POSCO : 2018 1Q Earnings Release - Q&A Script

2018 1Q POSCO Earnings Release

Q&A Summary

April 24, 2018

Domestic and Overseas Steel Market

1Q domestic price trend was continuously strong from the 4Q 2017. Domestic steel prices are highly linked with Chinese prices, which peaked in December and then weakened ever since until it rebounded recently along with lowered inventories. Demand in Japan and the U.S. shows a sound trend which is helpful for POSCO for its price negotiation. Therefore, it seems that the market resistance on price increase in 2Q will be less likely especially considering that 2Q is the peak season.

Shipbuilding - As major Korean shipbuilders are increasingly taking new orders, we were able to succeed in raising shipbuilding price in 1H. The positive trend will continue and we expect that there is room for us to further increase price with shipbuilders.

Automobile - There was concern over the recent issue surrounding GM Korea, but they seem to have avoided the worst scenario. So, the automaker's impact on POSCO's sales would not be massive.

In 2017, the Chinese government successfully pushed forward with supply reform and this year, it has set another goal to reduce 30 million ton capacity. By 2020, a total of 150 million tons will be eliminated. In addition, Chinese steel demand will remain sound backed by increasing infrastructure investment in Xiongan New Area Development and One Belt One Road Initiative to consume heavy volume of steel products. Also, Beijing Winter Olympics and Hangzhou Asian Games to be held in 2022 will play as a catalyst to boost steel demand starting from 2H this year.

All in all, we don't see a possibility of steel price collapse driven by demand shrinkage, which is not currently discussed in China either.

Domestic Subsidiaries

We expect higher earnings on domestic subsidiaries in 2018. Especially POSCO Daewoo will see an improved performance due to sales expansion from favorable market circumstances, WP increase, rise of oil price, and increased sales volume of gas field. POSCO

Chemtech is expected to expand anode material business and refractories sales. SNNC, which is engaged in producing ferronickel, will improve earnings due to hike of nickel price.

Regarding the fuel cell business of POSCO Energy, we continue to minimize sales as a way of restructuring. Due to the cost of LTSA, it is still forecasted to record operating loss in 2018, but we are making persistent efforts to improve profitability by signing a new project and increasing sales price, and it will lead to a reduced loss size from the fuel cell business this year.

Overseas Steel Business

In 2018, overseas steel performance will slightly hover that of last year. Among the companies, PT.KP is noticeable in its earnings growth. Helped by the increase of slab sales price and expansion of domestic plate sales, profit will be elevated compared to 2017. As upstream mill is now stabilized, PT.KS invested holding 100% stake in an HR mill at the site, currently being constructed and to be completed in 1H 2018. It will create synergy with PT. KP, and to add higher value to this, we can consider addition of a CR mill, on which we are closely discussing with the Indonesian government.

Vietnam SS VINA will reach breakeven this year improved from operating loss in 2017 mainly driven by the price increase from AD restriction on Chinese section steel. The reason for slower-than-expected pick-up is high electrode and scrap prices.

Raw Materials Outlook

Coking coal price sustained at a high level on China's strong steel price and seasonal supply disruption in Australia in 1Q 2018, but turned weak in March. The seasonal disruption will be eased in 2Q, and coal price would be lowered and stabilized. Hard coking coal price was $229/t in 1Q and is forecasted to be down at around $160/t to $170/t range in 4Q as ports and railroads maintenance in East Australia is scheduled in April, resulting in $190/t on an annual average. Iron ore price went down to $63/t in the end of 1Q18 due to drop in steel product price on the U.S. imposing steel tariffs, China's announcement on steel capacity cut, and reduction of iron ore distributors' inventory, etc. Also, major suppliers are expected to expand supply by 60mt this year, and the annual average price forecasts to decline at $65 to $70 level.

