POHANG AND POSCO ADJUSTING FOR THE FUTURE -- AMBASSADOR

UNCLAS SEOUL 000327 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EIND EMIN ELAB EINV PGOV PINR KS SUBJECT: POHANG AND POSCO ADJUSTING FOR THE FUTURE -- AMBASSADOR VISITS POHANG ¶1. (U) SUMMARY: During a visit to Pohang, the home of Korea?s steel industry, the Ambassador learned that POSCO, the world?s fourth largest steel producer, is having to adjust to the global economic slowdown, cutting production for the first time in its four decades of existence. The company, however, has new proprietary environmental technologies and operations in growing markets like India and China that should help it weather the storm. The company continues to be satisfied with its 50:50 joint venture with U.S. Steel in Pittsburg, California, where there are only eight Koreans among the roughly eight hundred employees. The city of Pohang, where POSCO is headquartered, is looking to develop new technological fields to keep its economy from a downward spiral, and also wants to increase tourism. The Ambassador also spoke to students at POSTECH, and visited Camp Mujuk, the only U.S. Marine Corps Camp in Korea, and the site of a memorial to former Senator John Warner?s commanding officer during the Korean War. END SUMMARY. ¶2. (U) The Ambassador traveled to Pohang, home of Korea?s steel industry, January 11 - 12, where she met with Mayor Park Seung- ho, visited U.S. Marine Corps Camp Mujuk, toured POSCO facilities, and spoke at the Pohang University of Science and Technology (POSTECH). APP Busan Officer Tyler Allen, EconMinCouns Drew Quinn, and Regional Public Affairs officer Jean Vander Woude accompanied her. POSCO: GUARDEDLY OPTIMISTIC DURING THE FINANCIAL CRISIS -------------- -------------- ¶3. (U) Korea?s modern steel industry was founded in Pohang in the late 1960s with significant financial and technical assistance from Japan, in tandem with the normalization of bilateral relations. POSCO?s Pohang works continue to be the centerpiece of POSCO?s global production and research, although POSCO actually now produces more steel at the Gwangyang facility in South Cholla province. Oh Chang-kwan, POSCO General Superintendent, explained to the Ambassador that because of slowing global demand, both for steel and products using steel (e.g., autos and ships),POSCO had for the first time in its history announced a cut in production -? by 200,000 tons in December. He added that further drops in demand could lead to further cutbacks. (NOTE: In January, POSCO announced cuts of 350,000 tons.) ¶4. (SBU) The fluctuating value of the won was another headache for POSCO. While a cheap won helped POSCO in the short term, it complicated long-term planning. Moreover, so many of POSCO?s inputs were imported, especially iron ore and coal, that a cheaper won simply translated into higher input prices for POSCO. Currency stability, Oh noted, was better. Labor relations were an ongoing challenge, but Oh guessed that only about 40-50 of the plants? 15,000 workers were hard-core radicals; to minimize labor-management discord, Oh noted he lunched with union members daily. ¶5. (SBU) These challenges notwithstanding, Oh said he was guardedly optimistic about the future. He and other POSCO executives pointed with pride to the new FINEX furnace inaugurated in 2007, saying it represented the first truly new steelmaking technology in decades. FINEX allowed POSCO to use raw iron and (regular, non-bituminous) coal to make steel, bypassing the need for sintering or coking plants. The effect of the FINEX process was to cut production costs by 20 percent. FINEX also reduced SOX and NOX emissions by up to 80 percent, although it reduced carbon dioxide emissions by only 10-15 percent, a figure Oh said he was working to improve. In addition, FINEX recycled 97 percent of its own water. POSCO held all the relevant patents for the FINEX process (although Siemens was involved in its development); when asked, Oh said POSCO had no plans to license the technology to other steelmakers at this time. ¶6. (SBU) Another advantage POSCO enjoyed, Oh explained, was that unlike many large Korean companies, it was not linked to a major business group and therefore could sell to them all, and did not have a single dominant shareholder. Share ownership of POSCO was widely dispersed: The two largest shareholders were State Street Bank of the U.S. (as custodian) and Warren Buffet?s Berkshire Hathaway, neither of whom sought to interfere in management decisions. Indeed, Oh noted, roughly 40 percent of POSCO?s stock was held by international investors, but this had no appreciable impact on the way management ran the business. (COMMENT: Oh?s assertion that POSCO was immune to outside influence was undercut to some extent when, a few days later, POSCO CEO Lee Ku-taek, who was named CEO during the term of President Roh Moo-hyun, announced he would resign before the end of his term, amid widespread speculation that he was forced out by the Lee Myung- bak Government, which wanted to put a friend of its own in his place. Despite the complaints about whether this was an appropriate role for the government to play with a private company in which the government has no equity stake, no one expected the change of CEOs to have any substantive impact on POSCO?s performance or strategy, perhaps bearing out Oh?s assertion that POSCO managers can operate independently of outside interference.) ¶7. (SBU) Oh also believed POSCO could hold its own in the current international environment. In Japan, POSCO continued to enjoy a close cooperative relationship with Nippon Steel, the company whose technology provided the basis for POSCO. Nippon Steel had recently visited to be briefed on some of POSCO?s new technologies, including FINEX, and said it was impressed. This, Oh said, impressed POSCO as showing that they had finally caught up with their teacher. Asked if the logic of global consolidation might lead to a merger between POSCO and Nippon, Oh said he thought that unlikely, since both companies were roughly the same size and had the same market capitalization. Oh added that earlier that day, Toyota had announced (to considerable press fanfare) that it would begin to buy POSCO steel for cars built for the Japanese market. This was evidence that POSCO could penetrate the Japanese market on its own. In a separate conversation, when asked about possible consolidation, Dr. Goh Jun-hyeong, Senior Economist at the POSCO Research Institute, stated that he expected roughly one quarter of the world?s current steelmakers would go bankrupt in