an e-business venture called www.steel-n.com (n stood for neo or new), in which,
accredited customers could purchase Posco’s products online. Steel-n.com comprised of e-Sales and e-
Procurement (e-Sales-site handled sales side work and was comprised of e-Market and e-Transaction, and

8
“Posco: The Next Big Steel”, Baseline magazine, June 2002.
9
Brian Bremner, Moon Ihlwan, Dexter Roberts, “Posco: One Sharp Steelmaker”, Business Week, August 30, 2004.

5
e-Procurement dealt in purchasing, and was designed to search for new suppliers. It also enabled
electronic bidding and exchanges of transaction documents and information). Steel-n.com became
operational in September 2001 and sold over 600,000 tons online within the first year. The venture
shortened the supply chain considerably, as it brought the manufacturer and the customers in contact with
each other and eliminated the need for intermediaries, which also made the final product cheaper. Low
volume customers, who could not buy directly from Posco earlier, could also do so over the site.

CASHING IN ON CHINA

China had emerged as the biggest importer of steel, in 2002, overtaking the US. (In 1978, the Chinese
government had opened up the economy and implemented market reforms that increased the economic
activity in the country significantly.) Despite being the biggest manufacturer of steel in the world, the
country imported large quantities of the metal to meet the demands of its rapid economic activity (Refer
Exhibit VII on the major steel producing countries). It was estimated that China consumed almost 25 per
cent of the world steel production. In the early 2000s, Posco exported almost 80 per cent of its production
within the Southeast Asian region, and almost 40 per cent of the company’s exports went to China (Refer
Exhibit VIII on Posco’s sales to China).

Posco had also invested over $800 million in China until 2003 to take advantage of the booming steel
market. It set up the Posco-China Holding Corp., which oversaw the company’s Chinese operations.
Posco also had 14 joint ventures with Chinese companies as in mid-2004. Benxi Iron & Steel Co., near
Shenyang was one of them. It will produce 1.8 million tons of cold-rolled sheets annually for autos and
home appliances when it opens in 2006. Another joint venture, with the Jiangsu Shagang Group,
produced 280,000 tons of stainless cold-rolled coils and nearly 1000,000 tons of galvanized steel every
year. Posco was planning to invest $1.4 billion in fresh investment in China by 2006. Most of the
investment would be in galvanized and stainless steel to supply to global auto and appliance makers that
opened plants in the country.

RESPONSIBLE CORPORATE CITIZEN

Posco was recognized as one of the companies having the best corporate governance in South Korea.
Soon after it was privatized, Posco separated its ownership from management and formed a board of
directors with eight independent directors and six internal directors to check and monitor its management.

In 2003, Asiamoney, a Hong Kong based magazine ranked Posco first in the list of companies having the
best corporate governance in the materials industry in Asia. In the overall ranking, Posco ranked third
behind the Hong Kong and Shanghai Banking Corporation and CLP Holdings, one of the largest electric
utilities companies in Asia. Asiamoney had conducted a survey of 120 major companies in 10 industries
and 48 analysts on issues such as the guarantee of shareholders rights, management transparency, and the
formation and role of management and the board of directors.

In 2003, Posco was also recognized by three influential Korean organizations – the Korea Economic
Daily, Korea Investor Relations Association, Money Today, as having the best investor relations in Asia.

In March 2004, Posco formed a committee of lawyers, economists, and bankers to recommend names of
independent board members. The new board, when it was composed had independents (including a
shareholder rights activist, a banker, and two foreigners) making up 60 per cent of the strength.

Posco was also involved in environmental protection and conservation and it was reported that in the
early-2000s, the company had spent about $155 million on pollution control, which about two times the

6
industry average in South Korea. One analyst who visited Posco’s Pohang steelworks said that there
seemed to be more workers working outside on the lawns and gardens, than inside the mills.

“In today’s business paradigm, shifting from traditional profit-focused management to progressive
environmental, environmentally sound and sustainable development has become the key factor in
strengthening corporate competitiveness,” said Ku-Taek Lee, Chairman and CEO of Posco.10

THREATS TO SUSTAINABLE COMPETITIVE ADVANTAGE

Analysts said in the midst of all its success, Posco had a few weak spots that could threaten its long-term
stability and competitive advantage.

