VZCZCXYZ0007
RR RUEHWEB

DE RUEHUL #0327/01 0620105
ZNR UUUUU ZZH
R 030105Z MAR 09
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 3445
INFO RUEHBJ/AMEMBASSY BEIJING 5302
RUEHKO/AMEMBASSY TOKYO 5410
RUEHMO/AMEMBASSY MOSCOW 9238
RUEHNE/AMEMBASSY NEW DELHI 0740
RUEHHI/AMEMBASSY HANOI 2236
RUEHIN/AIT TAIPEI 2956
RUEKJCS/SECDEF WASHINGTON DC//OSD/ISA/EAP

UNCLAS SEOUL 000327 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND EMIN ELAB EINV PGOV PINR KS
SUBJECT: POHANG AND POSCO ADJUSTING FOR THE FUTURE -- AMBASSADOR 
VISITS POHANG 
 
¶1. (U) SUMMARY:  During a visit to Pohang, the home of Korea?s 
steel industry, the Ambassador learned that POSCO, the world?s 
fourth largest steel producer, is having to adjust to the global 
economic slowdown, cutting production for the first time in its 
four decades of existence.  The company, however, has new 
proprietary environmental technologies and operations in growing 
markets like India and China that should help it weather the 
storm.  The company continues to be satisfied with its 50:50 
joint venture with U.S. Steel in Pittsburg, California, where 
there are only eight Koreans among the roughly eight hundred 
employees.  The city of Pohang, where POSCO is headquartered, is 
looking to develop new technological fields to keep its economy 
from a downward spiral, and also wants to increase tourism.  The 
Ambassador also spoke to students at POSTECH, and visited Camp 
Mujuk, the only U.S. Marine Corps Camp in Korea, and the site of 
a memorial to former Senator John Warner?s commanding officer 
during the Korean War.  END SUMMARY. 
 
¶2. (U) The Ambassador traveled to Pohang, home of Korea?s steel 
industry, January 11 - 12, where she met with Mayor Park Seung- 
ho, visited U.S. Marine Corps Camp Mujuk, toured POSCO 
facilities, and spoke at the Pohang University of Science and 
Technology (POSTECH).  APP Busan Officer Tyler Allen, 
EconMinCouns Drew Quinn, and Regional Public Affairs officer Jean 
Vander Woude accompanied her. 
 
POSCO: GUARDEDLY OPTIMISTIC DURING THE FINANCIAL CRISIS 
-------------------------- ---------------------------- 
 
¶3. (U) Korea?s modern steel industry was founded in Pohang in the 
late 1960s with significant financial and technical assistance 
from Japan, in tandem with the normalization of bilateral 
relations.  POSCO?s Pohang works continue to be the centerpiece 
of POSCO?s global production and research, although POSCO 
actually now produces more steel at the Gwangyang facility in 
South Cholla province.  Oh Chang-kwan, POSCO General 
Superintendent, explained to the Ambassador that because of 
slowing global demand, both for steel and products using steel 
(e.g., autos and ships), POSCO had for the first time in its 
history announced a cut in production -? by 200,000 tons in 
December.  He added that further drops in demand could lead to 
further cutbacks.  (NOTE: In January, POSCO announced cuts of 
350,000 tons.) 
 
¶4. (SBU) The fluctuating value of the won was another headache 
for POSCO.  While a cheap won helped POSCO in the short term, it 
complicated long-term planning.  Moreover, so many of POSCO?s 
inputs were imported, especially iron ore and coal, that a 
cheaper won simply translated into higher input prices for POSCO. 
Currency stability, Oh noted, was better.  Labor relations were 
an ongoing challenge, but Oh guessed that only about 40-50 of the 
plants? 15,000 workers were hard-core radicals; to minimize 
labor-management discord, Oh noted he lunched with union members 
daily. 
 
¶5. (SBU) These challenges notwithstanding, Oh said he was 
guardedly optimistic about the future.  He and other POSCO 
executives pointed with pride to the new FINEX furnace 
inaugurated in 2007, saying it represented the first truly new 
steelmaking technology in decades.  FINEX allowed POSCO to use 
raw iron and (regular, non-bituminous) coal to make steel, 
bypassing the need for sintering or coking plants.  The effect of 
the FINEX process was to cut production costs by 20 percent. 
FINEX also reduced SOX and NOX emissions by up to 80 percent, 
although it reduced carbon dioxide emissions by only 10-15 
percent, a figure Oh said he was working to improve.  In 
addition, FINEX recycled 97 percent of its own water.  POSCO held 
all the relevant patents for the FINEX process (although Siemens 
was involved in its development); when asked, Oh said POSCO had 
no plans to license the technology to other steelmakers at this 
time. 
 