the current recession. He noted that with sound financials, POSCO might decide to take this opportunity to expand itself through acquisition (although most of its investments had historically been on a greenfield basis). POSCO: EXPANDING OPERATIONS -------------- ¶8. (SBU) While admitting that developing countries represented a challenge to POSCO, Oh was again reasonably confident. China had quickly developed into a leading global steel exporter. Nonetheless, this was not a big problem for POSCO since 70 percent of its products did not compete with Chinese steel products. Asked about production of advanced materials, Goh explained that POSCO currently produces approximately 70 percent steel and 30 percent other materials. By 2030, however, this should shift to approximately 30 percent steel and 70 percent other materials, because the latter supported newer, innovative industries, such as aerospace, information technology, or green energy, and therefore could overcome steel as the major manufacturing material in the near future. ¶9. (SBU) Oh said that POSCO realized that even as it moved into higher grades of steel and specialty materials, its customers preferred that the steel company be able to provide all grades of steel -? the high grades made in Pohang as well as the cheaper grades made in China. Therefore, POSCO had constructed facilities in Vietnam and India to be able to supply those grades of steel on a cost-competitive basis. A key POSCO initiative was its investment in India, which would amount to a total of $10 billion over the next ten years and represent the largest foreign direct investment ever in India. Goh explained that POSCO was one of the first players to identify India?s potential, given its natural abundance of three key inputs for a successful steel plant: coking coal, iron ore, and human labor. Their investment, however, faced a number of difficulties, such as increased competition in the Indian market and the poor Indian infrastructure. Since POSCO began its project in India, a slew of domestic and international firms had begun steel projects there. Also, in order to develop a successful plant, Goh shared, POSCO needed to completely rebuild the infrastructure in the town, including roads, telecommunications, and hospitals. ¶10. (U) Asked about USS-POSCO Industries, POSCO?s 50:50 joint- venture with U.S. Steel in Pittsburg, California, Oh said the company was generally satisfied with it, although it had a spotty profit/loss record. He noted that Korean staff from POSCO made up only eight of the roughly 800 people working at the plant. POHANG: REACHING OUT TO JAPAN -------------- ¶11. (U) In addition to her meetings with POSCO, Ambassador Stephens participated in various meetings with Mayor Park. These meetings illustrated that Pohang, an industrial town that, thanks to POSCO, has grown from 69,000 in the early 1970s to 500,000 today, is attempting to break its steel-town mold by emphasizing cultural and tourist sites, projects, and festivals. Mayor Park explained that, given its proximity to Japan, Pohang is currently reaching out to Japanese tourists, trying to attract an increase in both sea and air routes, and hoping to pull in Japanese investment. Pohang is also striving to be Korea?s technological capital, expanding into nanotechnology, biotechnology, environmental technology, information technology, and robotics. ¶12. (SBU) According to Mayor Park, Pohang?s industry has been sufficiently successful to ensure that Pohang had not yet felt the full effects of the economic downturn. The city was nonetheless preparing for when the crisis might reach Pohang, using its goals of port expansion and technology innovation to soften the blow. He further boasted of Pohang?s strength, explaining that Pohang?s tax payments made up 65 percent of North Gyeongsang Province?s tax revenue, allowing Pohang to make special demands. For example, Pohang recently requested a KTX stop, which the Mayor claimed it would receive during the Lee Myung-bak administration. CAMP MUJUK -------------- ¶13. (U) While in Pohang, Ambassador Stephens visited Camp Mujuk, the only U.S. Marine Corps Camp in Korea. There the Ambassador paid homage to a plaque dedicated to the heroism of Senator John Warner?s former commanding officer in the Korean War. COMMENT: POSCO MOVING FORWARD -------------- ¶14. (SBU) POSCO is one of the benchmark successes of Korea?s economy, and by most measures the company?s competitive strength in steelmaking continues to grow as it advances into new technologies and new markets. At a time when Korean newspapers are sometimes filled with breathless reports on the global economic downturn and its impact on Korea, it was interesting to see that POSCO managers, despite being quite exposed to the depressed global market for capital goods, barely mentioned the fluctuations in the economy as they explained their strategy for the future. It was equally telling to see that while the media would soon be filled with reports of ?upheaval? in POSCO?s CEO suite, that seemed to have no impact on plant-level decisions that will propel the company into the future. COMMENT: POHANG?S DEVELOPMENT -------------- ¶15. (SBU) Mayor Park has reason to be optimistic for future development because Pohang is President Lee's hometown and represented by arguably one of the most powerful NA members, LMB's brother Lee Sang-deuk. Mayor Park was notably careful to promote and not criticize any of LMB?s proposals. As long as Mayor Park maintains political support from LMB, with healthy doses of government investment, he should not face serious problems during the 2010 election. That said, Pohang still needs a lot more investment if it is to become a destination for tourists from any country or to shake off its reputation as a gritty steel town. In addition to the pall the steel factory casts over the city, it lacks a modern hotel and its cultural and tourist attractions are still in their infancy, despite the city?s population and income. BIONOTE: MAYOR PARK -------------- ¶16. (SBU) Mayor Park has extensive central government experience, having worked in both the Blue House and the Ministry of Home Affairs, and for provincial and city governments. He also spent over two years in China as the first Chief Delegate of the Korea Local Authorities Foundation for International Relations where he developed local governance programs in every province, and wrote a book (in Korean) about the experience. He is ambitious, and we will stay in touch with him as political circles here gear up for the 2010 elections. STEPHENS