First, Posco depended excessively on sales in the domestic market. In the early-2000s, when globalization
was the order of the day, Posco still depended heavily on sales in South Korea. Almost 75 per cent of the
company’s sales came from the domestic market. Analysts felt that this was a wrong strategy and that the
company should focus on exports because exports would bring in foreign currency, which could be used
to procure raw materials. It would also help the country service its foreign currency debts and create
greater international stability. Export would help Posco develop strong relationships with overseas
buyers, which could prove beneficial in the long run if domestic demand weakened.

Besides, there was also a possibility that Posco would lose its dominant position in the domestic market.
Analysts expected that South Korea’s phasing out of steel tariffs by the mid-2000s in keeping with a
WTO agreement would increase steel imports into the country and reduce Posco’s control over the
economy.

In addition to this, some of Posco’s domestic clients bought its products at prices that were almost 20
percent lower than the prices charged for overseas customers. Critics said that Posco did this to keep the
government happy. However, company officials said that the lower prices were a result of long-term
contracts that the company had signed with its clients before Chinese demand drove global steel prices
up. They believed that the prices would correct themselves once the contracts expired.

Second, South Korea did not have deposits of iron ore or coal and the company was completely
dependent on the import of these essential raw materials. Analysts said that this was a potential threat, as
external disturbances could easily disrupt the company’s supply of raw materials and result in production
blockages.

Third, some analysts felt that Posco’s efficiency was not as appreciable as it was made out to be. They
argued that US steel companies took, on an average, only about 3.95 man-hours to produce one ton of
cold rolled steel11, while at Posco and other South Korean steel companies, the average was around 4.7
man hours per ton.12 Nevertheless, South Korean companies appeared more efficient because of their
considerably lower labor costs, which allowed them to employ more workers at a lower cost to increase
production. As a result, while production increased, the cost of production did not rise proportionately
creating an impression of efficiency. Analysts said that this apparent efficiency could disappear in the
event of wage rates increasing in Asian countries, and Posco would lose its competitive advantage.

10
www.posco.co.kr.
11
Cold rolled steel is steel that is made thinner and longer by rolling it at room temperature.
12
The figures are relevant to the early 2000s.

7
Fourth, analysts said that Posco did not match with western steel firms on the technology front. They said
that most of the steel manufacturing units in the US and Europe were far superior to Asian companies like
Posco in the technology they used. Posco gained an advantage mainly from cheap labor. “But one thing
that is clear about this industry, is that technology isn’t always a savior,” added one analyst.13

Fifth analysts said that Posco was too dependent on China for its exports, with almost 40 per cent of its
exports going to the country. It had also made several investments in the country, which could be
threatened if the Chinese government changed its policy towards foreign investment.

In the early 2000s, the Chinese government was looking for ways in which to slow down the economic
growth of the country, to enable growth that was more balanced. (The economy had been growing at
almost ten per cent per annum because of the high levels of foreign investments pouring into the country
attracted by cheap labor and a growing economy. China’s government sought to reduce it to a more
reasonable seven per cent). The government had identified certain key industries for special restrictions
and among them were aluminum, autos, construction supplies, real estate, steel, and textiles. The
government was also discouraging new projects by withholding approvals and requiring investors to
invest more of their own money. For instance, investors in steel mills previously had to put up only 25 per
cent of a project’s value, but the limit was increased to 40 per cent in 2004.

Certain analysts felt that these restrictions would affect Posco adversely, but Posco’s management was
not apprehensive. They said that the Chinese government’s restrictions would not apply to Posco, because
most of Posco’s sales to China were of production inputs that were bought by Chinese manufacturing
companies, rather than final products. They also said that in the case of restrictions being placed, it would
give Posco an opportunity to correct its production imbalances, which were a result of a sudden spurt of
demand from China. “These constraints will have a short-term negative influence, but long-term, this is
actually progress,” said a spokeswoman of Posco.14

Posco also came in for criticism for the fact that it received many concessions from the government when
it was set up, which gave it an initial competitive advantage. “I’d love to have a seaport, paid for by the
government, just like Posco,” said Thomas Usher, the chairman of US Steel, “But I’d rather be right
where I am today – on the doorstep of my customers in Chicago and Detroit.”15 Brent Bartlett, an
American economist also said, “They have figured out how to make very good steel very cheaply, but it’s
not been the product of entrepreneurialism. They’ve done it with a lot of government intervention.” 16
However, other analysts felt that, although Posco obtained many advantages from the government, it was
always run like a private company.

