FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on May 12, 2014

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

(Mark One)

  ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

  ¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report             

For the transition period from              to             

Commission file number 1-13368

POSCO

(Exact name of Registrant as specified in its charter)

 

POSCO

  The Republic of Korea

(Translation of Registrant’s name into English)

  (Jurisdiction of incorporation or organization)

POSCO Center, 440 Teheran-ro, Gangnam-gu

Seoul, Korea 135-777

(Address of principal executive offices)

Kim, Min Da

POSCO Center, 440 Teheran-ro, Gangnam-gu,

Seoul, Korea 135-777

Telephone: +82-2-3457-5724; E-mail: happy7513@posco.com; Facsimile: +82-2-3457-1982

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

  Name of Each Exchange on Which Registered

American Depositary Shares, each representing

one-fourth of one share of common stock

  New York Stock Exchange, Inc.

Common Stock, par value Won 5,000 per share *

  New York Stock Exchange, Inc. *

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of December 31, 2013, there were 79,783,624 shares of common stock, par value Won 5,000 per share, outstanding

(not including 7,403,211 shares of common stock held by the company as treasury shares)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x        No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨         No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x         No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨         No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x        Accelerated filer ¨        Non-accelerated filer ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.    U.S. GAAP  ¨        IFRS  x       Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨         Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨         No  x

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

GLOSSARY

     1  

PART I

     2  

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISERS      2  
  Item 1.A.    Directors and Senior Management      2  
  Item 1.B.    Advisers      2  
  Item 1.C.    Auditors      2  

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      2  
  Item 2.A.    Offer Statistics      2  
  Item 2.B.    Method and Expected Timetable      2  

ITEM 3.

  KEY INFORMATION      2  
  Item 3.A.    Selected Financial Data      2  
  Item 3.B.    Capitalization and Indebtedness      4  
  Item 3.C.    Reasons for Offer and Use of Proceeds      4  
  Item 3.D.    Risk Factors      5  

ITEM 4.

  INFORMATION ON THE COMPANY      22  
  Item 4.A.    History and Development of the Company      22  
  Item 4.B.    Business Overview      22  
  Item 4.C.    Organizational Structure      40  
  Item 4.D.    Property, Plants and Equipment      40  

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      43  

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      43  
  Item 5.A.    Operating Results      43  
  Item 5.B.    Liquidity and Capital Resources      69  
  Item 5.C.    Research and Development, Patents and Licenses, Etc.      72  
  Item 5.D.    Trend Information      73  
  Item 5.E.    Off-balance Sheet Arrangements      73  
  Item 5.F.    Tabular Disclosure of Contractual Obligations      73  
  Item 5.G.    Safe Harbor      73  

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      73  
  Item 6.A.    Directors and Senior Management      73  
  Item 6.B.    Compensation      77  
  Item 6.C.    Board Practices      78  
  Item 6.D.    Employees      79  
  Item 6.E.    Share Ownership      80  

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      82  
  Item 7.A.    Major Shareholders      82  
  Item 7.B.    Related Party Transactions      82  
  Item 7.C.    Interests of Experts and Counsel      82  

ITEM 8.

  FINANCIAL INFORMATION      83  
  Item 8.A.    Consolidated Statements and Other Financial Information      83  
  Item 8.B.    Significant Changes      84  


Table of Contents

ITEM 9.

  THE OFFER AND LISTING      84  
  Item 9.A.    Offer and Listing Details      84  
  Item 9.B.    Plan of Distribution      86  
  Item 9.C.    Markets      86  
  Item 9.D.    Selling Shareholders      90  
  Item 9.E.    Dilution      91  
  Item 9.F.    Expenses of the Issuer      91  

ITEM 10.

  ADDITIONAL INFORMATION      91  
  Item 10.A.    Share Capital      91  
  Item 10.B.    Memorandum and Articles of Association      91  
  Item 10.C.    Material Contracts      96  
  Item 10.D.    Exchange Controls      96  
  Item 10.E.    Taxation      100  
  Item 10.F.    Dividends and Paying Agents      105  
  Item 10.G.    Statements by Experts      105  
  Item 10.H.    Documents on Display      105  
  Item 10.I.    Subsidiary Information      105  

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      105  

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      107  
  Item 12.A.    Debt Securities      107  
  Item 12.B.    Warrants and Rights      107  
  Item 12.C.    Other Securities      107  
  Item 12.D.    American Depositary Shares      108  

PART II

     109  

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      109  

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      109   

ITEM 15.

  CONTROLS AND PROCEDURES      109  

ITEM 16.

  [RESERVED]      110  

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      110  

ITEM 16B.

  CODE OF ETHICS      110  

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      111  

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      111  

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      112  

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      112  

ITEM 16G.

  CORPORATE GOVERNANCE      112  

ITEM 16H.

  MINE SAFETY DISCLOSURE      113  

PART III

     114  

ITEM 17.

  FINANCIAL STATEMENTS      114  

ITEM 18.

  FINANCIAL STATEMENTS      114  

ITEM 19.

  EXHIBITS      114  


Table of Contents

GLOSSARY

 

“ADR”

   American Depositary Receipt evidencing ADSs.

“ADR depositary”

   Citibank, N.A.

“ADS”

   American Depositary Share representing one-fourth of one share of Common Stock.

“Australian Dollar” or “A$”

   The currency of the Commonwealth of Australia.

“Commercial Code”

   Commercial Code of the Republic of Korea.

“common stock”

   Common stock, par value Won 5,000 per share, of POSCO.

“deposit agreement”

   Deposit Agreement, dated as of July 19, 2013, among POSCO, the ADR Depositary and all holders and beneficial owners from time to time of ADRs issued thereunder.

“Dollars,” “$” or “US$”

   The currency of the United States of America.

“FSCMA”

   Financial Investment Services and Capital Markets Act of the Republic of Korea.

“Government”

   The government of the Republic of Korea.

“IASB”

   International Accounting Standards Board.

“IFRS”

   International Financial Reporting Standards.

“Yen” or “JPY”

   The currency of Japan.

“Korea”

   The Republic of Korea.

“Korean GAAP”

   Generally accepted accounting principles in the Republic of Korea.

“Gwangyang Works”

   Gwangyang Steel Works.

“We”

   POSCO and its consolidated subsidiaries.

“Pohang Works”

   Pohang Steel Works.

“POSCO Group”

   POSCO and its consolidated subsidiaries.

“Renminbi”

   The currency of the People’s Republic of China.

“Securities Act”

   The United States Securities Act of 1933, as amended.

“Securities Exchange Act”

   The United States Securities Exchange Act of 1934, as amended.

“SEC”

   The United States Securities and Exchange Commission.

“tons”

   Metric tons (1,000 kilograms), equal to 2,204.6 pounds.

“U.S. GAAP”

   Generally accepted accounting principles in the United States of America.

“Won” or “

   The currency of the Republic of Korea.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

 

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Table of Contents

PART I

Item 1.  Identity of Directors, Senior Managers and Advisers

Item 1.A.  Directors and Senior Management

Not applicable

Item 1.B.  Advisers

Not applicable

Item 1.C.  Auditors

Not applicable

Item 2.  Offer Statistics and Expected Timetable

Not applicable

Item 2.A.  Offer Statistics

Not applicable

Item 2.B.  Method and Expected Timetable

Not applicable

Item 3.  Key Information

Item 3.A.  Selected Financial Data

The selected financial data presented below should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data in Won as of December 31, 2012 and 2013 and for each of the years in the three-year period ended December 31, 2013 were derived from our Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with IFRS as issued by the IASB.

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with Korean International Financial Reporting Standards (“K-IFRS”) as adopted by the Korean Accounting Standards Board (the “KASB”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea. English translations of such financial statements are furnished to the Securities and Exchange Commission under Form 6-K. Beginning with our financial statements prepared in accordance with K-IFRS as of and for the year ended December 31, 2012, we are required to adopt certain amendments to K-IFRS No. 1001, Presentation of Financial Statements, as adopted by the KASB in 2012, pursuant to which we present operating profit or loss as an amount of revenue less cost of sales and selling and administrative expenses. In our consolidated statements of comprehensive income prepared in accordance with IFRS as issued by the IASB included in this annual report, such changes in presentation were not adopted. See “Item 5.a. Operating Results — Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

 

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Table of Contents

The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included in this annual report.

Selected consolidated statement of comprehensive income data

 

     For the Year Ended December 31,  
         2010              2011             2012             2013             2013      
     (In billions of Won and millions of Dollars, except per share data)  

Revenue (1)

         47,887             68,939            63,604            61,865      US$     58,623   

Cost of sales (2)

     39,722         59,824        56,143        55,005        52,123   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,165         9,115        7,461        6,860        6,501   

Administrative expenses

     1,492         2,035        2,129        2,232        2,115   

Selling expenses

     1,120         1,612        1,679        1,632        1,546   

Other operating income

     223         307        448        229        217   

Other operating expenses

     342         367        809        651        617   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     5,434         5,408        3,292        2,574        2,439   

Share of profit (loss) of equity-accounted investees

     183         51        (23     (180     (171

Finance income

     1,739         3,190        2,897        2,381        2,256   

Finance costs

     2,088         3,867        2,798        2,829        2,681   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

     5,267         4,782        3,368        1,946        1,844   

Income tax expense

     1,081         1,068        983        591        560   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the period

     4,186         3,714        2,386        1,355        1,284   

Total comprehensive income for the period

     4,765         2,442        1,748        1,369        1,297   

Profit (loss) for the period attributable to:

           

Owners of the controlling company

     4,106         3,648        2,462        1,376        1,304   

Non-controlling interests

     80         66        (76     (21     (20

Total comprehensive income (loss) attributable to:

           

Owners of the controlling company

     4,640         2,530        1,912        1,444        1,368   

Non-controlling interests

     126         (88     (164     (75     (71

Basic and diluted earnings per share (3)

     53,297         47,224        31,874        17,409        16,497   

Dividends per share of common stock

     10,000         10,000        8,000        8,000     

Dividends per share of common stock (in Dollars) (4)

