Posco Holdings Inc (PKX) 2005 Q3 法說會逐字稿

Good day everyone and welcome to POSCO Q3 earnings conference call. For the duration of the presentation all lines will be placed in listen only mode. A question and answer session will follow after the main presentation. [OPERATOR INSTRUCTIONS]. I would now like to hand the call over to Mr Yongsuk Son and I will be standing by for the Q&A session. Thank you sir, you may now begin.

Good morning and evening and thank you for participating in POSCO's Q3 earnings conference call. We have with us Mr Jae Ku Cho, department manager, finance management department, Mr Duk Il Yoon, head of IR and the IR team with us today. Mr Cho will briefly present us with POSCO's Q2 results followed by Q&A session. Without further delay I will begin the presentation. Mr Cho?

Thank you. Good afternoon for Singapore and good morning for London. It's my pleasure to have you all on this, our conference call. This is Jae Ku Cho, general manager of the finance department in POSCO. I am with my IR staff to discuss POSCO's recent operating performance with you.

Sales revenue for the cumulative three quarters rose by 16.3% to 16.5 trillion Korean won compared to the same period of last year. Operating profit rose by 40.2% year on year to 4.8 trillion Korean won and net profit rose by 37% to 3.6 trillion Korean won.

Revenue growth was largely attributable to the higher ASP compared to the same period of 2005, however weak demand and the high inventory level for steel caused the sales volume to decline by 1.6% to 21.3 billion tons. On the other hand, the improved productivity resulting from the refurbishment of Number 2 blast furnace and the rationalization of Number 2 hot rolled plant caused the production volume of finished product to remain flat at 21.9 billion tons. Operating profit margin and EBITDA margin recorded 29.3% and 36% respectively.

On the balance sheet, fixed assets increased to 15.5 trillion Korean won due to the incremental capital expenditure on Number 1 FINEX plant and the Number 5 CGL. The 4% share buyback to release the POSCO shares on the Tokyo stock exchange caused the current asset to decline to 7.5 trillion Korean won.

Equity ratio increased to 81.7% as the scheduled debt repayments were made on a timely basis.

Now, speaking of the recent steel pricing trends, the steel prices in North America and Europe seem to have bottomed out. Recently the inventory level and the import volume have declined in North America and some of the steel companies in Europe such as Arcelor have announced a price hike in the fourth quarter of this year.

In Asia, steel prices in China and North East Asia remain weak due to the increased supply and the delay in pick up in the steel demand. However, we are seeing some encouraging signs such as China [turning net imports] by 140,000 tons and 560,000 tons in July and August respectively. The steel prices in Japan remained flat and POSCO cut its domestic prices by 6 to 9%. However, some of the tightly supplied products such as the plate and the grain-oriented electric steel sheet have been excluded from this price cut. The tight supply of high grade steel is being translated into strong pricing trends whereas low grade steel is characterized by the excessive supply, thus weak pricing. We still expect to see the kind of polarized pricing trends between the low grade and the high grade steel down the road.

Going forward, we expect to see the differences in the regional steel prices to narrow and stabilize as the major steel mills around the globe are expected to carry out a profit focused pricing strategy. Furthermore, the accelerated steel industry consolidation conducive to creating supply discipline in China is expected to become more visual in the medium term, especially with China's new steel pricing policy. However, the pricing risk is associated with over-supply of low grade steel, steel [inaudible] over the regional steel markets. This is again the very reason why POSCO is trying to ship more aggressively its product mix to high grade steel by rolling out the enhanced R&D and the investment in high grade steel operation.

On the operational side, as part of POSCO's approach to increase the production of high grade strategic products, the production of Number 5 continuous carbonized line with a capacity of 450,000 per year was successfully commissioned in the third quarter. Another notable achievement in the technological aspect of POSCO is its world's first production of high tension auto steel sheet that can bear the weight of 50 kilograms as opposed to the previous 35 kilograms. We plan to boost our auto steel sheet production with the additional construction of Number 6 CGL as the steel product is expected to be in short supply in the next couple of years. In addition we are adding more capacity to the current TWB plant resulting in the production capacity of 5.5 million sheets per annum by the end of this year.