The size and scale of Posco’s operations also made some analysts view Posco as a monopoly (Almost 60
per cent of South Korea’s domestic steel production came from Posco). In 1998, the Korean Fair Trade
Commission had recommended that Posco be split into two different companies, one operating at Pohang
and the second at Kwangyang. Although nothing came out of this recommendation, many analysts
believed that Posco did abuse its power in certain cases.

Posco faced charges of dumping from some of the countries that it exported to as well. In the late-1990s
and early 2000s, many steel companies in the US filed suits against Posco that it dumped its products in
13
“Posco: The Next Big Steel”, Baseline magazine, June 2002.
14
Jim Frederick, “A Time to Slow Down”, Time, May 24, 2004.
15
“Posco: The Next Big Steel”
16
Tom Breckenridge, “The Plain Dealer: Productivity in a Korean Paradise”, Cleveland.com, November 11, 2001.

8
the US at prices lower than the market price. However, when President bush imposed a 30 per cent tariff
on steel imports in early 2001, Posco was the first company to be exempted, by virtue of its joint venture
with US Steel.

THE OUTLOOK FOR POSCO

In 2004, Business Week, a premier US-based business magazine said that Posco was one of South Korea’s
‘champion’ companies, as it had the long term competitiveness and sustainability to succeed in its
industry. “This is one Korean champion likely to be in fighting trim for many years to come” the
magazine wrote.17

In the early-2000s, Posco was focusing on expansion into emerging economies like China and India.
While it had already made considerable investment in China, Posco was considering settling up a new
plant in Orissa, India, with Australia based mining giant BHP Billiton Ltd. The plant was expected to cost
$8.5 billion and would have a manufacturing capacity of 10 mmt.

In its 2003 annual report, Posco stated that India figured prominently in the global production strategy
and was second only to China in terms of growth opportunities. In targeting India, Posco was completing
with companies like Arcelor and LNM, who also followed a strategy of aggressively investing in
developing countries. The company was also looking at other resource-rich Southeast Asian locations to
set up new plants and planned to invest 15 per cent of its total investment over the next five years in
overseas steel manufacturing plants.

Posco was also looking at diversification and had make investments in fields like telecommunications,
engineering and research and development. The company founded POSRI, a research institution that
worked on emerging management issues and steel industry dynamics, and provided advisory services in
the mid-1990s, Posco had been trying to change its production system from the mass production of low-
cost, high-volume commodities to a combination of mass production and flexible production of
diversified goods.

The company was also entering into partnerships with local companies in other countries, to improve its
competitive edge. While it had the resources to acquire new companies (Posco had a strong balance sheet,
with only $1.2 billion in net debt and $1.7 billion in cash and liquid securities in 2003), it preferred
partnerships to acquisitions. “While mergers and acquisitions are often the favored vehicle for growth in
today’s ultra competitive markets, we prefer to partner with local firms in our global growth strategy”,
said the company’s 2003 annual report.18

Analysts said that Posco was a good example of a late starter’s success in the steel industry. The
company was able to achieve success by combining Third World advantages like cheap labor,
with First World technology, which made it the most profitable company in the steel industry.

17
Brian Bremner, Moon Ihlwan, Dexter Roberts, “Posco: One Sharp Steelmaker”, Business Week, August 30, 2004.
18
www.posco .co.kr

9
 EXHIBIT 1

COMPARATIVE PRODUCTION COSTS OF MAJOR STEEL PRODUCERS IN

THE EARLY 2000s
Company Cost ($per hot rolled coil)
Posco 175-180
Arcelor 210
Nucor 210
US Steel 210
Nippon 240
Corus 250
Source: compiled from various sources.

EXHIBIT II

TOP TEN STEEL PRODUCING COMPANIES-OUTPUT IN MILLIONS OF

METRIC TONS
Company 2003 2002
Arcelor 42.8 44.0
LNM Group 35.3 34.8
Nippon Steel 31.3 29.8
JFE 30.2 28.9
Posco 28.9 28.1
Shanghai Baosteel 19.9 19.5
Corus Group 19.1 16.8
US Steel 17.9 14.4
Thyssenkrupp 16.1 16.4
Nucor 15.8 12.4
Source: www.worldsteel.org

EXHIBIT III

NOTE ON THE GLOBAL STEEL INDUSTRY

The global steel market is the market for crude steel, pig iron, and direct reduced iron, including
scrap. The industry includes all the producers of iron and steel and related products.