     US$    8.78         US$    8.67        US$    7.47        US$    7.58     

Selected consolidated statements of financial position data

 

     As of December 31,  
     2010      2011      2012      2013      2013  
     (In billions of Won and millions of Dollars)  

Working capital (5)

         9,395             13,952             11,791             11,425       US$     10,826   

Total current assets

     27,672         33,557         31,566         31,666         30,007   

Property, plant and equipment, net

     25,438         28,453         32,276         35,760         33,886   

Total non-current assets

     41,746         44,852         47,700         52,789         50,023   

Total assets

     69,418         78,409         79,266         84,455         80,029   

Short-term borrowings and current installments of long-term borrowings

     10,476         10,792         10,509         10,714         10,153   

Long-term borrowings, excluding current installments

     10,664         16,020         14,412         15,533         14,719   

Total liabilities

     30,881         37,679         36,836         38,633         36,609   

Share capital

     482         482         482         482         457   

Total equity

     38,537         40,730         42,429         45,822         43,421   

 

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Selected consolidated statements of cash flows data

 

     For the Year Ended December 31,  
     2010     2011     2012     2013     2013  
     (In billions of Won and millions of Dollars)  

Net cash provided by operating activities

         3,582            1,692            7,319            4,858        US$    4,603   

Net cash used in investing activities

     (6,915     (5,517     (6,169     (8,752     (8,293

Net cash provided by (used in) financing activities

     4,588        4,900        (908     3,532        3,347   

Net increase (decrease) in cash and cash equivalents

     1,248        1,078        82        (472     (447

Cash and cash equivalents at beginning of the year

     2,273        3,521        4,599        4,681        4,436   

Cash and cash equivalents at end of the year

     3,521        4,599        4,681        4,209        3,988   

 

 

(1) Includes sales by our consolidated subsidiaries of steel products purchased by such subsidiaries from third parties, including trading companies to which we sell steel products.

 

(2) Includes purchases of steel products by our consolidated subsidiaries from third parties, including trading companies to which we sell steel products.

 

(3) See Note 36 of Notes to Consolidated Financial Statements for method of calculation. The weighted average number of common shares outstanding used to calculate basic and diluted earnings per share was 77,032,878 shares as of December 31, 2010, 77,251,818 shares as of December 31, 2011, 77,244,444 shares as of December 31, 2012 and 78,009,654 shares as of December 31, 2013.

 

(4) Translated into Dollars by applying the exchange rate at the end of the applicable year as announced by Seoul Money Brokerage Services, Ltd.

 

(5) “Working capital” means current assets minus current liabilities.

EXCHANGE RATE INFORMATION

The following table sets out information concerning the market average exchange rate for the periods and dates indicated.

 

Period

   At End
of Period
     Average Rate (1)      High      Low  
     (Per US$1.00)  

2009

     1,167.6         1,276.4         1,573.6         1,152.8   

2010

     1,138.9         1,156.3         1,261.5         1,104.0   

2011

     1,153.3         1,108.1         1,199.5         1,049.5   

2012

     1,071.1         1,126.9         1,181.8         1,071.1   

2013

     1,055.3         1,095.0         1,159.1         1,051.5   

October

     1,061.4         1,066.8         1,075.7         1,056.5   

November

     1,062.1         1,062.8         1,072.9         1,055.8   

December

     1,055.3         1,056.7         1,061.9         1,051.5   

2014 (through May 9)

     1,023.5         1,061.0         1,086.1         1,023.5   

January

     1,079.2         1,064.8         1,084.1         1,050.4   

February

     1,067.7         1,071.3         1,086.1         1,060.5   

March

     1,068.8         1,070.9         1,080.3         1,062.6   

April

     1,031.7         1,044.6         1,066.1         1,031.7   

May (through May 9)

     1,023.5         1,061.0         1,086.1         1,023.5   

 

Source: Seoul Money Brokerage Services, Ltd.

 

(1) The average rate for each year is calculated as the average of the market average exchange rates on the last business day of each month during the relevant year (or portion thereof). The average rate for a month is calculated as the average of the market average exchange rates on each business day during the relevant month (or portion thereof).

Item 3.B.  Capitalization and Indebtedness

Not applicable

Item 3.C.  Reasons for Offer and Use of Proceeds

Not applicable

 

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Table of Contents

Item 3.D.  Risk Factors

You should carefully consider the risks described below.

The global economic downturn may adversely affect our business and performance. While there have been mixed signs of recovery from the prolonged global economic downturn that began in the second half of 2008, the global economic outlook for the near future continues to remain uncertain.

Our business is affected by highly cyclical market demand for our steel products from a number of industries, including the construction, automotive, shipbuilding and electrical appliances industries as well as downstream steel processors, which are sensitive to general conditions in the global economy. Macroeconomic factors, such as the economic growth rate, employment levels, interest rates, inflation rates, exchange rates, commodity prices, demographic trends and fiscal policies of governments can have a significant effect on such industries. From time to time, these industries have experienced significant and sometimes prolonged downturns, which, in turn, have negatively impacted our steel business. While there have been mixed signs of recovery from the prolonged global economic downturn that began in the second half of 2008, the global economic outlook for the near future continues to remain uncertain, particularly in light of concerns regarding the timing and potential economic impact of a future scale-down by the U.S. Federal Reserve of its “quantitative easing” stimulus program, as well as the recent slowdown of economic growth in China and continuing financial difficulties affecting several European countries, including Cyprus, Greece, Spain, Portugal and Italy.

An actual or anticipated further deterioration of global economic conditions may result in a decline in demand for our products that could have a negative impact on the prices at which they can be sold. In such a case, we will likely face pressure to reduce prices and we may need to rationalize our production capacity and reduce fixed costs. In response to sluggish demand from our customers in industries adversely impacted by the deteriorating global economic conditions in the second half of 2008, such as the automotive and construction industries, we reduced our crude steel production and sales prices in December 2008 and the first quarter of 2009. Signs that the pace of deterioration in market conditions had slowed began to appear in the second quarter of 2009, however, and demand from certain segments of our customer base, including the domestic automotive and construction industries, showed signs of recovery starting in the second quarter of 2009. In response, we began to incrementally increase our crude steel production starting in April 2009 and our production level normalized in the second half of 2009. Our crude steel production decreased from 34.7 million tons in 2008 to 31.1 million tons in 2009, but rebounded to 35.4 million tons in 2010, 39.1 million tons in 2011 and 39.7 million tons in 2012. However, in 2013, we reduced our production to 38.3 million tons in response to slowdown in global demand for steel products. Prices of our steel products gradually recovered starting in the third quarter of 2009, but our export prices fell substantially in the second half of 2011 and decreased further in 2012 and the first half of 2013. Our domestic sales prices remained relatively stable in the second half of 2011 but decreased in 2012 and the first half of 2013.

We expect that fluctuation in demand for our steel products and trading services to continue to prevail at least in the near future. We may decide to further adjust our future crude steel production or our sales prices on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. In addition, economic downturns in the Korean and global economies could result in market conditions characterized by weaker demand for steel products from a number of industries as well as falling prices for export and import products and reduced trade levels. Deterioration of market conditions may result in changes in assumptions underlying the carrying value of certain assets, which in turn could result in impairment of such assets, including intangible assets such as goodwill. In addition, our ability to reduce expenditures for production facilities and research and development during an industry downturn is limited because of the need to maintain our competitive position. If we are unable to reduce our expenses sufficiently to offset reductions in price and sales volume, our margins will suffer and our business, financial condition and results of operations may be materially and adversely affected.

 

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Table of Contents

Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.

We are incorporated in Korea, and a substantial portion of our operations and assets are located in Korea. Korea is our most important market, accounting for 48.8% of our total revenue from steel products produced and sold by us in 2013. Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automotive, electrical appliances and downstream steel processors, and the Korean economy in general. In addition, the trading operations of Daewoo International Corporation (“Daewoo International”), our consolidated subsidiary in which we hold a 60.3% interest, are affected by the general level of trade between Korea and other countries, which in turn tends to fluctuate based on general conditions in the Korean and global economies. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.

Due to recent liquidity and credit concerns and volatility in the global financial markets, the value of the Won relative to the Dollar and other foreign currencies and the stock prices of Korean companies have fluctuated significantly in recent years. In particular, there has been increased volatility in light of concerns regarding the timing and potential economic impact of a future scale-down by the U.S. Federal Reserve of its “quantitative easing” stimulus program, as well as the recent slowdown of economic growth in China and continuing financial difficulties affecting several European countries, including Cyprus, Greece, Spain, Portugal and Italy. In addition, economic and political instability in certain emerging economies, such as Argentina and Ukraine, have resulted in an increase in volatility in the global financial markets. Accordingly, the overall prospects for the Korean and global economies in the remainder of 2014 and beyond remain uncertain. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy include:

 

   

difficulties in the financial sectors in Europe and elsewhere and increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the Dollar, the Euro or the Yen exchange rates or revaluation of the Renminbi), interest rates, inflation rates or stock markets;

 

   

continuing adverse conditions in the economies of countries and regions that are important export markets for Korea, such as the United States, Europe, Japan and China, or in emerging market economies in Asia or elsewhere;

 

   

increasing delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers;

 

   

the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China), as well as a slowdown in the growth of China’s economy;

 

   

the economic impact of any pending or future free trade agreements;

 

   

social and labor unrest;

 

   

substantial decreases in the market prices of Korean real estate;

 

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a decrease in tax revenues and a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that, together, would lead to an increased government budget deficit;

 

   

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

   

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain Korean conglomerates;

 

   

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

   

geo-political uncertainty and risk of further attacks by terrorist groups around the world;

 

   

the occurrence of severe health epidemics in Korea and other parts of the world;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;

 

   

political uncertainty or increasing strife among or within political parties in Korea;

 

   

hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or increase in the price of oil;

 

   

the occurrence of severe earthquakes, tsunamis and other natural disasters in Korea and other parts of the world, particularly in trading partners (such as the March 2011 earthquake in Japan, which also resulted in the release of radioactive materials from a nuclear plant that had been damaged by the earthquake); and

 

   

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

We rely on export sales for a significant portion of our total sales. Adverse economic and financial developments in Asia in the future may have an adverse effect on demand for our products in Asia and increase our foreign exchange risks.

