Decarbonization Pressures And Chinese Overcapacity Will Squeeze Margins

Key Takeaways

• Reliance on traditional steel faces long-term decline, while new green ventures struggle with high risks, cost pressures, and uncertain earnings.
  
• Persistent overcapacity and local supply trends erode market share, keeping pressure on margins and threatening sustained profitability.
  
• Expansion into battery materials and eco-friendly steel diversifies revenue streams, while restructuring and targeted investments enhance profitability, efficiency, and resilience against market headwinds.

Catalysts

Operates as an integrated steel producer in Korea and internationally.

• The persistent global trend toward decarbonization and stricter climate policies is likely to reduce long-term demand for traditional steel and coal-based products, placing chronic pressure on POSCO Holdings' core revenue streams and eroding margins as its primary business confronts shrinking end-markets and costly compliance needs.
  
• Ongoing shifts in global manufacturing toward more regionalized and locally sourced supply chains are expected to decrease Asian steel export volumes, undermining POSCO's ability to capture international market share and leading to flat or potentially lower revenues from its overseas steel operations.
  
• Execution risks and significant delays in scaling new green steel and battery material businesses-exacerbated by suppressed lithium prices, high ramp-up costs at new plants, and slow EV market growth-threaten POSCO's ability to generate the high-margin growth that its elevated valuation implies, resulting in prolonged losses and disappointing earnings from energy materials.
  
• Intensifying global steel overcapacity, particularly from aggressive supply in China and emerging market producers, will force ongoing price competition, limiting POSCO's ability to sustain profit recovery and putting persistent downward pressure on mill margins and overall group earnings.
  
• The company's heavy and ongoing capital investments for decarbonization, new materials R&D, and capacity expansion expose POSCO to escalating financial risk, straining free cash flow and endangering both its dividend payout and return on invested capital over the long term, especially if new businesses fail to mature as anticipated.

POSCO Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on POSCO Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming POSCO Holdings's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.2% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach ₩1848.2 billion (and earnings per share of ₩22699.53) by about July 2028, up from ₩856.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, down from 29.6x today. This future PE is greater than the current PE for the US Metals and Mining industry at 10.8x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

POSCO Holdings Future Earnings Per Share Growth

Risks

• The company's aggressive ramp-up of new lithium and battery material plants, along with recent successful product certifications and long-term contracts that have already exceeded current plant capacities, positions POSCO Holdings to benefit from ongoing global investment in electric vehicles and energy storage-supporting a potential rebound in revenue and operating profit as this business segment stabilizes.
  
• Initiatives in restructuring, asset sales, and cost innovation-including significant cash generation from divestitures and targeted deployment of proceeds to treasury share buybacks-improve asset efficiency and capital allocation, which may result in higher net margins and increased shareholder returns over the medium term.
  
• Investments in premium, eco-friendly, and value-added steel products, such as electric furnaces and hydrogen-based steelmaking, enable POSCO to capture a greater share of high-margin segments in the global steel market, which could offset traditional steel market headwinds and help maintain or improve overall group profitability.
  
• Stable performance and targeted expansion in the energy and infrastructure businesses, including LNG terminals and upstream energy projects in Australia and Myanmar, diversify earnings and provide resilience against cyclical downturns in steel and battery materials, thereby supporting overall earnings stability and growth.
  
• The company's strong financial position-with sound balance sheet management, selective capital expenditures, and proactive risk management in response to trade barriers and fluctuating markets-empowers it to seize strategic opportunities in emerging growth markets, enhance its global competitiveness, and potentially deliver increased returns on invested capital and future profit growth.

Valuation

• The assumed bearish price target for POSCO Holdings is ₩237230.28, which represents two standard deviations below the consensus price target of ₩375130.43. This valuation is based on what can be assumed as the expectations of POSCO Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩520000.0, and the most bearish reporting a price target of just ₩225000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩73039.6 billion, earnings will come to ₩1848.2 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 9.9%.
• Given the current share price of ₩335000.0, the bearish analyst price target of ₩237230.28 is 41.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.