With this kind of investment to boost auto steel sheet production together with the strategic initiatives such as the [inaudible], supply chain management, new customer development and so forth. POSCO should be able to increase the share of total auto steel sheet [towards] the top 15 auto makers. The aforementioned strategy associated with auto steel sheet sales is an example of POSCO's effort to boost the sales of one the many high grade products in the medium term.

This kind of efforts to shift the product mix to higher grades on the revenue front together with well controlled operating costs, triggered the international credit rating agencies to upgrade the POSCO's credit standing. Moody's upgraded POSCO's foreign currency issue rating from A3 Stable to A2 Stable which [inaudible] Korean government the rating. Standard & Poors also changed its outlook from A minus Stable to A minus Positive to reflect POSCO's continued leading market position in the steel industry and the strong cash flow generating power. These ratings are highest grades amongst the integrated [inaudible] in the world. Other major products, such as the FINEX plant Number 1 and the feasibility study on the Indian slab project are all progressing well according to the schedule. The operating result of the FINEX in particular were released during the IISI conference which have been included in our earnings release presentation material.

Finally, we have revised our annual business plan for the fiscal year 2005 as we do on a quarterly basis, incorporating all the new [macro] factors as well as the changes in the steel business environment. Based on the new guidance the year 2005, the production volume and the sales volume are 30.8 billion tons and the 29.5 billion tons respectively with the sales revenue of 22.3 trillion Korean won. Please also note the year 2005 capital expenditure has been revised down from 4.1 trillion to 3.6 trillion Korean won.

In conclusion, if we are to continue the recent outstanding performance in the future, we must significantly boost the production of the high grade steel, the supporting strategy to increase the production of high grade steel are currently shaping up. At the same time tighter control, the cost of control measures must be carried out throughout the company to enhance the profitability.

Thank you once again for taking time to join this call and we'd like to welcome any question you may have. Thank you.

Thank you Mr Cho, shall we start with the Q&A session.

Thank you sir, we will now proceed with the Q&A session. [OPERATOR INSTRUCTIONS]. Our first question coming from the line of Mr Owen [Flanagan] from the UK. Please go ahead.

Hi there it's Owen Flanagan here from Thames River Capital in the UK. My question relates to the guidance for this year which you just announced, I'm sorry there was some break up in the line as you gave those numbers. If you could run through them again in terms of the sales, the production and sales volume numbers and the revenue number, and also if you could tell us if you have EBITDA guidance for 2005? Thank you.

Our production plan this year, our production will be 30.8 million tons, means 1.9% increase compared to last year, and sales revenue is 29.5 trillion Korean won, so sales volume is 29.5 billion tons so almost 1.7% increase year on year. Sales revenue will 22.3 trillion Korean won, it will be almost 13% increase compared to last year.

And can you give us guidance on EBITDA or on margins generally for the full year?

Hello, up to third quarter this year our operating margin is as you see on our material 29.3%, and year based we estimate you know definitely a higher than last year, sorry about that, we cannot tell you the exact number.

So operating profit margin last year was 28%, is that correct?

Last year operating margin was 25.5%.

Okay right, thank you.

Thank you sir. Our next question coming from the line of Andrew [Tay] from the UK, please go ahead, thank you.

Thank you, it's Andrew Tay from [Boar Allen] in London.

Could you discuss the outlook as you see it, the factors you, I just caught your comments on Chinese steel industry restructuring, I may have missed any comments on pricing earlier in your discussion, but I was wondering if you might be able to elaborate on the factors that you see affecting pricing going forward? And you know, when you think those factors are going to be felt?