Our export sales and overseas sales to customers abroad accounted for 51.2% of our total revenue from steel products produced and sold by us in 2013. Our export sales volume to customers in Asia, including China, Japan, Indonesia, Thailand and Malaysia, accounted for 70.4% of our total export sales revenue from steel products produced and exported by us in 2013, and we expect our sales to these countries, especially to China, to remain important in the future. Accordingly, adverse economic and financial developments in these countries may have an adverse effect on demand for our products. Economic weakness in Asia may also adversely affect our sales to the Korean companies that export to the region, especially companies in the construction, shipbuilding, automotive, electrical appliances and downstream steel processing industries. Weaker demand in these countries, combined with addition of new steel production capacity, particularly in China, may also reduce export prices in Dollar terms of our principal products. We attempt to maintain and expand our export sales to generate foreign currency receipts to cover our foreign currency purchases and debt service requirements. Consequently, any decrease in our export sales could also increase our foreign exchange risks.

Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the price of the ADSs.

Our consolidated financial statements are prepared from our local currency denominated financial results, assets and liabilities and our subsidiaries around the world, which are then translated

 

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into Won. A substantial proportion of our consolidated financial results is accounted for in currencies other than the Won. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies. In 2013, 51.2% of our total revenue from steel products produced and sold by us was in overseas markets outside of Korea. To the extent that we incur costs in one currency and make sales in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:

 

   

an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt;

 

   

an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated primarily in Dollars; and

 

   

foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.

Appreciation of the Won against major currencies, on the other hand, causes:

 

   

our export products to be less competitive by raising our prices in Dollar, Yen and Renminbi terms; and

 

   

a reduction in net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars and to a lesser extent in Yen and Renminbi.

We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables and our overseas subsidiaries have sought to further mitigate the adverse impact of exchange rate fluctuations by conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is partially mitigated by such strategies, we and our subsidiaries, particularly Daewoo International and POSCO Engineering & Construction Co., Ltd. (“POSCO E&C”), also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge our foreign exchange risks. However, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. Because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), depreciation of the Won generally has a negative impact on our results of operations.

Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the KRX KOSPI Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the ADRs of cash dividends, if any, paid in Won on shares of common stock represented by the ADSs.

We are dependent on imported raw materials, and significant increases in market prices of essential raw materials could adversely affect our margins and profits.

We purchase substantially all of the principal raw materials we use from sources outside Korea, including iron ore and coal. POSCO imported approximately 48.9 million dry metric tons of iron ore and

 

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26.6 million wet metric tons of coal in 2013. Iron ore is imported primarily from Australia, Brazil and South Africa. Coal is imported primarily from Australia, Canada and the United States. Although we have not experienced significant unanticipated supply disruptions in the past, supply disruptions, which could be caused by political or other events in the countries from which we import these materials, could adversely affect our operations. In addition, we are particularly exposed to increases in the prices of coal, iron ore and nickel, which represent the largest components of our cost of goods sold. The prices of our key raw materials have fluctuated significantly in recent years. For example, the average market price of coal per wet metric ton (benchmark free on board price of Australian premium hard coking coal) was US$289 in 2011, US$209 in 2012 and US$159 in 2013. The average market price of iron ore per dry metric ton (free on board price of Platts Iron Ore index with iron (Fe) 62% content) was US$160 in 2011, US$122 in 2012 and US$126 in 2013.

Our long-term supply contracts generally have terms of three to ten years and provide for periodic price adjustments to the then-market prices. We typically adjust the prices on a quarterly basis and maintain approximately one month of inventory of raw materials. Such price negotiations are driven by various factors, including the global economic outlook, global market prices of raw materials and steel products, supply and demand outlook of raw materials and production costs of raw materials. Typically, globally influenced buyers and sellers of raw materials determine benchmark prices of raw materials, based on which other buyers and sellers negotiate their prices after taking into consideration the quality of raw materials and other factors. In the case of iron ore, if we fail to agree on the quarterly price adjustment within a predetermined deadline, the supplier and we typically agree on the purchase price based on the price formula that reflects the spot market price as well as the quality of iron ore and transportation expense. As of December 31, 2013, 193 million tons of iron ore and 14 million tons of coal remained to be purchased under long-term supply contracts. Future increases in prices of our key raw materials and our inability to pass along such increases to our customers could adversely affect our margins and profits. Increased prices may also cause potential customers to defer purchase of steel products, which would have an adverse effect on our business, financial condition and results of operations.

We operate in the highly competitive steel, trading and constructing industries, and our failure to successfully compete would adversely affect our market position and business.

Steel. The markets for our steel products are highly competitive and we face intense global competition. In recent years, driven in part by strong growth in steel consumption in the developing world, particularly in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. China is the largest steel producing country in the world by a significant margin, with the balance between its domestic production and demand being an important factor in the determination of global steel prices. In addition, the global steel industry has experienced consolidation in the past decade, including through the merger of Mittal and Arcelor in 2006 that created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal S.A. and new market entrants, especially from China and India, have resulted in significant price competition and may result in declining margins and reductions in revenue. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.

The increased production capacity, combined with a decrease in demand due to the recent slowdown of the global economy, has resulted in production over-capacity in the global steel industry. Production over-capacity in the global steel industry may intensify if the slowdown of the global economy is prolonged or demand from developing countries, particularly from China, does not meet the recent growth in production capacity. Production over-capacity in the global steel industry is likely to:

 

   

reduce export prices in Dollar terms of our principal products, which in turn may reduce our sales prices in Korea;

 

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increase competition in the Korean market as foreign producers seek to export steel products to Korea as other markets experience a slowdown;

 

   

negatively affect demand for our products abroad and our ability to expand export sales; and

 

   

affect our ability to increase steel production in general.

Steel also competes with other natural and synthetic materials that may be used as steel substitutes, such as aluminum, cement, composites, glass, plastic and wood. Government regulatory initiatives mandating the use of such materials instead of steel, whether for environmental or other reasons, as well as the development of attractive alternative substitutes for steel products, may reduce demand for steel products and increase competition in the global steel industry.

As part of our strategy to compete in this challenging landscape, we will continue to invest in developing innovative products that offer the greatest potential returns and enhance the overall quality of our products, as well as make additional investments in the development of new manufacturing technologies. However, there is no assurance that we will be able to continue to compete successfully in this economic environment or that the prolonged slowdown of the global economy or production over-capacity will not have a material adverse effect on our business, results of operations or financial condition.

Trading. Daewoo International competes principally with six other Korean general trading companies, each of which is affiliated with a major domestic business group, as well as global trading companies based in other countries. In the domestic market, competition for export transactions on behalf of domestic suppliers and import transactions on behalf of domestic purchasers was limited, as most affiliated general trading companies of large Korean business groups generally relied on affiliate transactions for the bulk of their trading business. However, in recent years, many of these Korean general trading companies have reduced their reliance on their affiliated business group and transactions carried out on behalf of their member companies and instead have generally evolved to focus on segments of the import and export markets in which they have a competitive advantage. As a result, competition among Korean general trading companies in the area of traditional trade has become more intense.

The overseas trading markets in which Daewoo International operates are also highly competitive. Daewoo International’s principal competitors in the overseas trading markets include Korean trading companies that operate in various international markets, as well as foreign trading companies, particularly those based in Japan. As Daewoo International diversifies into businesses other than traditional trading such as natural resources development, it also increasingly competes with other Korean and international companies involved in these businesses. Some of Daewoo International’s competitors may be more experienced and have greater financial resources and pricing flexibility than Daewoo International, as well as more extensive global networks and wider access to customers. There is no assurance that Daewoo International will be able to continue to compete successfully in this economic environment or that the prolonged slowdown of the global economy will not have a material adverse effect on its business, results of operations or financial condition.

Construction. POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, operates in the highly competitive construction industry. Competition is based primarily on price, reputation for quality, reliability, punctuality and financial strength of contractors. Intense competition among construction companies may result in, among other things, a decrease in the price POSCO E&C can charge for its services, difficulty in winning bids for construction projects, an increase in construction costs and difficulty in obtaining high-quality contractors and qualified employees.

In Korea, POSCO E&C’s main competition in the construction of residential and non-residential buildings, EPC (or engineering, procurement and construction) projects, urban planning and development projects and civil works projects consists of approximately ten major domestic construction companies, all of which are member companies of other large business groups in Korea

 

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and are capable of undertaking larger-scale, higher-value-added projects that offer greater potential returns. A series of measures introduced by the Government over the past few years to regulate housing prices in Korea, as well as increasing popularity of low-bid contracts in civil works project mandates, have contributed to increased competition in the Korean construction industry in recent years.

Competition for new project awards in overseas markets is also intense. In these markets, POSCO E&C faces competition from local construction companies, as well as international construction companies from other countries, including other major Korean construction companies with overseas operations. Construction companies from other developed countries may be more experienced, have greater financial resources and possess more sophisticated technology than POSCO E&C, while construction companies from developing countries often have the advantage of lower wage costs. Some of these competitors have achieved higher market penetration than POSCO E&C has in specific markets in which it competes, and POSCO E&C may need to accept lower margins in order for it to compete successfully against them. POSCO E&C’s failure to successfully compete in the domestic or overseas construction markets could adversely affect its market position and its results of operations and financial condition.

We may not be able to successfully execute our diversification strategy.

In part to prepare for the eventual maturation of the Korean steel market, our overall strategy includes securing new growth engines by diversifying into new businesses related to our steel operations that we believe will offer greater potential returns, such as participation in EPC projects in the steel sector and natural resources development, as well as entering into new businesses not related to our steel operations such as power generation and alternative energy solutions, production of comprehensive materials such as lithium, silicon, carbon and magnesium, information and technology consulting services, and automation and system integration engineering services. From time to time, we may selectively acquire or invest in companies to pursue such diversification strategy. For example, on September 20, 2010, we acquired a controlling interest in Daewoo International for Won 3.37 trillion. Daewoo International is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects.

