Enterprise Risk Management at Posco|Enterprise Risk Management|Case Study|Case Studies

Enterprise Risk Management at Posco

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Case Details:

Case Code : ERMT-011
Case Length : 11 Pages
Period : 2003
Pub Date : 2003
Teaching Note :Not Available
Organization : Posco
Industry : Steel
Countries : Global

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In 2001, Posco was the second largest steel company in the world, producing over 27.8 million tons of crude steel. The largest and the only fully integrated steel producer in Korea, Posco manufactured a wide range of steel products, including hot rolled and cold rolled products, plates, wire rods, silicon steel sheets and stainless steel products.

Posco produced almost all of its steel at its Pohang Works and Kwangyang Works. In 2001, Pohang Works had a production capacity of 12.20 million tons of annual crude steel and stainless steel. The Kwangyang Works had an annual crude steel production capacity of 15.80 million tons. Domestic sales accounted for 73.3 % of total sales volume in 2001.

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In volume terms, Posco had an overall domestic market share of approximately 58.9 %. Posco's domestic market share was larger than 50.0 % in each of the major product categories.

Posco's exports in 2001 accounted for 26.7 % of total steel sales volume, compared to 28.4 % in 2000. Posco's major export market was Asia, with Japan accounting for 23.9 %, China 21.7 % and the rest of Asia 25.1 % of total export volumes.

Posco was established by the government in 1968. The government owned more than 70 % of Posco's equity until 1988. Then the government reduced its ownership to 35 % through a public offering. During the period, 1998-2000, the government completed its divestment.

Overview of Risks

In 1997 and 1998, following the Asian currency crisis, Korea saw a significant increase in the number of companies filing for bankruptcy. As a result of these corporate failures and large levels of short-term foreign currency borrowings, there was a sharp increase in non-performing loans and a deterioration in their capital adequacy ratios. These developments led international credit rating agencies to downgrade the credit ratings of various companies, including Posco. Although the Korean economy recovered more quickly than anticipated, any developments that adversely affected the economy would also decrease demand for Posco's services.

Developments that could hurt the Korean economy in the future included

• Social and labor unrest resulting from higher unemployment and lower levels of income,
• A decrease in tax revenues and a substantial increase in the Government's expenditures for unemployment compensation and other social programs that might lead to an increased budget deficit,
• Volatility in foreign currency reserve levels, exchange rates, interest rates and the stock market...

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