Okay if we see the outlook of the steel industry in the near future, including next year, you know the previously, historically the price movement in the supply and demand balance is very cyclical and a better routine. But these days we see that period is getting shorter and relatively changeable, and we see in the United States the [inaudible] inventory now is decreasing and in China, even in China the export from China is now decreasing as well. So we still very mixing, negative and positive factors are a big thing in this moment, and definitely the production volume trend from China is the negative factor, and if we see, if we refine the positive factor, the steel product demand is gradually increase, but also we expect Chinese Government, the tightening policy, we can expect in the near future.

Even, it depends on the institution, they have some different view on the steel industry and you know, in terms of price, first quarter of next year this weaker trend will be continued up to first quarter of next year, but from the second quarter of next year we expect price increase slightly.

Is that cost driven?

Well the, as you will see with a sharp hike of the price is for the [inaudible] three year, during the recent years, yes, the steel price has been driven by the cost side most of all, but given the view [inaudible] two year, we expected the prices for the iron ore or the coal will be stable, we'd like to get a little bit weaker price for the coming years, so I cannot say the steel price will be driven by the cost side any more, but will be driven by the balance of the [inaudible] demand of the steel, mainly from China.

And, so are you saying that you're expecting iron ore and coal prices to be flat year on year, or lower when you come for your renegotiations for 2006?

[Inaudible] to have, to present any clear picture for the new price for the fiscal year of 2006 because usually we start the pricing negotiation with major suppliers from the end of the year, to conclude the new price before the end of March next year.

But you know the price for this year has been historically high, very hard to be borne by the steel makers, especially under the recent weaker trend of the price, and we have seen new sources on the screen so we'd like to, we'd like to be more passive for the new price for next year.

And just on your comments about a weaker price trend into Q1 of '06, but then a slight increase, what are you basing that off? What are the key assumptions behind that prognosis?

Once again we, the supply from China, right, will be controlled by Chinese Government, the new steel policy will be effective from next year, that's what we believe.

I see, so is that the main source of your price improvement expectation in the second quarter?

Yes that's really happening in the Asia region now.

Right okay. And on overall demand I see that in your presentation you're talking about the various segments of demand that you're seeing. Could you just elaborate on those a bit more, the areas that you are becoming more bullish on and those that perhaps are not performing so well?

A few steel products is very short in Asian regions for example auto sheet and electric sheet and the plate. Those three items are very short in Asia including Korea and Japan and China, so even for example the electric sheet, the price is almost double compared to early of this year and the plate price, last week, two weeks ago, we [inaudible] the plate price because the [inaudible] is quite good so that’s why we can see a two tier market in Asian country.

Okay. I have just one last question for you, just on the point you made about your auto steel, the new high grade auto steel that can sustain a load of 50 kilograms, is that at the level of the Japanese steel mills or is there still a difference between the performance of the sheet?

We think this is the first time. 50 kilogram is the first time.

Right so it's better than the Japanese mills at this point?

Definitely right.

Okay, thank you very much.

Thank you Mr Tay. Our next question comes from the line of [Kumar Ashwami] from India, please go ahead, thank you.

Most of my questions were asked actually. I just wanted to know with so much capacities coming in China what will be the real impact on prices in the next year or so for steel? Do you foresee any softening of the prices in the next two quarters?

We hear and see a huge capacity increase in China but not high [inaudible] the facility. For example the HR capacity increased almost double over three years. That is based on the minimal base not the [inaudible] base but we worry about in the future the tough buy including [inaudible] Ansan after they completed their blast furnace almost 20 million or 10 million tons over five years. But before that we don’t see any significant flat product in Asian regions.

Okay. So you feel the prices will stabilize around these levels?

Yes.

Okay thanks.

Thank you Mr Kumar. Our next question coming from the line of [Ashish Kumar] from Korea, please go ahead, thank you.

Thank you. My first question sir is on your presentation. It seems that your finished steel inventory has gone up from about four days two quarters back, to eight days. Could you comment on inventory both with you and your feel for inventory in the channel?

Excuse me, our inventory and inventory level in China did you say?

No, inventory with your customers.

This is only for the POSCO.