The success of the overall diversification strategy will depend, in part, on our ability to realize the growth opportunities and anticipated synergies. The realization of the anticipated benefits depends on numerous factors, some of which are outside our control, including the availability of qualified personnel, establishment of new relationships and expansion of existing relationships with various customers and suppliers, procurement of necessary technology and know-how to engage in such businesses and access to investment capital at reasonable costs. The realization of the anticipated benefits may be impeded, delayed or reduced as a result of numerous factors, some of which are outside our control. These factors include:

 

   

difficulties in integrating the operations of the acquired business, including information and accounting systems, personnel, policies and procedures, and in reorganizing or reducing overlapping operations, marketing networks and administrative functions, which may require significant amounts of time, financial resources and management attention;

 

   

unforeseen contingent risks or latent liabilities relating to the acquisition that may become apparent in the future;

 

   

difficulties in managing a larger business; and

 

   

loss of key management personnel or customers.

Accordingly, we cannot assure you that our diversification strategy can be completed profitably or that the diversification efforts will not adversely affect our combined business, financial condition and results of operations.

 

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Expansion of our production operations abroad is important to our long-term success, and our limited experience in the operation of our business outside Korea increases the risk that our international expansion efforts will not be successful.

We conduct international trading and construction operations abroad, and our business relies on a global trading network comprised of overseas subsidiaries, branches and representative offices. Although many of our subsidiaries and overseas branches are located in developed countries, we also operate in numerous countries with developing economies. In addition, we intend to continue to expand our steel production operations internationally by carefully seeking out promising investment opportunities, particularly in China, India, Southeast Asia and Latin America, in part to prepare for the eventual maturation of the Korean steel market. We may enter into joint ventures with foreign steel producers that would enable us to rely on these businesses to conduct our operations, establish local networks and coordinate our sales and marketing efforts abroad. To the extent that we enter into these arrangements, our success will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.

In other situations, we may decide to establish manufacturing facilities by ourselves instead of relying on partners. The demand and market acceptance for our products produced abroad are subject to a high level of uncertainty and are substantially dependent upon the market condition of the global steel industry. We cannot assure you that our international expansion plan will be profitable or that we can recoup the costs related to such investments.

Expansion of our trading, construction and production operations abroad requires management attention and resources. In addition, we face additional risks associated with our expansion outside Korea, including:

 

   

challenges caused by distance, language and cultural differences;

 

   

higher costs associated with doing business internationally;

 

   

legal and regulatory restrictions, including foreign exchange controls that might prevent us from repatriating cash earned in countries outside Korea;

 

   

longer payment cycles in some countries;

 

   

credit risk and higher levels of payment fraud;

 

   

currency exchange risks;

 

   

potentially adverse tax consequences;

 

   

political and economic instability; and

 

   

seasonal reductions in business activity during the summer months in some countries.

We have limited insurance coverage and may incur significant losses resulting from operating hazards, product liability claims from customers or business interruptions.

The normal operation of our manufacturing facilities may be interrupted by accidents caused by operating hazards, power supply disruptions and equipment failures, as well as natural disasters. As with other industrial companies, our operations involve the use, handling, generation, processing, storage, transportation and disposal of hazardous materials, which may result in fires, explosions, spills and other unexpected or dangerous accidents causing property damage as well as personal injuries or death. We are also exposed to risks associated with product liability claims in the event that the use of the products we sell results in injury. We maintain property insurance for our property, plant and equipment that we believe to be consistent with market practice in Korea. However, we may not have adequate resources to satisfy a judgment in excess of our insurance coverage in the event of a successful claim against us. Any occurrence of accidents or other events affecting our operations could result in potentially significant monetary damages, diversion of resources, production disruption and delay in delivery of our products, which may have a material adverse effect on our business, financial condition and results of operations.

 

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We may from time to time engage in acquisitions for which we may be required to seek additional sources of capital.

From time to time, we may selectively acquire or invest in companies or businesses that may complement our business. In order to finance these acquisitions, we intend to use cash on hand, funds from operations, issuances of equity and debt securities, and, if necessary, financings from banks and other sources as well as entering into consortiums with financial investors. However, no assurance can be given that we will be able to obtain sufficient financing for such acquisitions or investments on terms commercially acceptable to us or at all. We also cannot assure you that such financings and related debt payment obligations will not have a material adverse impact on our financial condition, results of operations or cash flow.

Further increases in, or new impositions of, anti-dumping or countervailing duty proceedings may have an adverse impact on our export sales.

In recent years, we have become subject to a number of anti-dumping duties in India, Indonesia, Australia, Thailand, Brazil, Taiwan and Malaysia and a number of anti-dumping and countervailing duty investigations in several other countries, including the U.S., India and Canada. In addition, the Mexican government initiated an anti-dumping investigation in October 2012 relating to our exports of cold rolled steel products, and the investigation was suspended until 2018 on condition that we comply with supply undertakings. Our products that are subject to anti-dumping or countervailing duty proceedings in the aggregate currently do not account for a material portion of our total sales, and such proceedings have not had a material adverse impact on our business and operations in recent years. However, there can be no assurance that increases in, or new impositions of, anti-dumping duties, countervailing duties, quotas or tariffs on our exports of products abroad may not have a material adverse impact on our exports in the future. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”

We participate in overseas natural resources exploration, development and production projects abroad, which expose us to various risks.

As part of consortia or through acquisitions of minority interests, we engage in overseas natural resources exploration, development and production projects in various locations, including a gas field exploration project in Myanmar, in which Daewoo International had invested approximately US$ 1,103 million as of December 31, 2013 and plans to make further investments in the future. Daewoo International began recognizing revenue from the Myanmar gas field project starting in November 2013. We may also selectively acquire or invest in companies or businesses that engage in such activities. As part of our efforts to diversify our operations, we intend to continue to expand our operations by carefully seeking out promising exploration, development and production opportunities abroad. To the extent that we enter into these arrangements, our success in these endeavors will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.

The demand and market acceptance for such activities abroad are subject to a substantially higher level of uncertainty than our traditional steel business and are substantially dependent upon the market condition of the global natural resources industry as well as the political and social environment of the target countries. The performance of projects in which we participate may be adversely affected by the occurrence of military hostility, political unrest or acts of terrorism. In addition, some of our current exploration, development and production projects involve drilling exploratory wells on properties with no proven amount of natural resource reserves. Although all drilling, whether developmental or exploratory, involves risks, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of natural resources. We have limited experience in this business, and we cannot assure you that our overseas natural resources exploration, development and production projects will be profitable, that we will be able to meet the financing requirements for such projects, or that we can recoup the costs related to such investments, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

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We may encounter problems with joint overseas natural resources exploration, development and production projects and large-scale infrastructure projects, which may materially and adversely affect our business.

In recent years, we have begun to focus increasingly on overseas natural resources exploration, development and production projects. We typically pursue these natural resources exploration, development and production projects jointly with consortium partners or through acquisition of minority interests in such projects, and we expect to be involved in other joint projects in the future. We sometimes hold a majority interest in the projects among the consortium partners, but we often lack a controlling interest in the joint projects. Therefore, we may not be able to require that our joint ventures sell assets or return invested capital, make additional capital contributions or take any other action without the vote of at least a majority of our consortium partners. If there are disagreements between our consortium partners and us regarding the business and operations of the joint projects, we cannot assure you that we will be able to resolve them in a manner that will be in our best interests. Certain major decisions, such as selling a stake in the joint project, may require the consent of all other partners. These limitations may adversely affect our ability to obtain the economic and other benefits we seek from participating in these projects.

In addition, our consortium partners may:

 

   

have economic or business interests or goals that are inconsistent with us;

 

   

take actions contrary to our instructions, requests, policies or objectives;

 

   

be unable or unwilling to fulfill their obligations;

 

   

have financial difficulties; or

 

   

have disputes with us as to their rights, responsibilities and obligations.

Any of these and other factors may have a material adverse effect on the performance of our joint projects and expose us to a number of risks, including the risk that the partners may be incapable of providing the required financial support to the partnerships and the risk that the partners may not be able to fulfill their other obligations, resulting in disputes not only between our partners and us, but also between the joint ventures and their customers. Such a material adverse effect on the performance of our joint projects may in turn materially and adversely affect our business, results of operations and financial condition.

Cyclical fluctuations based on macroeconomic factors may adversely affect POSCO E&C’s business and performance.

In order to complement our steel operations, we engage in engineering and construction activities through POSCO E&C, an 89.5%-owned subsidiary. The construction segment, which accounted for approximately 11.1% of our consolidated sales in 2013 after adjusting for inter-company sales, is highly cyclical and tends to fluctuate based on macroeconomic factors, such as consumer confidence and income, employment levels, interest rates, inflation rates, demographic trends and policies of the Government. Although we believe that POSCO E&C’s strategy of focusing on high-value-added plant construction and urban planning and development projects such as Songdo New City has enabled it to be exposed to a lesser degree to general economic conditions in Korea in comparison to some of its domestic competitors, our construction revenues have fluctuated in the past depending on the level of domestic construction activity including new construction orders. POSCO E&C’s construction operations could suffer in the future in the event of a general downturn in the construction market resulting in weaker demand, which could adversely affect POSCO E&C’s business, results of operations or financial condition.

 

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Many of POSCO E&C’s domestic and overseas construction projects are on a fixed-price basis, which could result in losses for us in the event that unforeseen additional expenses arise with respect to the project.

Many of POSCO E&C’s domestic and overseas construction projects are carried out on a fixed-price basis according to a predetermined timetable, pursuant to the terms of a fixed-price contract. Under such fixed-price contracts, POSCO E&C retains all cost savings on completed contracts but is also liable for the full amount of all cost overruns and may be required to pay damages for late delivery. The pricing of fixed-price contracts is crucial to POSCO E&C’s profitability, as is its ability to quantify risks to be borne by it and to provide for contingencies in the contract accordingly.

