Pohang Iron and Steel Company Ltd.

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Pohang Iron and Steel Company Ltd.

1, Koedong dong
Pohangshi
Kyongbak
Republic of Korea
(0562) 700 114
Fax: (0562) 72 75 90

State-Owned Company
Incorporated: 1968
Employees: 22,518 (1989)
Sales: US$6.42 million (1989)

Pohang Iron and Steel Company (POSCO), 70% owned by the government of the Republic of Korea, is an integrated iron and steel producer which, since starting production in 1973, has enabled Korean industry to move from virtually complete dependence on imported iron and steel to reliance on domestic supplies for most needs. The 11th-largest steel company in the world, POSCO has been noteworthy for the efficiency of its construction and of its subsequent operations, which has allowed production and expansion to come onstream more rapidly than anticipated, and helped make the company profitable when steelmakers in the United States and, for one year even in Japan, were making losses. The company has imported technology as required from various countries and has absorbed it, “Koreanizing” it so that the technology could be, in some instances, exported to other developing countries, or adapted for use in other Korean industries.

In the aftermath of the Korean War, it was in the interests of South Korea, as well as of the United States and its supporters in that conflict, that the country’s economy recover and develop as rapidly a possible. As the First Development Plan was elaborated, measures were included for protecting new industries with tariffs, quotas, and, in some cases, prohibition of imports of competitive products.

The industry initially given the highest priority by Koreans was steel, production capacity having been damaged severely during the war. An integrated steel mill with an annual capacity of 300,000 tons was discussed at a very early stage, and there were some hopes of including it in the First Plan. The World Bank and other international agencies considered the plan too ambitious and inappropriate because, they argued, Koreans could not master the technology, and the plant would not be large enough to operate efficiently, while anticipated domestic demand would be insufficient to justify construction of a larger mill. Ultimately they were to be proven wrong.

In place of the larger scheme, a number of small-scale steel plants based on electric furnaces and domestic scrap were built. One of the first and most important of these was the Inchon Heavy Industrial Corporation financed by the Korean government. Inchon had a 50-ton open hearth furnace and a medium rolling mill capable of producing 10,000 tons of sheet steel per year. Further development on a similar scale led, particularly after 1963, to the establishment of some 15 firms involved in producing steel of various kinds. Initially employing old-fashioned techniques, non-continuous rolling mills produced sheet steel, bars and rods, wire, and pipe of uneven quality in quantities insufficient to meet demand. Although the size of these undertakings was to be dwarfed by POSCO they were gradually updated, in some instances absorbing technology from POSCO, and have been able to play an important role in providing a wide range of domestic steel products for Korean industry and consumers. POSCO itself is responsible for most of the industry’s products.

This early steel production was based on imported pig iron and scrap, while at the same time Korea was actually exporting iron ore. Only tungsten was a more important mineral export. By the 1980s, in sharp contrast, iron and steel exports accounted for some 10% of Korea’s commodity exports, while the industry could only secure sufficient domestic supplies of limestone, but had to import about 90% of its iron ore and bituminous coal and 66% of its scrap requirements.

The chairman of Korean Tungsten Mining Company, former Major General Tae Chun Park, spearheaded a second attempt to put together an international financial package to build an integrated steel mill. He had the strong support of President Chung Hee Park. Tae Chun Park is quoted as having referred to the president and himself as “the two crazy men who had this conviction that for South Korea to have a viable heavy industry, it needed the capability to produce its own steel.”

This scheme, to build a plant capable of producing 600,000 tons of crude steel per year, was elaborated by a consortium of seven Western steelmakers, known as Korea International Steel Associates (KISA). In October 1967, a contract between KISA and the Korean government stipulated that KISA would raise an international loan by 1969, and complete the integrated mill by 1972. Costs were estimated at US$100 million. The operating company, Pohang Iron and Steel, was incorporated in 1968.

Fulfillment of the plan, however, had to be postponed, in part because the consortium’s structure was extremely cumbersome, making it difficult to reach rapid decisions. Koppers, the leading consultant in the group, was unable to raise the necessary capital, and the KISA was dissolved in 1969.

Advice given to the Korean government continued to oppose the building of an integrated steel capacity, primarily on the grounds of the domestic market’s inability to support an efficient plant. The government remained convinced of the steel mill’s importance, however, and decided to raise foreign loans to finance it rather than continuing to attempt to secure private capital.

Japanese steelmakers and the Japanese government felt they could derive worthwhile economic and political advantages from assisting the Koreans in this plan. During the annual conference between Korean and Japanese ministers in August 1969, preliminary agreement was reached for resurrecting the KISA plan. Discussions through the rest of the year led to a contract whereby Japan would arrange loans covering most of the capital required. Japan’s Export-Import Bank provided US$52.5 million, its Economic Cooperation Fund US$46.43 million, and Japanese commercial loans US$28.58 million. The remaining US$24,345 came from other sources.

Detailed planning was carried out with the help of Mitsubishi Heavy Industries. Care at this stage was a major factor in enabling POSCO to save the large amounts of capital that would have been required to cover any delays. Construction was planned and carried out in such a way as to facilitate future expansion.

The Japanese steelmakers involved in the plans, Nippon Kokan (NK) and Nippon Steel Corporation (NSC) benefited considerably from the arrangements made in 1970 for provision of the underlying technology needed. Virtually every detail from scheduling the timing of construction to specifications, supervision, purchasing, and inspection, culminating with on-site support for start-up and operation, was in Japanese hands. The involvement of Korean engineers in this first phase was limited to the inspection of specifications, in conjunction with foreign engineers.

