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POSCO, LX riding high on soaring raw materials prices

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A palm oil farm operated by POSCO International. Korea Times file
A palm oil farm operated by POSCO International. Korea Times file

By Lee Kyung-min

POSCO International and LX International, the trading affiliates of steel giant POSCO and LX Group, respectively, are registering an unexpected earnings surprise, a rare boon propelled by a spike in global key raw material prices, coupled with the sharp depreciation of the Korean won against the greenback, industry officials and market watchers said Monday.

The rapid weakening of the Korean currency is a grave concern for the local financial authorities, mostly due to foreign capital outflow risks that are closely tied to stable market operations in an emerging economy.

However, the otherwise grim news is a great opportunity for local trading firms, long struggling due to years of globalization that almost completely undermined the role of intermediaries that charge commissions based on trade volume.

Global uncertainties-led depreciation of the Korean currency prompted price increases of key commodities imported, pushing up the trading volume overall. This in turn nets trading firms higher brokerage fees, a short-term lucrative business model sustained by greater demands amid accelerating inflation.

Further anchoring their profit is the firms being paid in U.S. dollars for their services instead of in Korean currency, a temporary boost for their recorded sales and operating profits.

POSCO International registered 320.6 billion won ($223.8 million) in operating profit in the second quarter of this year, up 89 percent year-on-year. The figure for LX International in the same period surged to 289.4 billion won, up 130 percent year-on-year.

Unexpected boon

"It certainly has been a boon," a POSCO International official said. "Our profit margins were bolstered by overall prices in goods and services, and the plummeting won. Trades of our coal and palm oil have definitely surged."

The sentiment is echoed by LX International. "Over 99 percent of our transactions are in U.S. dollars. The strong dollar has contributed greatly to improving our financial statements."

However, the two firms said the upbeat market outlook can take an unexpected turn next year, due in large part to recessionary fears.

"Concerns of economic recessions are looming, I understand, a reason why our record earnings in the past few quarters can just as easily turn into sharp losses," the LX International official said.

According to FN Guide, a financial data provider, the operating profit of LX International in the third and fourth quarters, is expected to log a year-on-year increase of 4 percent and 22 percent respectively.

Local brokerages including NH Investment and Securities and Mirae Asset Securities said both firms will be able to exceed 1 trillion won in operating profit this year.

Lee Kyung-min lkm@koreatimes.co.kr


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