POSCO E&C attempts to anticipate costs of labor, raw materials, parts and components in its bids on fixed-price contracts. However, the costs incurred and gross profits realized on a fixed-price contract may vary from its estimates due to factors such as:

 

   

unanticipated variations in labor and equipment productivity over the term of a contract;

 

   

unanticipated increases in labor, raw material, parts and components, subcontracting and overhead costs, including as a result of bad weather;

 

   

delivery delays and corrective measures for poor workmanship; and

 

   

errors in estimates and bidding.

If unforeseen additional expenses arise over the course of a construction project, such expenses are usually borne by POSCO E&C, and its profit from the project will be correspondingly reduced or eliminated. If POSCO E&C experiences significant unforeseen additional expenses with respect to its fixed price projects, it may incur losses on such projects, which could have a material adverse effect on its financial condition and results of operations.

POSCO E&C’s domestic residential property business is highly dependent on the real estate market in Korea.

The performance of POSCO E&C’s domestic residential property business is highly dependent on the general condition of the real estate market in Korea. The construction industry in Korea is experiencing a downturn due to excessive investment in recent years in residential property development projects, stagnation of real property prices and reduced demand for residential property, especially in areas outside of Seoul. In addition, as liquidity and credit concerns and volatility in the global financial markets increased significantly starting in September 2008, there has been a general decline in the willingness by banks and other financial institutions in Korea to engage in project financing and other lending activities to construction companies, which may adversely impact POSCO E&C’s ability to meet its desired funding needs. The Government has taken measures to support the Korean construction industry, including easing of regulations imposed on redevelopment of apartment buildings and resale restrictions in the metropolitan areas, as well as reductions in property taxes. Although the Korean real estate market temporarily recovered in the second half of 2009 and into 2010, declines in demand and price took place in the Korean real estate market in recent years due to the downturn of the domestic economic cycle and financial risk in Europe, and the overall prospects for the Korean real estate market in 2014 and beyond remain uncertain.

We are subject to environmental regulations, and our operations could expose us to substantial liabilities.

We are subject to national and local environmental laws and regulations, including increasing pressure to reduce emission of carbon dioxide relating to our manufacturing process, and our steel manufacturing and construction operations could expose us to risk of substantial liability relating to

 

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environmental or health and safety issues, such as those resulting from discharge of pollutants and carbon dioxide into the environment, the handling, storage and disposal of solid or hazardous materials or wastes and the investigation and remediation of contaminated sites. We may be responsible for the investigation and remediation of environmental conditions at currently and formerly operated manufacturing or construction sites. We may also be subject to associated liabilities, including liabilities for natural resource damage, third party property damage or personal injury resulting from lawsuits brought by the Government or private litigants. In the course of our operations, hazardous wastes may be generated at third party-owned or operated sites, and hazardous wastes may be disposed of or treated at third party-owned or operated disposal sites. If those sites become contaminated, we could also be held responsible for the cost of investigation and remediation of such sites, for any associated natural resource damage, and for civil or criminal fines or penalties.

Failure to protect our intellectual property rights could impair our competitiveness and harm our business and future prospects.

We believe that developing new steel manufacturing technologies that can be differentiated from those of our competitors, such as FINEX, strip casting and silicon steel manufacturing technologies, is critical to the success of our business. We take active measures to obtain protection of our intellectual property by obtaining patents and undertaking monitoring activities in our major markets. However, we cannot assure you that the measures we are taking will effectively deter competitors from improper use of our proprietary technologies. Our competitors may misappropriate our intellectual property, disputes as to ownership of intellectual property may arise and our intellectual property may otherwise become known or independently developed by our competitors. Any failure to protect our intellectual property could impair our competitiveness and harm our business and future prospects.

We rely on trade secrets and other unpatented proprietary know-how to maintain our competitive position, and unauthorized disclosure of our trade secrets or other unpatented proprietary know-how could negatively affect our business.

We rely on trade secrets and unpatented proprietary know-how and information. We enter into confidentiality agreements with each of our employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally provide that all inventions, ideas, discoveries, improvements and patentable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business.

We face the risk of litigation proceedings relating to infringement of intellectual property rights of third parties, which, if determined adversely to us, could cause us to lose significant rights, pay significant damage awards or suspend the sale of certain products.

Our success depends largely on our ability to develop and use our technology and know-how in a proprietary manner without infringing the intellectual property rights of third parties. The validity and scope of claims relating to technology and patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. In addition, because patent applications in many jurisdictions are kept confidential for an extended period before they are published, we may be unaware of other persons’ pending patent applications that relate to our products or manufacturing processes. Accordingly, we face the risk of litigation proceedings relating to infringement of intellectual property rights of third parties. See “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings.”

 

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The plaintiffs in actions relating to infringement of intellectual property rights typically seek injunctions and substantial damages. Although patent and other intellectual property disputes are often settled through licensing or similar arrangements, there can be no assurance that such licenses can be obtained on acceptable terms or at all. Accordingly, regardless of the scope or validity of disputed patents or the merits of any patent infringement claims by potential or actual litigants, we may have to engage in protracted litigation. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings could subject us to pay substantial damages to third parties, require us to seek licenses from third parties and pay ongoing royalties or redesign certain products, or subject us to injunctions prohibiting the manufacture and sale of our products or the use of technologies in certain jurisdictions. The occurrence of any of the foregoing could have a material adverse effect on our reputation, business, financial condition and results of operations.

We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.

Under the Labor Standards Act, an employee is legally entitled to “ordinary wages.” Under the guidelines previously issued by the Ministry of Employment and Labor (formerly the Ministry of Labor), ordinary wages include base salary and certain fixed monthly allowances for overtime work performed during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, we and other companies in Korea had interpreted these guidelines as excluding fixed bonuses that are paid other than on a monthly basis (such as bi-monthly, quarterly or biannually paid bonuses) from the scope of ordinary wages.

On December 18, 2013, the Supreme Court of Korea ruled that regularly paid bonuses, including those that are paid other than on a monthly basis, shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement that attempts to exclude such regular bonuses from ordinary wage will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further ruled that an employee’s claim for underpayments under the expanded scope of ordinary wages for the past three years within the statute of limitations may be denied based on principles of good faith if (i) there is an agreement between the employer and employees that the regular bonus shall be excluded from ordinary wage in determining the total amount of wage, (ii) such claim results in further wage payments that far exceed the level of total amount of wage agreed between the employer and employees, and (iii) such claim would cause an unexpected financial burden to the employer leading to material managerial difficulty or a threat to the employer’s existence. The principles of good faith, however, do not apply to an agreement on wages entered into between the employer and employees after December 18, 2013, the date of the above decision of the Supreme Court of Korea.

The Supreme Court decision may result in additional labor costs to us in the form of additional payments under the expanded scope of ordinary wages applicable in the past three years as well as to be incurred in the future, which may have an adverse effect on our financial condition and results of operations.

Escalations in tensions with North Korea could have an adverse effect on us and the market value of our common shares and ADSs.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, since the death of Kim Jong-il in December 2011, there has been increased uncertainty with respect to the future of North Korea’s political leadership and concern regarding its

 

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implications for political and economic stability in the region. Although Kim Jong-il’s third son, Kim Jong-eun, has assumed power as his father’s designated successor, the long-term outcome of such leadership transition remains uncertain.

In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-range missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

   

In April 2013, North Korea blocked access to the inter-Korean industrial complex in its border city of Gaeseong to South Koreans, while the U.S. deployed nuclear-capable stealth bombers and destroyers to Korean air and sea space.

 

   

In March 2013, North Korea stated that it had entered “a state of war” with Korea, declaring the 1953 armistice invalid, and put its artillery at the highest level of combat readiness to protest the Korea-United States allies’ military drills and additional sanctions imposed on North Korea for its missile and nuclear tests.

 

   

North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty in January 2003 and conducted three rounds of nuclear tests between October 2006 to February 2013, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council unanimously passed resolutions that condemned North Korea for the nuclear tests and expanded sanctions against North Korea, most recently in March 2013.

 

   

In December 2012, North Korea launched a satellite into orbit using a long-range rocket, despite concerns in the international community that such a launch would be in violation of the agreement with the United States as well as the United Nations Security Council resolutions that prohibit North Korea from conducting launches that use ballistic missile technology.

 

   

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges. For example, in November 2009, the North Korean government redenominated its currency at a ratio of 100 to 1 as part of a currency reform undertaken in an attempt to control inflation and reduce income gaps. In tandem with the currency redenomination, the North Korean government banned the use or possession of foreign currency by its residents and closed down privately run markets, which led to severe inflation and food shortages. Such developments may further aggravate social and political tensions within North Korea.

There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea and North Korea break down or military hostilities occur, could have a material adverse effect on the Korean economy and on our business, results of operations and financial condition and the market value of our common shares and ADSs.

If you surrender your ADRs to withdraw shares of our common stock, you may not be allowed to deposit the shares again to obtain ADRs.

Under the deposit agreement, holders of shares of our common stock may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADRs, and holders of ADRs may surrender ADRs to the ADR depositary and receive shares of our common stock. However, under current Korean

 

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laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit that exceeds the difference between (i) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (ii) the number of shares on deposit with the depositary bank at the time of such proposed deposit. It is possible that we may not give the consent. As a result, if you surrender ADRs and withdraw shares of common stock, you may not be able to deposit the shares again to obtain ADRs. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”

You may not be able to exercise preemptive rights for additional shares of common stock and may suffer dilution of your equity interest in us.

The Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we issue new shares to persons other than our shareholders (See “Item 10.B. Memorandum and Articles of Association — Preemptive Rights and Issuance of Additional Shares”), a holder of our ADSs will experience dilution of such holding. If none of these exceptions is available, we will be required to grant preemptive rights when issuing additional common shares under Korean law. Under the deposit agreement governing the ADSs, if we offer any rights to subscribe for additional shares of our common stock or any rights of any other nature, the ADR depositary, after consultation with us, may make the rights available to you or use reasonable efforts to dispose of the rights on your behalf and make the net proceeds available to you. The ADR depositary, however, is not required to make available to you any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

   

a registration statement filed by us under the Securities Act is in effect with respect to those shares; or

 

   

the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.