Yes I was asking that your own inventory has gone up. I wondered if you could express, are you comfortable with your own inventory level and second, what is your impression of the inventory level with your customers?

Even though our inventory build up sharply, the first half of next year, we have many maintenance schedule in the line so that meaning is our production will be decreased in first half of next year, so even if we have a huge inventory now, we can sell in first half of next year because our production will be reduced. You understand what I'm saying?

Yes.

Okay.

And how is the inventory level with our major customers?

Our market?

Yes, by your top customers, do you think they also have re-stock inventory, how is their steel inventory?

We don’t know exact number but that's true, even in the market or even the same situation in Japan, in China, so all the Asian regions, the inventory level is very high.

So that's why POSCO decide to decrease our receipt price for further inventories [inaudible] in our customers. So we already know the customer's steel [inaudible] inventory level so we will need to make them comfortable for their inventory so that’s why we decreased our price.

Understood thank you. My second question is, and you did briefly comment, as you know there is incremental supply coming out of China in fourth quarter and you did suggest that you expect price weakness in commodity grade flat steel to continue into fourth quarter. I was wondering if you could share as to what magnitude of price decline in the spot market do you foresee as I'm sure you know just before the Chinese weekend or weekday holiday, the spot prices started to decline quite meaningfully. What is your feel, how much price decline in spot market for commodity products can we expect in the fourth quarter?

I think this price is the bottom, right. We believe that. And as I explained to you the export from China is now decreasing so the price will be, now we believe this is the bottom, right.

Yes I think you have said that in all net imports into China has increased and exports as you’ve said have come down, and you know there is a school of thought amongst analysts that track POSCO and they tell me that the situation will reverse and exports from China will increase significantly from November onwards. You are one of the major players in the industry and I thought I'll ask you whether you agree with this view that China will start to re-export and their exports will increase from second half of the fourth quarter.

I think whenever there is a steel flow between countries it's always the difference in the prices. But as we mentioned earlier the steel price in the US has picked up significantly and also the same case applies to Europe as well. And Korea's HR price is around 550 Japan. They pretty much mention that it's going to stay flat and we mentioned earlier, for the next quarter or so we think the price gap between different regions will narrow and stabilize. Having that said, if that does happen we think further deterioration of Chinese HR price is not very likely. As a matter of fact we think Chinese HR price may show some upturn.

If you can see the presentation material which is the IS title POSCO you can get the more exact number for the export and the import [inaudible] for steel by China. Till the end of August at this year, China is the net exporter. Yes, they exported 13 billion tons of long product while they imported 3 million tons of long product so China is the net exporter by 10 million tons for the long product and low graded steel. But in terms of the flat steel, they are definitely in, that's the importer, the number for the total import of flat steel is 15.3 million tons while the export remains around the 6.4 million tons.

Once again the China is very aggressive to the supply the steel but it's mainly for with the commodity rated steel. And we held the 39th IISI, International Iron and Steel Institute, conference last week here in Seoul which held three sessions especially on new development and iron and steel technology, raw material and technology etc. And during the sessions the key leaders for the steel makers discussed the recent concerns in the global steel industry and [inaudible] and the stormy [inaudible] by the Chinese, the steel makers in China to control the level of production not to deteriorate the current, the steel industry environment. So we hope they can be more clever not to cause any serious problems especially till the end of this year.

Thank you sir.

Thank you sir does that conclude your question?

Yes.

Thank you. Our next question coming from the line of [Manesh Poll] from Singapore, please go ahead, thank you.

Hello. I had a question regarding your product mix, POSCO has been talking about the disparity between high value and low value steel, what percentage of your current product mix would you classify as high value?

Okay, this year we focused almost 43% of our total in our finished product is -- we call this is the [inaudible] product. [inaudible] product, it means high value added product.

So 43%.

43, 43.

Yes 43% of your overall sales you would consider as high value. How do you see that evolving over the next couple of years?

