POSCO scandal politics, not business

By Kim Myong-hwan

SEOUL (Reuters): A scandal involving the former chairman and more than a dozen executives of Pohang Iron and Steel Co (POSCO) is unlikely to hurt the company, analysts and industry sources say.

But the political scandal would be a good argument for privatizing state-run POSCO, the world's second largest steelmaker, they said.

"This sort of political fuss in POSCO will likely be a thing of the past once the privatization is completed," said Jeremy Ryu, analyst at LG Securities.

The government is to sell its 20.84 percent stake in POSCO by the end of this year. Remarkably, foreign investors currently hold 38 percent of the company's shares.

"POSCO is probably the most successful case of state-run companies, but it needs to become more sophisticated through privatization," said Park Joon, analyst at SG Securities.

Last December, the Board of Audit and Inspection said in a regular audit of POSCO it had found 170 "irregularities".

The audit report alleged former chairman Kim Mahn-je had used company funds to make private investments in stocks and bonds during his four-year tenure, which ended last March.

It also said POSCO and its affiliates had made contracts based mostly on private negotiations rather than competitive bidding, costing it up to 1.36 trillion won (US$1.2 billion).

The board ordered the company to punish 39 executives believed to be responsible for the losses.

POSCO sacked 19 top executives and reshuffled 550 mid-level managers in the largest personnel shake-up in its history.

Prosecutors were studying the audit board's report and to date have not indicted or charged anyone.

"This was nothing but a purge of executives close to former chairman Kim Mahn-je," said one of the fired executives, speaking anonymously. "This was obviously masterminded by Park Tae-joon."

Park Tae-joon founded POSCO in 1968, and with his tough military-style discipline, molded POSCO's management culture and set the stage for its success.

POSCO also flourished on preferential loans and an industry monopoly in an economy that grew an average eight percent annually during the past three decades.

"Park had a clear vision and could push it through like a field general," said Shin Yoon-shik, analyst at Dongwon Economic Research Institute." "His vigilance against corruption also helped greatly."

But Park resigned after challenging the candidacy of former President Kim Young-sam in 1992 and later was accused of diverting millions of dollars in company funds for personal use.

Park became a coalition partner of Kim Dae-jung, who won the presidency over the government party candidate in 1997.

Within weeks of Kim Dae-jung's inauguration, Kim Mahn-je was replaced by Yoo Sang-boo, a Park loyalist.

Kim Mahn-je, a scholar and former finance minister, presided over a period of success and profitability at POSCO.

"After years of Park's management, POSCO lacked flexibility," said Yoo Hahn-soo, a former head of POSCO's research arm and now an executive at the Federation of Korean Industries, the lobby for big business groups.

POSCO earned two trillion won of net profits during Kim's tenure which ended in March 1998, including a record profit of 884 billion won in 1996.

POSCO said unofficial figures showed it had posted a record net profit of 1.12 trillion won in 1998, up from 728.9 billion won a year earlier. Sales also set a record in 1998 at 11.14 trillion won, up from 9.72 trillion won in 1997, it said.

Analysts said POSCO should not suffer much lasting damage from the latest scandal.

"Politics has not been a key part of POSCO's management culture," said Lee Jeoung-ja, research head at HSBC Securities. "The management system has been set up solidly and systematically over time, so it doesn't matter much who is at the helm."

The government said last July it would privates POSCO and four other state companies by 1999 and another six by 2001.

The government hopes selling stakes, especially to foreigners, would help ease a foreign exchange crunch that forced the nation to accept a $58.35 billion-bailout arranged by the International Monetary Fund in December of 1997.

The government sold 5.1 percent of POSCO through a global offering of American Depositary Receipts (ADRs), which was the first step in the government's divestment of POSCO shares.

At four ADRs to a POSCO share, the offering raised about $300 million from the sale of 3.14 percent of the POSCO stock held by the government and 1.97 percent by state-owned Korea Development Bank. It also raised the foreign stake in POSCO to 38 percent from 32 percent.

Analysts said POSCO's biggest concerns at the moment should be deteriorating business conditions, not politics.

POSCO said unofficial figures showed it had a record net profit of 1.12 trillion won in 1998, up from 728.9 billion won a year earlier. Sales also set a record in 1998 at 11.14 trillion won, up from 9.72 trillion won in 1997.

But POSCO recently said it would cut its exports by more than five percent this year to avoid possible trade conflict with the United States. Domestic sales could slide as local rivals expand.

"Anti-dumping threats by industrial nations will hamper exports of Korean steel products," said Hwang Ki-doo, analyst at Indosuez W.I. Carr Securities.

Hyundai Pipe this year will begin to operate a cold-rolled steel mill with an annual capacity of 1.8 million tons, and Dongbu Steel will double its production capacity of cold-rolled sheets to 1.3 million tons this year.

POSCO produced 25.3 million tons of steel in 1998, of which 37 percent was cold-rolled sheets, 48 percent hot-rolled steel sheets and the rest stainless steel.

The proportion of exports to total sales rose to about 50 percent last year from 37 percent in 1997 due to the won's depreciation against the dollar.

The now appreciating won will have the opposite effect, said Moon Jung-up, analyst at Daishin Economic Research Institute.

Analysts see POSCO's sales falling about seven percent this year from 1998 with profit margins dropping 10 to 20 percent.

But POSCO's long-term potential to expand profits has led foreign investors to pay a premium of more than 30 percent for its share in the over-the-counter market.

POSCO was trading at 60,600 won at 03.20 GMT on Thursday.

"POSCO will likely be a darling of most investors for some years to come as privatization is expected to add a boost to the already-strong POSCO," said Park Joon of SG Securities.