We are under no obligation to file any registration statement under the Securities Act to enable you to exercise preemptive rights in respect of the common shares underlying the ADSs, and we cannot assure you that any registration statement would be filed or that an exemption from the registration requirement under the Securities Act would be available. Accordingly, if a registration statement is required for you to exercise preemptive rights but is not filed by us, you will not be able to exercise your preemptive rights for additional shares and may suffer dilution of your equity interest in us.

U.S. investors may have difficulty enforcing civil liabilities against us and our directors and senior management.

We are incorporated in Korea with our principal executive offices located in Seoul. The majority of our directors and senior management are residents of jurisdictions outside the United States, and the majority of our assets and the assets of such persons are located outside the United States. As a result, U.S. investors may find it difficult to effect service of process within the United States upon us or such persons or to enforce outside the United States judgments obtained against us or such persons in U.S. courts, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or such persons in courts in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for a U.S. investor to bring an action in a Korean court predicated upon the civil liability provisions of the U.S. federal securities laws against our directors and senior management and non-U.S. experts named in this annual report.

 

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We could be adversely affected if the U.S. government were to determine that our affiliate’s Iran-related business activities are sanctionable under the U.S. Iranian sanction laws and regulations.

We acquired a controlling interest in Sungjin Geotec Co., Ltd. (“Sungjin Geotec”), a manufacturer of specialized equipment used in the power and energy industries in May 2010. Sungjin Geotec merged with POSCO Plantec Co., Ltd. (“POSCO Plantec”) in July 2013, and we currently hold a 36.2% interest in POSCO Plantec. Prior to the merger, Sungjin Geotec entered into contracts with various suppliers to supply equipment for the development of natural gas fields in Iran, including natural gas fields located in South Pars that is led by Pars Oil and Gas Company, a subsidiary of National Iranian Oil Company. Sungjin Geotec recognized revenues of approximately Won 27 billion in 2010, Won 240 billion in 2011 and Won 134 billion in 2012, and net profits of approximately Won 1 billion in 2010, Won 15 billion in 2011 and Won 25 billion in 2012 related to such activities. Sungjin Geotec has completed or terminated all of its remaining outstanding supply contracts to sell equipment for the development of natural gas fields in Iran, and neither Sungjin Geotec nor POSCO Plantec (subsequent to the merger with Sungjin Geotec in July 2013) recognized any revenues nor profits from such activities in 2013. POSCO Plantec does not plan to engage in any sale of equipment in Iran related to the country’s development of petroleum resources.

In July 2010, the United States adopted legislation that expands U.S. economic sanctions against foreign companies doing business with Iran in certain sectors. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “CISADA”) expands the scope of sanctionable activities by, among other things, broadening the definition of “investment” under the Iran Sanctions Act (the “ISA”) arguably to include the supply of goods for use in petroleum and gas production. The CISADA also expands the severity of potential sanctions available under the ISA and imposes mandatory investigation and reporting requirements designed to increase the likelihood of enforcement. The CISADA requires the imposition of sanctions against parties found by the U.S. administration, following an investigation, to have engaged in conduct sanctionable under the ISA, subject to certain waiver provisions and exceptions.

Under the ISA, as amended, sanctions can also be imposed against a company that has actual knowledge of, or should have known of, sanctionable conduct engaged in by another company that it owns or controls. A range of sanctions may be imposed on companies that engage in sanctionable activities, including among other things the blocking of any property subject to U.S. jurisdiction in which the sanctioned company has an interest, which could include a prohibition on transactions or dealings involving securities of the sanctioned company. By its terms, the CISADA is applicable to certain investments in Iran that commenced on or after July 1, 2010.

There can be no assurance that Sungjin Geotec’s Iran-related business activities did not constitute sanctionable activities or that we will not be subjected to sanctions under the ISA as amended by the CISADA. Our business and reputation could be adversely affected if the U.S. government were to determine that Sungjin Geotec’s Iran-related business activities constituted sanctionable activity attributable to us. Investors in our securities may also be adversely affected if we are sanctioned under the CISADA or if their investment in our securities is restricted under any sanctions regimes with which the investors are required to comply. As noted above, sanctions under the ISA could include the blocking of any property in which we have an interest, which would effectively prohibit all U.S. persons from receiving any payments from us, or otherwise acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property in which we have any interest.

We expect to continue operations and investments relating to countries targeted by United States and European Union economic sanctions.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or “OFAC,” enforces certain laws and regulations (“OFAC Sanctions”) that impose restrictions upon U.S. persons and, in

 

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some instances, foreign entities owned or controlled by U.S. persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of OFAC Sanctions (“U.S. Sanctions Targets”). U.S. persons are also generally strictly prohibited from facilitating such activities or transactions. Similarly, the European Union enforces certain laws and regulations (“E.U. Sanctions”) that impose restrictions upon nationals of E.U. member states, persons located within E.U. member states, entities incorporated or constituted under the law of an E.U. member state, or business conducted in whole or in part in E.U. member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of E.U. Sanctions (“E.U. Sanctions Targets” and together with U.S. Sanctions Targets, “Sanctions Targets”). E.U. persons are also generally prohibited from activities that promote such activities or transactions.

We engage in limited business activities in countries that are deemed Sanctions Targets, including Iran, Syria and Sudan. We produce and export, typically through our sales subsidiaries, steel products to such countries, including automotive steel sheets and other steel materials to Iranian entities. Our subsidiaries also engage in limited business activities in countries that are deemed Sanctions Targets. In particular, Daewoo International, a global trading company in which we hold a 60.3% interest, engages in the trading of steel, raw materials and other items with entities in countries that are deemed Sanctions Targets, including Iran and Sudan. We believe that such activities and investments do not involve any U.S. goods or services. Our activities and investments in Iran, Syria and Sudan accounted for approximately 3.4% of our consolidated revenues in 2011, 1.4% in 2012 and 0.2% in 2013.

We expect to continue to engage in business activities and make investments in countries that are deemed Sanctions Targets over the foreseeable future. Although we believe that OFAC Sanctions under their current terms are not applicable to our current activities, our reputation may be adversely affected, some of our U.S. investors may be required to divest their investments in us under the laws of certain U.S. states or under internal investment policies or may decide for reputational reasons to divest such investments. We are aware of initiatives by U.S. governmental entities and U.S. institutional investors, such as pension funds, to adopt or consider adopting laws, regulations, or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with countries identified as state sponsors of terrorism. We cannot assure you that the foregoing will not occur or that such occurrence will not have a material adverse effect on the value of our securities.

This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

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Item 4.  Information on the Company

Item 4.A.  History and Development of the Company

We were established by the Government on April 1, 1968, under the Commercial Code, to manufacture and distribute steel rolled products and plates in the domestic and overseas markets. The Government owned more than 70% of our equity until 1988, when the Government reduced its ownership of our common stock to 35% through a public offering and listing our shares on the KRX KOSPI Market. In December 1998, the Government sold all of our common stock it owned directly, and The Korea Development Bank completed the sale of our shares that it owned in September 2000. The Government no longer holds any direct interest in us, and our outstanding common stock is currently held by individuals and institutions. See “Item 7. Major Shareholders and Related Party Transactions — Item 7A. Major Stockholders.”

Our legal and commercial name is POSCO. Our principal executive offices are located at POSCO Center, 440 Teheran-ro, Gangnam-gu, Seoul, Korea 135-777, and our telephone number is (822) 3457-0114.

Item 4.B.  Business Overview

The Company

We are the largest fully integrated steel producer in Korea, and one of the largest steel producers in the world, based on annual crude steel production. We produced approximately 38.3 million tons of crude steel in 2013 and approximately 39.7 million tons in 2012, a substantial portion of which was produced at Pohang Works and Gwangyang Works. As of December 31, 2013, Pohang Works had 17.3 million tons of annual crude steel and stainless steel production capacity, and Gwangyang Works had an annual crude steel production capacity of 20.8 million tons. We believe Pohang Works and Gwangyang Works are two of the most technologically advanced integrated steel facilities in the world. We manufacture and sell a diversified line of steel products, including cold rolled and hot rolled products, stainless steel products, plates, wire rods and silicon steel sheets, and we are able to meet a broad range of customer needs from manufacturing industries that consume steel, including automotive, shipbuilding, home appliance, engineering and machinery industries.

We sell primarily to the Korean market. Domestic sales accounted for 48.8% of our total revenue from steel products produced and sold by us in 2013 and 52.0% in 2012. On a non-consolidated basis, we believe that we had an overall market share of approximately 43% of the total sales volume of steel products sold in Korea in 2013 and approximately 42% in 2012. Our export sales and overseas sales to customers abroad accounted for 51.2% of our total revenue from steel products produced and sold by us in 2013 and 48.0% in 2012. Our major export market is Asia, with China accounting for 30.2%, Asia other than China and Japan accounting for 27.7%, and Japan accounting for 12.5% of our total steel export revenue from steel products produced and exported by us in 2013 and Asia other than China and Japan accounting for 26.7%, China 28.9% and Japan 14.1% of our total steel export revenue from steel products produced and exported by us in 2012.

We also engage in businesses that complement our steel manufacturing operations as well as carefully seek out promising investment opportunities to diversify our businesses both vertically and horizontally, in part to prepare for the eventual maturation of the Korean steel market. POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, is one of the leading engineering and construction companies in Korea that primarily engages in the planning, design and construction of industrial plants and architectural works and civil engineering. Daewoo International, our consolidated subsidiary in which we hold a 60.3% interest, is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects throughout the world. POSCO Energy Corporation, our wholly-owned consolidated subsidiary in which we hold an 89.0% interest, is the largest private power generation company in Korea.