Over the years, the steel industry received favored treatment from the governments of countries,
who gave steel manufacturing companies a number of subsidies and exemption. In the mid to
late 1900s, most of the steel companies in the world were owned by the governments, either
partly or wholly. However, in the 1990s, many of these companies were privatized to improve
their efficiency and competitive position and eliminate the negative impacts of government
ownership like bureaucracy.

10
In the 1990s, competition in the global steel industry also increased rapidly. Privatization led to a
minimization of government protection and many companies began to compete globally. In the 1900s, the
collapse of the USSR reduced the trade flows between the countries of Eastern Europe and most of the
companies in that region began to target the global market. The low costs of production that these
companies had gave them a clear advantage in the global market and created severe price imbalances in
the global industry.

In March 2001, the US imposed 30 per cent tariffs on imported steel products to protect the domestic
industry. Many companies that exported to the US suffered because of this policy. However, the WTO
held the tariffs illegal and the US reversed them in late 2003.

In the early-2000s, the global steel industry was highly fragmented and competitive. While traditionally,
the industry was dominated by the United States, Russia, and Japan, in the early 2000s, competition from
China, and other Southeast Asian countries was growing fast. China emerged as the biggest producer of
steel in the world, with an output of over 220 million metric tons (mmt), in 2003. It was also the biggest
consumer of steel and steel products, importing 32 mmt of steel in 2003.

In 2003, world output of crude steel stood at 965 mmt up from 902 mmt in 2002. In the first three years of
the 2000s, the industry had grown by 4.4 per cent. (Refer Table-1).

TABLE I
GLOBAL STEEL PRODUCTION 2003
(In millions of metric tons)

Year Quantity

1995 752
1996 750
1997 799
1998 777
1999 789
2000 848
2001 850
2002 902
2003 965
Source: www.worldsteel.org

In the early-2000s, Arcelor was the largest steel manufacturer in the world, followed by the LNM Group.
In 2003, Arcelor produced 42.8 mmt of crude steel.

Most of the companies produced steel using furnaces. However, in 2003, Posco announced the
development of Finex technology, which was more efficient and environment friendly than traditional
furnaces.

Cost was a critical factor in the steel industry and the survival of a company depended on its cost
structure. Posco was the most efficient producer of steel and had the lowest costs. Major costs relevant to
the industry were labor, raw materials, (scrap, iron ore, coke, coking coal, and thermal coal) and
transportation.

Some of the major problems of the global steel industry were:

11
• Overcapacity: The generous subsidies and exemptions granted by the governments to steel
manufacturing companies over the years led to overcapacity. In the early 2000s, overcapacity in the
industry exceeded 260 mmt. Overcapacity led to higher costs and price imbalances.
• Competition and Fragmentation: The industry was highly competitive and fragmented and
companies within a country competed with each other as well as other foreign companies. The extent
of fragmentation is evident by the fact that in the early 2000s, the top five companies in the industry
held just a little over seven per cent of the global market share.
• Trade Disputes: The high level of competition led some countries to impose trade restrictions on the
import of steel products to protect the domestic industry. This led to trade wars and weakened the
industry (However, members of the WTO cannot legally impose major restrictions on imports.)
• Geographic Price-Differentials: Price was a critical factor in the steel industry because of the high
competition in the market. The cost of production differed widely across countries, because of the
different economic and political conditions. Countries like South Korea and China, where labor costs
were considerably lower than in developed countries gained an edge in the cost of production and
hence, were able to sell at lower prices than companies in developed counties.
• Declining prices: In the early-2000s, global steel prices were declining, led by low cost producers.
Overcapacity also contributed to the problem. This led to a further drop in margins.

Analysts felt that consolidation was the best solution to the problems of the steel industry. Consolidation
had already begun in the US and European steel industries, with larger and profitable companies taking
over smaller ones, but few companies had the resources to attempt global consolidation.

Source: Compiled from various sources.