Well, today we have only three listings in Korea, and we said next year this ratio will be 52% and the year 2007 it will be almost 60%. So finally year 2008 is the ratio reached to almost 80%.

And some examples of what you consider higher value? You’ve talked about the electric sheets, the high grade auto sheets but what else would you consider to have high value?

Okay, we selected eight products as strategic product including auto sheet and high, the function the cold rolled [coil] and the high value API and the also high function HR [coil] and TMCP and electric sheet, and also high value of the wire rod and the 400 standards in all the products. Those are, these are our strategic products.

Okay the domestic market is obviously your biggest market, 75% of your overall sales, what percentage of that do you think is at risk from Chinese low cost imports into Korea? And related to that, you did mention China and [net net] is still a huge importer of flat steel, how do you see that evolving because that’s where the biggest capacity increases are coming in? You saw that in the long products last year and China is self sufficient and exporting; the capacity increases this year are exorbitant, the likes of 40% and above in the flat market. What risk do you see to your product line in the domestic market?

Well today also the [inaudible] our in-house researchers' position, they forecast China still needs almost 25 million tons' import from overseas, especially those are all the flat, those are all the high value added mainly from Japan, Korea and Taiwan. 25 million tons they needed to import. The meaning is even though they have huge capacity expression in these days, but they still leave a lot of the high value added. That meaning is capacity expression is not happening in all -- in high value added products in area. So as I briefly explained earlier of this conference call, this trend will be continued at least for five years before the top five come into the stream.

Okay, so you expect a lag of five years before --

Yes the minimum is five years, the maximum is ten years, right?

Before China can catch up with --

Yes high value added area.

With making high value added products.

Right.

Okay, if I may switch gears a little bit, fourth quarter steel pricing, there have been some rumors that there could be some further price cuts. Is it too early to comment on that or, what are your thoughts on that?

We lowered our price about, recently, and this will be continued at least second quarter, two quarter, right. First half of next year we believe this price will be continued.

Where the domestic price for the steel in China has been [inaudible] substantially during the [inaudible] for the [inaudible] the price was 547 bucks per ton in January this year. Which has been down to 422 in July, now it stands around the 380. Yes, with the more volume to come in the market, the price can be weaker but we'd like to believe this could be the bottom [inaudible] the coastal production by [inaudible] by Chinese steel is near to the market price, the margin has been squeezed significantly at this level of the price. According to the recent issue by the World Steel Dynamics the cost for the production of a ton of [inaudible] by Chinese steel mills is around the $350 per ton. So I don’t believe they could be aggressive and afraid to increase the volume of production to cause the margin deterioration at all. So I would like to bet this could be the bottom.

Okay but that could mean different things in that your HR [inaudible] pricing you said is 550, China was slightly below 400 and Japan is 600. You expected the price differential to narrow, that could mean that your prices will fall as you're saying and the Chinese prices rise. Where do you think it comes to rest?

Whereas we are sorting the, there have been two polarized, two tier all these prices in the market. One is for the high graded and the other, the second tier is for the commodity rated steel. There are some, the [inaudible] in that the two tiers and we expect this could be the case to the [inaudible] to the end of this year.

Okay, sorry one final question. You did allude to coal and iron ore pricing, you mentioned the hope that it remains flat to slightly down, is that correct?

Once again it's too early to give any hint for the new price for next year, well before the start of the price negotiation, but the price for the key raw materials has been unbelievable level. [Inaudible] at all and [inaudible] view our associates to come into the market, we delight to see the price to be stabilized around the current level.

Okay.

And already the steel price has been weaker, so another high quality price cannot be accepted by the steel makers at all.

But if you look at the supply and demand dynamics within the coal and the iron ore industry, supply is still pretty tight especially in iron ore.

That's right, iron ore is, steel is being tight but coal is already more the -- to be okay. Yes, there are some -- the room for another rise of the price for the iron ore, but the tests can -- if any its [inaudible] would not be welcome by the steel makers who is under pressure for the margin squeeze at present.