Lithium Business & Technology

We have signed a long term off-take agreement for maximum 240,000 tons/year of spodumene with Pilbara in Australia and we will build a 30,000 ton capacity of lithium conversion plants in Korea to produce lithium carbonate and hydroxide from 2020. The expected revenue is 400~500 billion KRW and it will reach breakeven that year. The target of lithium production from Gwangyang PosLX plant is 1,000 ton and revenue would be 16 billion KRW in 2018. We also continue to search for the most suitable brine in South America, and the successful negotiation would be settled within this year.

Regarding our lithium extraction technology, there are two types of process. The first process is the upstream to produce lithium phosphate from raw material such as brine and spodumene. Then downstream, which is the exclusive technology, is to convert into lithium carbonate and hydroxide from lithium phosphate. We have already completed the pilot test for producing lithium phosphate from spodumene in March 2018. The greatest strengths of our technology are a high recovery rate of lithium and low amount of impurities, and we believe it makes the best quality of lithium for making batteries.

Dividend Policy

POSCO has been maintaining a long-term stable cash dividend policy. We have continued to provide 8,000 KRW per share from 2004. Although we recorded consolidated net loss in 2015, we maintained the same amount of dividend at that time. We will stick to the stable cash dividend policy considering long term investors, and there will be no radical change in dividend policy as of now.

Non-Operating Gains or Losses

Non-operating gains peaked in 2017 as we recognized gains from sales of investment securities of Hyundai Heavy Industries and KB Financial Group, etc. and reflected recovery of impairment loss on Thainox shares on our book last year. It is unlikely to occur one-off gains this year as we increased our hedge position on forex which led to less sensitivity. On the other hand, it is likely to book one-off loss regarding the suspicion oncustomsdeclarationof LNG imports at low price, which is scheduled to be ruled in May, depending on its result. Overall, the size of non-operating gains or losses would be less than the previous year level.

U.S. Steel Import Quota System

Under Section 232, Korea received 2,680 thousand tons of steel quota based on the 3-year average. It includes 1,340 thousand tons of flat products and 1,040 tons of pipemaking products. Out of the exposure to pipemakers, POSCO supplies 550 thousand tons to 4 major clients, which falls short by 340 thousand tons compared with our plan. For this volume, we have set different strategies. We will expand exports to regions other than the U.S. In the Korean market, we will continue to replace imports. Through this, the 340 thousand ton decrease from the U.S. market will be fully compensated with other customers and other countries. It will also lead to an increase of POSCO's domestic sales and profits, which in turn means there is almost no impact from decreased quota for pipemakers.

Corporate Governance & CEO Appointment Process

Since its privatization in 2000, every CEO had resigned without completing his term. CEO Mr. Kwon expressed that there was no political pressure behind his resignation through his email to employees to express his thoughts upon leaving the company. He thought that marking POSCO's 50-year history, the company needs a new young CEO who can lead the company to start the next 50 years.

It will take around 2-3 months to appoint the next CEO after thoroughly conducting qualifications screening in the CEO Candidate Recommendation Committee. Yesterday, the first meeting of the CEO Succession Council, as the first step toward CEO appointment, was convened after being set up and in the upcoming second meeting, it will be discussed more deeply how fast they will proceed with the appointment process.

In our capacity, POSCO has been endeavoring to establish a corporate governance system that fits to professional management by diverse measures including separation between the BOD Chairman and CEO, forming of the CEO Succession Council and the CEO Candidate Recommendation Committee, and facilitating a program to foster CEO candidates through close cooperation between Outside Directors and CEO.

In the future, however, we will make further efforts to improve the corporate governance system if there is any inadequacy and raise understanding of investors and stakeholders if there is any lack of communication. Through this way, we will build a stronger corporate governance system.

Impact of Inter-Korean Economic Cooperation on POSCO

It is premature to discuss what kind of business opportunities POSCO will have in case the inter-Korean Summit brings positive results in the relationship between the South and the North. We had already reviewed many business opportunities when the South-North relations were much more eased than now. When the time ripes, we are convinced that POSCO can play various roles in the business area.