EXHIBIT IV

PROFITABILITY OF THE TOP FIVE STEEL MANUFACTURERS

(Amounts in millions of US dollars)
Company Revenue 2003 Net Income 2003
Posco 14925 1692
Arcelor 32583.5 522
Nippon 1399.2 194.7
JFE* 21910 173.4
LNM 5441 66
*Figures are approximate values taken at yen/dollar conversion in mid-2004
Compiled from various sources

EXHIBIT V

PROFILES OF SOME OF THE MAJOR COMPETITORS OF POSCO

Company Profile
Arcelor SA. Arcelor was formed by the combination of steel giants Usinor (France), ARBED
(Luxembourg), and Aceralia (Spain). The new company was the world’s leading
steelmaker in 2003, with an annual capacity of about 45 mmt of crude steel.
Arcelor was headquartered in Luxembourg and produced a variety of steel
products for purposes ranging from automobile manufacture, to household use,

12
 and construction. The company also had a presence in nuclear, oil and
chemicals.
Nippon Steel Headquartered in Tokyo, Nippon was one of the biggest steel manufacturers in
the world until Posco and later Arcelor overtook it. The company manufactured
steel plates, sheets, pipes, and tubes, as well as specialty, processed, and
fabricated steel product. Annual capacity was around 27 mmt.
LNM Group UK based LNM Group comprised of LNM Holdings and Ispat International. It
manufactured a number of steel products like flat steel, long steel, pipes, and
wires. The group also owned coal and iron ore mines in numerous countries. It
had the capacity to produce around 36 mmt of steel annually.
HFE Holdings JFE was formed in September 2002, with the merger of the second and third
largest steel companies in Japan – NKK and Kawasaki. The company is
headquartered in Tokyo and manufactures steel products such as bars, pipes,
steel frames, tubes, and stainless steel for the automotive, construction, and
petroleum industries. Its annual capacity was a little over 30 mmt.
Shanghai China’s biggest iron and steel company was owned by the government and
Baosteel headquartered in Shanghai. The company produced steel formed as billets,
Group tubes, pipes, bars, and plates, and iron and tin products. It also had a presence in
Corporation the appliance, auto, construction, oil, and shipbuilding industries, both in China
and abroad. It had a capacity of about 20 mmt.
Corus Group Corus was formed in 1999, with the merger of British Steel and Dutch
steelmaker Hoogovens. It was Britain’s biggest steel maker in the early-2000s.
Corus’s flagship products included carbon-enriched steel and stainless steel, but
it also had a presence in the aluminum industry. Its annual capacity was 19 mmt.
US Steel Based in Pittsburg, US Steel was the top steel company in America. It had mills
in Alabama, Illinois, Indiana, Michigan, Minnesota, Ohio, Pennsylvania, and the
Slovak Republic. US steel produced sheet and semifinished steel, tubular and
plate steel, and tin products. The company’s customers were primarily in the
automotive, construction, petrochemicals, and steel service center industries. It
also provided services like mineral resource management, real estate
development, and engineering and consulting. Annual capacity was around 18
mmt.
ThyssenKrupp ThyssenKrupp was a product of a 1999 merger between Thyssen AG and Krupp
AG AG. The company had eight business units operating in different sectors like
steel, elevators, automobiles, and technology, around the world. The company
was headquartered in Düsseldorf, Germany and had an annual capacity of over
16 mmt.
Nucor Headquartered in Charlotte in North Carolina, Nucor organized its businesses
Corporation into two – steel mills and steel products. Principal products from the steel mills
segment were hot-rolled steel and cold rolled steel, while steel products were
steel joists and joist girders, steel deck, cold finished steel, steel fasteners, metal
building systems, and light gauge steel framing. Annual capacity was around 16
mmt.

Compiled from various sources

13
 EXHIBIT VI

STEEL MAKING AT POSCO

Iron Ore Coking Coal

Sintering Coke Oven

Plant

Blast
Furnace

Torpedo Ladle Car

Basic Oxygen
Steelmaking

Secondary
Refining

Continuous
Costing

Bloom
Slab Billet

Hot Strip
Mill

Hot Rolled Plate

Steel

Adapted from www.posco.co.kr

14
 EXHIBIT VII

MAJOR STEEL PRODUCING COUNTRIES 2003 – OUTPUT IN MILLIONS OF

METRIC TONS OF CRUDE STEEL
Country Output
China 220.1
Japan 110.5
Russia 62.7
South Korea 46.3
Germany 44.8
Ukraine 36.9
India 31.8
Brazil 31.1
Italy 26.7
Source: www.worldsteel.com

EXHIBIT VIII

POSCO’S SALES TO CHINA

Year Quantity in thousands of tons
2000 1676
2001 1735
2002 1673
2003 2512
Source: www.posco.co.kr

15