¶6. (SBU) Another advantage POSCO enjoyed, Oh explained, was that 
unlike many large Korean companies, it was not linked to a major 
business group and therefore could sell to them all, and did not 
have a single dominant shareholder.  Share ownership of POSCO was 
widely dispersed:  The two largest shareholders were State Street 
Bank of the U.S. (as custodian) and Warren Buffet?s Berkshire 
Hathaway, neither of whom sought to interfere in management 
decisions.  Indeed, Oh noted, roughly 40 percent of POSCO?s stock 
was held by international investors, but this had no appreciable 
impact on the way management ran the business.  (COMMENT:  Oh?s 
assertion that POSCO was immune to outside influence was undercut 
 
to some extent when, a few days later, POSCO CEO Lee Ku-taek, who 
was named CEO during the term of President Roh Moo-hyun, 
announced he would resign before the end of his term, amid 
widespread speculation that he was forced out by the Lee Myung- 
bak Government, which wanted to put a friend of its own in his 
place.  Despite the complaints about whether this was an 
appropriate role for the government to play with a private 
company in which the government has no equity stake, no one 
expected the change of CEOs to have any substantive impact on 
POSCO?s performance or strategy, perhaps bearing out Oh?s 
assertion that POSCO managers can operate independently of 
outside interference.) 
 
¶7. (SBU) Oh also believed POSCO could hold its own in the current 
international environment.  In Japan, POSCO continued to enjoy a 
close cooperative relationship with Nippon Steel, the company 
whose technology provided the basis for POSCO.  Nippon Steel had 
recently visited to be briefed on some of POSCO?s new 
technologies, including FINEX, and said it was impressed.  This, 
Oh said, impressed POSCO as showing that they had finally caught 
up with their teacher.  Asked if the logic of global 
consolidation might lead to a merger between POSCO and Nippon, Oh 
said he thought that unlikely, since both companies were roughly 
the same size and had the same market capitalization.  Oh added 
that earlier that day, Toyota had announced (to considerable 
press fanfare) that it would begin to buy POSCO steel for cars 
built for the Japanese market.  This was evidence that POSCO 
could penetrate the Japanese market on its own.  In a separate 
conversation, when asked about possible consolidation, Dr. Goh 
Jun-hyeong, Senior Economist at the POSCO Research Institute, 
stated that he expected roughly one quarter of the world?s 
current steelmakers would go bankrupt in the current recession. 
He noted that with sound financials, POSCO might decide to take 
this opportunity to expand itself through acquisition (although 
most of its investments had historically been on a greenfield 
basis). 
 
POSCO: EXPANDING OPERATIONS 
--------------------------- 
 
¶8. (SBU) While admitting that developing countries represented a 
challenge to POSCO, Oh was again reasonably confident.  China had 
quickly developed into a leading global steel exporter. 
Nonetheless, this was not a big problem for POSCO since 70 
percent of its products did not compete with Chinese steel 
products.  Asked about production of advanced materials, Goh 
explained that POSCO currently produces approximately 70 percent 
steel and 30 percent other materials.  By 2030, however, this 
should shift to approximately 30 percent steel and 70 percent 
other materials, because the latter supported newer, innovative 
industries, such as aerospace, information technology, or green 
energy, and therefore could overcome steel as the major 
manufacturing material in the near future. 
 
¶9. (SBU) Oh said that POSCO realized that even as it moved into 
higher grades of steel and specialty materials, its customers 
preferred that the steel company be able to provide all grades of 
steel -? the high grades made in Pohang as well as the cheaper 
grades made in China.  Therefore, POSCO had constructed 
facilities in Vietnam and India to be able to supply those grades 
of steel on a cost-competitive basis.  A key POSCO initiative was 
its investment in India, which would amount to a total of $10 
billion over the next ten years and represent the largest foreign 
direct investment ever in India.  Goh explained that POSCO was 
one of the first players to identify India?s potential, given its 
natural abundance of three key inputs for a successful steel 
plant: coking coal, iron ore, and human labor.  Their investment, 
however, faced a number of difficulties, such as increased 
competition in the Indian market and the poor Indian 
infrastructure.  Since POSCO began its project in India, a slew 
of domestic and international firms had begun steel projects 
there.  Also, in order to develop a successful plant, Goh shared, 
POSCO needed to completely rebuild the infrastructure in the 
town, including roads, telecommunications, and hospitals. 
 
