POSCO takes new tack with $4 billion Daewoo shipyard bid

By Miyoung Kim - Analysis

SEOUL (Reuters) - Frustrated in bidding against global rivals over costly iron ore assets, South Korea's POSCO (005490.KS) is taking a different approach to diversification -- looking to buy up one of its biggest customers to secure future demand.

This contrarian bet at a time of soaring raw material prices and looming overcapacity in the steel sector risks riling investors, who say the world's No. 4 steelmaker needs to put its $4 billion cash pile to better use.

But with possible mining targets limited and expensive after a multi-year bull market for commodities, POSCO may have little option as it seeks to boost returns.

Cash-rich but resource poor, POSCO is one of at least five bidders circling Daewoo Shipbuilding and Engineering (042660.KS), the world's third largest shipbuilder.

"POSCO needs to be rather more aggressive in buying mining assets but its decision reflects the reality that resource assets are already too expensive and scarce," Hyundai Securities analyst Park Hyun-wook said.

POSCO joined its big peers this year in snapping up mining assets but its investment is dwarfed by heavy spending by its Western and Chinese rivals.

Its iron ore self-sufficiency is less than 20 percent, while top-ranked ArcelorMittal (ISPA.AS) boasts around 50 percent, leaving POSCO vulnerable to recent sharp rises in iron ore and coal prices.

Not that it has been idle -- this year it has bought a 10 percent stake purchase in Australian coal miner Macarthur (MCC.AX) for $400 million, a $350 million nickel mining and smelting project with a New Caledonia partner and a $200 million stake in a South African manganese mine.