 

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We generated revenue of Won 61,865 billion and profit for the period of Won 1,355 billion in 2013, compared to revenue of Won 63,604 billion and profit for the period of Won 2,386 billion in 2012. We had total assets of Won 84,455 billion and total equity of Won 45,822 billion as of December 31, 2013, compared to total assets of Won 79,266 billion and total equity of Won 42,429 billion as of December 31, 2012.

Business Strategy

Leveraging on our success during the past four decades, our goal is to strengthen our position as one of the leading steel producers in the world through focusing on core technologies, further solidifying our market leading position in Korea, and pursuing operational efficiencies to increase our margins in markets abroad. In order to compete effectively in the dynamic global market environment driven by emerging economies and increasing demand for more environmentally friendly products, we are committed to leveraging our competitive advantages and further enhancing our leadership positions. We believe that our proprietary technologies and expertise in developing environmentally-friendly steel production facilities, ability to independently construct such facilities, and know-how in their efficient operation and management enables us to develop differentiated steel products at a highly competitive cost structure. We also plan to selectively explore opportunities in growth industries that are integral to our overall business model, and we have identified steel, comprehensive materials, energy and new businesses as our key areas of focus.

We seek to strengthen our competitiveness and pursue growth through the following core business strategies:

Seek Opportunities to Further Strengthen Our Position in Global Markets as well as Selectively Expand Our Production Infrastructure Abroad

We plan to pursue higher margin businesses in various key markets abroad as well as further strengthen our competitiveness in new markets that we have entered in recent years. In China, which is showing signs of slowdown in economic growth and oversupply of steel products, we plan to focus on higher-margin products and pursue strategic entry or exit of various segments and regions. In Southeast Asia, we plan to pursue stabilization of our production operations in Indonesia as well as focus on increasing our market share of key products in Thailand, particularly for the automotive industry. We also plan to pursue differentiated strategies in each of our other key regions.

Drawing on our expertise in steel production, we also plan to carefully seek out promising business opportunities abroad to expand our production infrastructure. We seek out promising investment opportunities abroad, primarily in India and Southeast Asia. We believe that India and Southeast Asia continue to offer substantial growth opportunities, and we plan to selectively seek investment opportunities to construct steel production facilities. For example, we entered into a memorandum of understanding with Orissa State Government of India in June 2005 for the construction of an integrated steel mill and the development of iron ore mines in Orissa State. The Government of India reissued clearance for the construction of the steel mill in January 2014 and is currently in the process of preparing the land on which the integrated steel mill will be constructed. With respect to development of iron ore mines in Orissa State, we obtained a final ruling from the Indian Supreme Court in May 2013 with respect to authority of the central government to issue permission, and we are waiting for approval from the Government of India to start our exploration and development activities.

Maintain Technology Leadership in Steel Manufacturing

As part of our strategy, we have identified core products that we plan to further develop, such as premium automotive steel sheets, silicon steel and API-grade steel, and we will continue to invest in developing innovative products that offer the greatest potential returns and enhance the overall quality of our products. In order to increase our competitiveness and the proportion of our sales of higher margin, higher value-added products, we plan to make additional investments in the development of new manufacturing technologies and upgrade our facilities through continued modernization and rationalization.

 

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We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages through elimination of major sources of pollution such as sintering and coking plants, as well as reducing operating and raw material costs. In recent years, we have developed proprietary manufacturing technology using a compact endless cast rolling mill that combines the FINEX process with an advanced basic oxygen steelmaking process that uses more scrap in place of pig iron, which enables us to manufacture products at a highly competitive cost structure with lower carbon dioxide emission. Our compact endless cast rolling mill directly casts coils from liquid steel and uses a rolling process that rolls hot rolled coils up to 40 slabs at a time.

Diversify into Production of Comprehensive Materials, including Lithium, Nickel, Carbon and Magnesium

We plan to leverage our expertise in production of various steel-applied materials and venture into the fast-growing and high value-added business of producing environmentally friendly comprehensive materials. We have identified lithium and nickel as our main investment areas. Demand for lithium, which is used as an anode material in lithium ion batteries, has been increasing in recent years, and we have developed proprietary technology to extract lithium from its brine in approximately one month compared to twelve months through conventional production processes. We believe we are also able to leverage our expertise in production of crude steel to cost-effective production of carbon and magnesium, which have wide application of industrial use.

Further Develop Our Capabilities to become an Integrated Provider of Energy Solutions

We plan to pursue strategic synergies with our member companies of the POSCO Group to further strengthen our capabilities in the energy industry. POSCO Energy Corporation is the largest private power generation company in Korea. POSCO E&C is one of the leading engineering and construction companies in Korea with expertise in the design and construction of power plants. Daewoo International engages in various natural resources procurement and energy development projects around the world. In order to secure adequate procurement of principal raw materials, we have also invested in and will continue to explore additional investment opportunities in various raw material development projects abroad, as well as enter into long-term contracts with leading suppliers of iron ore, coal and nickel, principally in Australia and Brazil. We believe that the energy industry is a sustainable business area that offers us attractive opportunities. We will continue to seek opportunities in natural resources development and further expand our power generation and alternative energy solutions businesses, as well as pursue participation in additional power plant projects abroad.

Pursue Cost-Cutting through Operational and Process Innovations

We seek to achieve cost reductions in this era of increasing raw material costs through our company wide process for innovation and enhancing efficiency of operations. We believe that strategic cost cutting measures through utilization of efficient production methods and management discipline will strengthen our corporate competitiveness. We will also strive to invest more in human resources development to nurture employees who are capable of working in the global environment.

Selectively Seek Opportunities in Growth Industries

We will continue to selectively seek opportunities in growth industries to diversify our business both vertically and horizontally. Through POSCO ICT Co., Ltd., a 65.4%-owned subsidiary, we engage in information and technology consulting services as well as automation and system integration engineering services. POSCO E&C is one of the leading engineering and construction companies in Korea that primarily engages in the planning, design and construction of industrial plants and architectural works and civil engineering. On September 20, 2010, we acquired a controlling interest in Daewoo International Corporation for Won 3.37 trillion. Daewoo International is a global trading

 

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company that primarily engages in trading of steel and raw materials as well as investing in energy development projects. We will continue to selectively seek opportunities to identify new growth engines and diversify our operations.

Major Products

We manufacture and sell a broad line of steel products, including the following:

 

   

cold rolled products;

 

   

hot rolled products;

 

   

stainless steel products;

 

   

plates;

 

   

wire rods; and

 

   

silicon steel sheets.

The table below sets out our revenue of steel products produced by us and directly sold to external customers, which are recognized as external revenue of the Steel Segment, by major steel product categories for the periods indicated. Such amounts do not include steel products produced by us and sold to our consolidated subsidiaries.

 

     For the Year Ended December 31,  
     2011     2012     2013  

Steel Products

   Billions of
Won
             %             Billions of
Won
             %             Billions of
Won
             %          

Cold rolled products

   11,583         29.6   11,421         32.4   9,879         31.1

Hot rolled products

     7,752         19.8        6,291         17.8        5,134         16.1   

Stainless steel products

     7,453         19.0        7,305         20.7        7,425         23.4   

Plates

     4,560         11.6        3,620         10.3        3,266         10.3   

Wire rods

     2,240         5.7        1,906         5.4        1,867         5.9   

Silicon steel sheets

     1,782         4.6        1,556         4.4        1,476         4.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Sub-total

     35,369         90.3        32,099         91.0        29,047         91.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Others

     3,782         9.7        3,160         9.0        2,748         8.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

       39,152         100.0       35,259         100.0       31,795         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The table below sets out our sales volume of the principal categories of steel products produced by us and directly sold to external customers, which are recognized as external sales volume of the Steel Segment, by major steel product categories for the periods indicated. Such amounts do not include steel products produced by us and sold to our consolidated subsidiaries.

 

     For the Year Ended December 31,  
     2011     2012     2013  

Steel Products

     Thousands  
of Tons
             %               Thousands  
of Tons
             %               Thousands  
of Tons
             %          

Cold rolled products

     11,023         37.3     11,863         39.6     11,915         40.9

Hot rolled products

     8,902         30.1        8,540         28.5        7,589         26.1   

Stainless steel products

     2,414         8.2        2,760         9.2        2,883         9.9   

Plates

     4,373         14.8        4,145         13.8        3,849         13.2   

Wire rods

     1,686         5.7        1,531         5.1        1,735         6.0   

Silicon steel sheets

     1,134         3.8        1,143         3.8        1,134         3.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total (1)

     29,532         100.0     29,983         100.0     29,104         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

 

(1) Not including sales volume of steel products categorized under “others.”

 

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In addition to steel products produced by us and directly sold to external customers, we engage our consolidated sales subsidiaries (including Daewoo International) to sell our steel products produced by us. Our revenue from steel products produced by us and sold to our consolidated sales subsidiaries that in turn sold them to their external customers amounted to Won 10,415 billion in 2011, Won 10,344 billion in 2012 and Won 8,391 billion in 2013. Sales of such steel products by our consolidated sales subsidiaries to external customers are recognized as external revenue of the Trading Segment.

Cold Rolled Products

Cold rolled coils and further refined galvanized cold rolled products are used mainly in the automotive industry to produce car body panels. Other users include the household goods, electrical appliances, engineering and metal goods industries.

Our deliveries of cold rolled products produced by us and directly sold to external customers amounted to 11.9 million tons in 2013, representing 40.9% of our total sales volume of principal steel products produced by us and directly sold to external customers.

Cold rolled products constitute our largest product category in terms of sales volume and revenue from steel products produced by us and directly sold to external customers. In 2013, our sales volume of cold rolled products produced by us and directly sold to external customers increased by 0.4% compared to our sales volume in 2012 due to an increase in sales to automotive companies.

Including sales of cold rolled products produced by us and sold through our consolidated sales subsidiaries in addition to cold rolled products produced by us and directly sold to external customers, we had a domestic market share for cold rolled products of approximately 46% on a non-consolidated basis.