It was part of the Korean development strategy to locate new plant as far as possible from Seoul, to create industrial centers throughout the country. This practice had defense as well as economic and social reasons. When construction began in 1970, it was closely supervised by Tae Chun Park, who not only insisted that suppliers meet deadlines, but also, in some cases, advanced deadlines and insisted they be met. As a result the first phase of construction was completed a month earlier than scheduled. In the course of constructing the third phase of the plant, workers gave up time off that they would have expected for a major holiday, and also worked through the night when necessary. That phase was completed five months ahead of schedule.

While construction of the first phase was going on, Koreans were being trained abroad, particularly in Japan, to take over some of the technological work involved in operating the mill. They worked alongside their Japanese counterparts in construction and operating work, gaining valuable experience. As a result, in subsequent expansion, the amount of operating technology that had to be bought in from outside steadily decreased.

In the second phase of construction in 1974, Korean engineers were still only involved in specification inspection. In the third phase, begun in 1976, Koreans took over material balance and facilities specification and inspection of drawings. When the fourth stage began three years later, Koreans had ousted foreign engineers from the task of general engineering planning. The shift to domestic technological skills is also evident in the declining levels of royalties paid to outside experts from US$6.2 million for the first stage, US$5.8 million for the second, US$4.8 million for the third, and nothing for the fourth.

Koreans remain absent from initial process and equipment design. The construction of the four stages of POSCO has not justified the development of domestic expertise in these spheres, since the limited number of Korean engineers are needed to maintain maximum use of existing plant. Competition among foreign design firms has meant that importing technology for the construction stage of development represents an efficient use of both capital and human resources.

Technology developed by POSCO has been transferred to other Korean industries and has also been exported. In 1978, for example, Taiwan was constructing an integrated iron and steel plant for the Chinese Steel Corporation. It paid POSCO US$300,000 to train 42 Taiwanese engineers in plant operation and maintenance and to assist in initial production. Subsequently, six POSCO engineers designed Indonesia’s Krakatoa integrated steel works, providing technology and training.

When the first stage of construction was completed in 1973, the major plant consisted of a blast furnace and two steel converters. These had capacities of 949,000 and 1 million tons, respectively. The plant had a foundry pig iron furnace, with production capacity of 150,000 tons, as well as a blooming and slabbing mill, billet mill, and a plate and hot rolling mill. This plant reached full production within four months rather than the minimum of 12 months the Japanese steelmakers had anticipated.

The second construction stage, similar in capacity to the initial stage, was begun in 1974 and completed in 30 months. The third stage, started in 1976, had approximately double the capacity of the second, and was completed in 29 months. The fourth stage, initiated in 1979, required 24 months. The second blast furnace was brought to capacity production in 80 days, the third and fourth in 70 and 29 days, respectively. Steel converters followed a similar pattern, resulting in major cost savings.

By the time the last stage of construction had been completed, POSCO’s crude steel production capacity was 8.5 million tons. Only in the second stage was there any significant U.S. capital participation. Out of a total of US$342.25 million, US$61.6 million came from U.S. sources, about 75% of that in the form of commercial loans. In the third stage Japanese capital, in the form of commercial loans, accounted for more than half the US$766.30 billion raised. By the time the fourth stage was financed, Japanese interests were also absent. U.S. and Japanese steel producers were no longer willing to assist a competitor who was eroding their markets considerably. Korean finance gradually became more important.

In order to avoid some of the problems of erratic quality experienced by existing small-scale producers, POSCO’s emphasis initially was on the production of plain high-carbon steels of even quality that were used for general structural purposes, rather than on the development of a wider range of specialized products. As the company expanded, and engineering skills increased, it was possible to diversify production. The development of high tensile strength steel production in 1975 laid the foundation for the first major expansion of overall production, but domestic demand for special steels remained too low to justify attempts to develop them. Only as domestic demand increased, or was expected to increase, notably as defense industries developed, were facilities to broaden production created, based once again on imported technology.

Through the period of construction and operation, machinery came primarily from Japan and Austria. As time went on, however, a larger proportion of needed equipment was produced by Korea’s own heavy industry.

Korean engineering skills constituted a major part of the reason for POSCO’s ability to produce high-quality steel at low prices. In the spheres of equipment design and operating procedures, field engineers and technicians, have brought about major improvements in efficiency and quality along with reductions in waste and costs. Suggestions from people involved in the day-to-day operation of the plant have been incorporated into the plant and process and have generated massive savings. In 1980, when all of Korean industry was hit by recession, the number of proposals registered and carried out increased dramatically, and continued to do so in the following four years. POSCO continues to be profitable even in times of economic downturn.

One of POSCO’s major problems has been securing adequate supplies of iron ore. This need has involved the company in arrangements with foreign suppliers such as Brazil. While some supplies are secured simply by direct purchase, others have involved development and joint ventures. In this respect, POSCO has become a significant force in the world’s iron trade.

Competition with U.S. and Japanese steel producers exists primarily for markets within Korea itself. Given POSCO’s great efficiency and low costs, the longer term prospects for increased exports are considerable. A proportion of POSCO’s production has been exported, but the greater part has always been absorbed by domestic industries. Korea is not yet self-sufficient in iron and steel, but POSCO has taken the country a long way toward that position. Most notable among POSCO’s customers has been the Korean automobile industry, which has itself grown tremendously. When, in the 1980s, reference was made to Korea’s economic miracle, people were more likely to have consumer or heavy industries than the iron and steel industry in mind. Yet it is the iron and steel industry, and most importantly POSCO, which has made the expansion of the others possible both directly by supplying the steel requirements, and indirectly by helping to promote domestic industrial expansion and savings.