Thank you, thank you very much.

Thank you sir, our next question coming from the line of [Mayumi Watanabe] from Japan, please go ahead, thank you.

Hello, this is an American non-ferrous metal media report. What is your strategic plans for Japan after this thing in the stock exchange in November? And how much do you intend to export to Japan or how much percentage of your business would come from Japan in the future? And what are your strategies for securing raw materials such as ferrochrome? Do you have plans to acquire new stakes in new mines?

Has been one other major export market for POSCO, but the [inaudible] needs are relatively smaller than which has been the last few years, because China emerged the [SPD ton] market export market for POSCO We would like to maintain the [inaudible] demand from Japan especially for the quality steel with the cost of competitiveness. And the Japanese steel makers have been good friends and the competitor in this industry, and we'd like to keep the Japanese market as it is, what it is in the future as well. Yes we'd, the capacity expansion for the stainless steel, we'd like to develop new [inaudible] and we are seeking for the new -- the opportunity to join the stake investment in new minings around the world.

I wasn't able to read the PowerPoint slides you sent earlier or you have it available on the internet, I wasn't able to read it, so I may have missed something out of it. How much percentage of revenue comes from Japan right now?

Our expert [percentage] is around 25% of our total sales and our sales [inaudible] to Japan is around 20% of that 25%, so overall it's almost 5% at best of our total sales.

Okay, thank you.

Thank you Miss Mayumi, does that conclude your question?

One last question, have you made an acquisition of [inaudible] or Crown Mines in South Africa or is it a plan?

From 1996, after 1996 we invested 25% of the shareholding and we purchased almost 60,000 tons every year, we import [inaudible] from South Africa, this is chrome right, ferrochrome?

Yes ferrochrome, yes.

Right and at this moment we haven’t any other significant, the expansion plan in this company.

Okay thank you.

We have a follow up question from Owen Flanagan from the UK; please go ahead.

Yes hello there. My question relates to your sales volume guidance for the full year. If I look at the year to date accumulative sales volume 21.9 million tons, and your guidance for the full year was 29.5. Is that -- that would imply finished product sales higher in the fourth quarter than in the third quarter, I was just wondering if you could explain how that’s possible given the kind of production cut backs you’ve announced?

Well it has been the case for during the last few years the sales volume, [production] sales volume for the last quarter each year has been a little bit larger than the previous quarters. Where we have the plan for the production cut back by a small amount, it's not any significant the volume adjustment at all, it's kind of the show of strategy to the indicate market for the market stabilization effort by POSCO. So the small portion of the production cut backs has been reflected in our business plan for the last quarter of this year as well, and this is the most recent revision of these products, these business plans for the year of 2005 and that could meet, that should meet the target and should be achieved during this year.

Okay, if I look at what numbers you gave and imply for your production in the fourth quarter, it implies that finished product sales volumes would be about 7.6 million tons, so that’s up about 5% on the third quarter, can you tell me what kind of product categories you think will be driving that quarter on quarter growth?

As you know, most of the production costs actually were low grade steel coming out of the mini-mill. We are strategically trying to increase the share of high value added products like auto steel sheet. As you know we have completed the construction of Number 5 CGL line so we will have some increments of production volume that will translate into sales volume. And also we have other strategic products that will come on stream. So most of the incremental sales volume will come from high value added products whereas the production cuts will be centered on the low grade steel, coming out of the mini-mill. And some from stainless.

And actually we didn’t pay much attention to the incremental production increase, the plan for the production increase for the last quarter, but I assume that that could be attributable to our effort to increase the production of the flat steel for the shipbuilding which is significantly short in Korea.

Okay, thank you very much.

Thank you sir. Our next question comes from the line of Mr [Kurasata Kaja] from Korea. Please go ahead, thank you.

I have two questions, one is about earnings results. The expense between [SCA and OP] is much more than first and second quarter. What is the major reason?

Thank you sir, does that conclude your question?