¶10. (U) Asked about USS-POSCO Industries, POSCO?s 50:50 joint- 
venture with U.S. Steel in Pittsburg, California, Oh said the 
company was generally satisfied with it, although it had a spotty 
profit/loss record.  He noted that Korean staff from POSCO made 
up only eight of the roughly 800 people working at the plant. 
 
POHANG: REACHING OUT TO JAPAN 
----------------------------- 
 
 
¶11. (U) In addition to her meetings with POSCO, Ambassador 
Stephens participated in various meetings with Mayor Park.  These 
meetings illustrated that Pohang, an industrial town that, thanks 
to POSCO, has grown from 69,000 in the early 1970s to 500,000 
today, is attempting to break its steel-town mold by emphasizing 
cultural and tourist sites, projects, and festivals.  Mayor Park 
explained that, given its proximity to Japan, Pohang is currently 
reaching out to Japanese tourists, trying to attract an increase 
in both sea and air routes, and hoping to pull in Japanese 
investment.  Pohang is also striving to be Korea?s technological 
capital, expanding into nanotechnology, biotechnology, 
environmental technology, information technology, and robotics. 
 
¶12. (SBU) According to Mayor Park, Pohang?s industry has been 
sufficiently successful to ensure that Pohang had not  yet felt 
the full effects of the economic downturn.  The city was 
nonetheless preparing for when the crisis might reach Pohang, 
using its goals of port expansion and technology innovation to 
soften the blow.  He further boasted of Pohang?s strength, 
explaining that Pohang?s tax payments made up 65 percent of North 
Gyeongsang Province?s tax revenue, allowing Pohang to make 
special demands.  For example, Pohang recently requested a KTX 
stop, which the Mayor claimed it would receive during the Lee 
Myung-bak administration. 
 
CAMP MUJUK 
---------- 
 
¶13. (U) While in Pohang, Ambassador Stephens visited Camp Mujuk, 
the only U.S. Marine Corps Camp in Korea.  There the Ambassador 
paid homage to a plaque dedicated to the heroism of Senator John 
Warner?s former commanding officer in the Korean War. 
 
COMMENT: POSCO MOVING FORWARD 
----------------------------- 
 
¶14. (SBU) POSCO is one of the benchmark successes of Korea?s 
economy, and by most measures the company?s competitive strength 
in steelmaking continues to grow as it advances into new 
technologies and new markets.  At a time when Korean newspapers 
are sometimes filled with breathless reports on the global 
economic downturn and its impact on Korea, it was interesting to 
see that POSCO managers, despite being quite exposed to the 
depressed global market for capital goods, barely mentioned the 
fluctuations in the economy as they explained their strategy for 
the future.  It was equally telling to see that while the media 
would soon be filled with reports of ?upheaval? in POSCO?s CEO 
suite, that seemed to have no impact on plant-level decisions 
that will propel the company into the future. 
 
COMMENT: POHANG?S DEVELOPMENT 
----------------------------- 
 
¶15. (SBU) Mayor Park has reason to be optimistic for future 
development because Pohang is President Lee's hometown and 
represented by arguably one of the most powerful NA members, 
LMB's brother Lee Sang-deuk.  Mayor Park was notably careful to 
promote and not criticize any of LMB?s proposals.  As long as 
Mayor Park maintains political support from LMB, with healthy 
doses of government investment, he should not face serious 
problems during the 2010 election.  That said, Pohang still needs 
a lot more investment if it is to become a destination for 
tourists from any country or to shake off its reputation as a 
gritty steel town.  In addition to the pall the steel factory 
casts over the city, it lacks a modern hotel and its cultural and 
tourist attractions are still in their infancy, despite the 
city?s population and income. 
 
BIONOTE: MAYOR PARK 
------------------- 
 
¶16. (SBU) Mayor Park has extensive central government experience, 
having worked in both the Blue House and the Ministry of Home 
Affairs, and for provincial and city governments.  He also spent 
over two years in China as the first Chief Delegate of the Korea 
Local Authorities Foundation for International Relations where he 
developed local governance programs in every province, and wrote 
a book (in Korean) about the experience.  He is ambitious, and we 
will stay in touch with him as political circles here gear up for 
the 2010 elections. 
 
STEPHENS