Hello. We didn't release any of the data about that, so maybe we can give you personally, later. We don’t have the data now.

Yes, okay. And the second one is about stainless strategy. I know [inaudible] production at third quarter, but in China you make a lot of stainless. So I can see stainless [inaudible]. Could you explain your stainless strategy?

You know the situation recently; the major stainless supplier in China, their name is the [Taiwan] and [inaudible] steel and they increased their capacity significantly. And their price strategy -- according to their price strategy they lowered their prices also significantly, so almost $500 per ton is collapsed in [inaudible]. And we believe this trend will be continued up to year 2007. Over-supply will be continued -- this mean over-supply will be continued around two years. And also we believe the demand will be increased 5 or 6% over three years. That’s why around year 2007 the supply and demand will be balanced. [Inaudible].

So it is possible to decrease production or cut your price for future?

It definitely depends on the market situation.

Okay.

So [inaudible] stainless steel takes account of 2 million tons in our total sales volume, but this is the 50% to come from export. So in case of stainless steel we are really rely on export, especially second -- two thirds came from Chinese. So we really depend on China's situation, so our strategy is to diversify our export market and try to supply our [inaudible] to other downstream mills such as Russia or South Eastern Asia, such as like that. So we have -- internally, we have developed a lot of [inaudible] this kind of bad situation, so we think we can overcome this kind of situation and after [inaudible], after two years, there will be supply and demand still. And so at this time only a few number of stainless steel makers can be [inaudible] until that time. They seem to believe we can be one of them.

Yes. My first question about expense; according to page 6 there is an ESOP expense, what does it mean?

Okay, we have been the program for the employees which is called the employee staff ownership program. Each year each employee is entitled to subscribe up to 4 million Korean won worth of the treasury shares which is held by the company. So the employee can subscribe the shares at the average -- the book price of the treasury shares which is well under the current market price. According to the Korean accounting practice, Korean GAAP, we should realize the price gap between the market price and the subscription price as the expense, which was 174 billion Korean won for this year.

Thank you so much.

Thank you.

Thank you sir. We have a follow up question coming from the line of Ashish Kumar from Korea. Please go ahead.

Yes, thank you. Did I understand you correct that you suggested that steel prices in China might have bottomed and however those prices being much lower than prices either in Korea or Japan, that spot prices in these two countries, that is Korea and Japan, could continue to trend down in the fourth quarter. Is that the correct way of interpreting what you said?

Earlier we mentioned that Korea's HR price is around 550, but that’s -- generally we're talking about 2 millimeter -- I mean high value added, not high value added, but higher quality, higher grade HR, whereas the spot price of HR in China is a 3 millimeter low grade. So we are not really comparing apple to apple. These are really two different products that have different end users. So I don’t think it's fair to really compare these two products.

Thank you. And however, for like to like, that is not your product, but commodity grade HR spot price in Korea. That could perhaps be influenced by the weak Chinese prices. Would that be correct?

That’s right. The commodity rated steel mainly for use in the construction area, such as the long product or the [deformed] bar, has been shifted significantly already in Korea with the huge supply from China.

And my last question is, I think you revised down your full year revenue target by about 5% to 22.3 billion Korean won. I presume all of that is your expectation of lower revenue in fourth quarter than your earlier estimate. Is that being driven both by its expectation of lower prices and volume, or is [that] only price, only volume? Can you just throw some light on how have your expectations [inaudible] for fourth quarter?

As you see, we cut the domestic price mid-September this year already by 6 to 9%. We don’t have any plan for another cut price or any plan for the production cutback for the remainder of this year. So the number we presented is the already revised with the last price cutback.

Got it, thank you so much, that’s all.

Thank you sir for your questions. [OPERATOR INSTRUCTIONS] There appears to be no further questions at this point of time. Back to you sir, thank you.

Thank you. If there is no more questions thank you for participating on the call. If you have any further questions do not hesitate to contact POSCO's IR team or myself, Yongsuk from UBS. Thank you and good evening and have a good day.