Hot Rolled Products

Hot rolled coils and sheets have many different industrial applications. They are used to manufacture structural steel used in the construction of buildings, industrial pipes and tanks, and automobile chassis. Hot rolled coil is also manufactured in a wide range of widths and thickness as the feedstock for higher value-added products such as cold rolled products and silicon steel sheets.

Our deliveries of hot rolled products produced by us and directly sold to external customers amounted to 7.6 million tons in 2013, representing 26.1% of our total sales volume of principal steel products produced by us and directly sold to external customers. The largest customers of our hot rolled products are downstream steelmakers in Korea which use the products to manufacture pipes and cold rolled products.

Hot rolled products constitute our second largest product category in terms of sales volume and third largest product category in terms of revenue from steel products produced by us and directly sold to external customers. In 2013, our sales volume of hot rolled products produced by us and directly sold to external customers decreased by 11.1% compared to 2012 primarily due to a decrease in demand from downstream steelmakers in Korea and abroad.

Including sales of hot rolled products produced by us and sold through our consolidated sales subsidiaries in addition to hot rolled products produced by us and directly sold to external customers, we had a domestic market share for hot rolled products of approximately 42% on a non-consolidated basis.

Stainless Steel Products

Stainless steel products are used to manufacture household goods and are also used by the chemical industry, paper mills, the aviation industry, the automotive industry, the construction industry and the food processing industry.

 

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Our deliveries of stainless steel products produced by us and directly sold to external customers amounted to 2.9 million tons in 2013, representing 9.9% of our total sales volume of principal steel products produced by us and directly sold to external customers.

Stainless steel products constitute our second largest product category in terms of revenue from steel products produced by us and directly sold to external customers. Although sales of stainless steel products accounted for only 9.9% of total sales volume of the principal steel products produced by us and directly sold to external customers in 2013, they represented 23.4% of our total revenue from such steel products in 2013. Our sales volume of stainless steel products produced by us and directly sold to external customers increased by 4.4% in 2013 compared to 2012 due to an increase in demand from manufacturers of automotive exhaust systems.

Including sales of stainless steel products produced by us and sold through our consolidated sales subsidiaries in addition to stainless steel products produced by us and directly sold to external customers, we had a domestic market share for stainless steel products of approximately 48% on a non-consolidated basis.

Plates

Plates are used in shipbuilding, structural steelwork, offshore oil and gas production, power generation, mining, and the manufacture of earth-moving and mechanical handling equipment, boiler and pressure vessels and other industrial machinery.

Our deliveries of plates produced by us and directly sold to external customers amounted to 3.8 million tons in 2013, representing 13.2% of our total sales volume of principal steel products produced by us and directly sold to external customers. The Korean shipbuilding industry, which uses plates to manufacture chemical tankers, rigs, bulk carriers and containers, and the construction industry are our largest customers of plates.

In 2013, our sales volume of plates produced by us and directly sold to external customers decreased by 7.1% compared to 2012, reflecting a decrease in demand from the shipbuilding industry.

Including sales of plates produced by us and sold through our consolidated sales subsidiaries in addition to plates produced by us and directly sold to external customers, we had a domestic market share for plates of approximately 41% on a non-consolidated basis.

Wire Rods

Wire rods are used mainly by manufacturers of wire, fasteners, nails, bolts, nuts and welding rods. Wire rods are also used in the manufacture of coil springs, tension bars and tire cords in the automotive industry.

Our deliveries of wire rods produced by us and directly sold to external customers amounted to 1.7 million tons in 2013, representing 6.0% of our total sales volume of principal steel products produced by us and directly sold to external customers. The largest customers for our wire rods are manufacturers of wire ropes and fasteners.

In 2013, our sales volume of wire rods produced by us and directly sold to external customers increased by 13.3% compared to 2012, primarily reflecting an increase in demand from the domestic automotive industry, which we were able to meet following commencement of commercial operation of our fourth wire rod manufacturing plant.

Including sales of wire rods produced by us and sold through our consolidated sales subsidiaries in addition to wire rods produced by us and directly sold to external customers, we had a domestic market share for wire rods of approximately 50% on a non-consolidated basis.

 

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Silicon Steel Sheets

Silicon steel sheets are used mainly in the manufacture of power transformers and generators and rotating machines.

Our deliveries of silicon steel sheets produced by us and directly sold to external customers amounted to 1.1 million tons in 2013, representing 3.9% of our total sales volume of principal steel products produced by us and directly sold to external customers.

In 2013, our sales volume of silicon steel sheets produced by us and directly sold to external customers decreased by 0.8% compared to 2012 due to a decrease in demand from manufacturers of power transformers and generators.

Including sales of silicon steel sheets produced by us and sold through our consolidated sales subsidiaries in addition to silicon steel sheets produced by us and directly sold to external customers, we had a domestic market share for silicon steel sheets of approximately 87% on a non-consolidated basis.

Others

Other products include lower value-added semi-finished products such as pig iron, billets, blooms and slab.

Markets

Korea is our most important market. Domestic sales represented 48.8% of our total revenue from steel products produced and sold by us in 2013. Our export sales and overseas sales to customers abroad represented 51.2% of our total revenue from steel products in 2013. Our sales strategy has been to devote our production primarily to satisfy domestic demand, while seeking export sales to utilize capacity to the fullest extent and to expand our international market presence.

Domestic Market

We primarily sell in Korea higher value-added and other finished products to end-users and semi-finished products to other steel manufacturers for further processing. Local distribution companies and sales affiliates sell finished steel products to low-volume customers. We provide service technicians for large customers and distributors in each important product area.

The table below sets out our estimate of the market share of steel products sold in Korea for the periods indicated based on sales volume.

 

     For the Year Ended December 31,  

Source

       2011             2012             2013      

POSCO’s sales (1)

     41.4     41.9     43.4

Other domestic steel companies’ sales

     24.6        23.4        23.6   

Imports

     34.0        34.8        33.0   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

 

(1) POSCO’s sales volume includes steel products produced by us (but not by our subsidiaries) and sold through our consolidated sales subsidiaries in addition to steel products produced by us (but not by our subsidiaries) and directly sold to external customers.

 

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Exports

Our export sales and overseas sales to customers abroad represented 51.2% of our total revenue from steel products produced and sold by us in 2013, 70.4% of which was generated from exports sales and overseas sales to customers in Asian countries. Our export sales and overseas sales to customers abroad in terms of revenue from such products decreased by 5.9% from Won 21,888 billion in 2012 to Won 20,587 billion in 2013, primarily reflecting a decrease in our export prices resulting from production over-capacity in the global steel industry.

The tables below set out our export sales and overseas sales to customers abroad in terms of revenue from steel products produced and sold by us, by geographical market and by product for the periods indicated.

 

     For the Year Ended December 31,  
     2011     2012     2013  

Region

     Billions of  
Won
             %               Billions of  
Won
             %               Billions of  
Won
             %          

Asia (other than China and Japan)

   5,733         23.2   5,834         26.7   5,707         27.7

China

     6,984         28.3        6,328         28.9        6,220         30.2   

Japan

     3,415         13.8        3,084         14.1        2,583         12.5   

Europe

     1,609         6.5        942         4.3        999         4.9   

Middle East

     690         2.8        528         2.4        381         1.8   

North America

     2,387         9.7        1,288         5.9        1,145         5.6   

Others

     3,846         15.6        3,884         17.7        3,552         17.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

       24,665         100.0       21,888         100.0       20,587         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the Year Ended December 31,  
     2011     2012     2013  

Steel Products

     Billions of  
Won
             %               Billions of  
Won
             %               Billions of  
Won
             %          

Cold rolled products

   7,975         32.3   7,245         33.1   6,653         32.3

Hot rolled products

     4,210         17.1        3,783         17.3        3,300         16.0   

Stainless steel products

     6,295         25.5        5,302         24.2        5,125         24.9   

Plates

     1,487         6.0        1,573         7.2        1,238         6.0   

Wire rods

     689         2.8        598         2.7        569         2.8   

Silicon steel sheets

     996         4.0        840         3.8        837         4.1   

Others

     3,012         12.2        2,546         11.6        2,863         13.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

       24,665         100.0       21,888         100.0       20,587         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The table below sets out the world’s apparent steel use for the periods indicated.

 

     For the Year Ended December 31,  
             2011                     2012                     2013          

Apparent steel use (million metric tons)

     1,404        1,430        1,481   

Percentage of annual increase

     7.8     1.9     3.6

 

Source: World Steel Association.

Recent difficulties affecting the European Union and global financial sectors, adverse conditions and volatility in the European Union and worldwide credit and financial markets, fluctuations in oil and commodity prices, the general weakness of the global economy and the slowdown in growth of the Chinese economy have increased the uncertainty of global economic prospects in general and have adversely affected the global and Korean economies. The World Steel Association forecasts that global apparent steel use is expected to increase by 3.1% to 1,527 million metric tons in 2014.

 

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In recent years, driven in part by strong growth in steel consumption in emerging economies, the global steel industry has experienced renewed interest in expansion of steel production capacity. World Steel Dynamics estimated the global crude steel production capacity to be 2,168 million tons in 2013. The increased production capacity, combined with weakening demand due primarily to the recent slowdown of the global economy, has resulted in production over-capacity in the global steel industry. Production over-capacity in the global steel industry may intensify if the slowdown of the global economy continues or demand from developing countries that have experienced significant growth in recent years does not meet the growth in production capacity.

We distribute our export products mostly through Korean trading companies, including Daewoo International, and our overseas sales subsidiaries. Our largest export market in 2013 was China, which accounted for 30.2% of our export revenue from steel products produced and sold by us. The principal products exported to China were cold rolled products and plates. Our exports to China amounted to Won 6,328 billion in 2012 and Won 6,220 billion in 2013. Our exports to China decreased by 1.7% in 2013 primarily due to a decrease in our export prices to China as well as our decision to allocate more products to European countries where we could obtain better export prices. Our export sales in terms of revenue from European countries increased by 6.1% from Won 942 billion in 2012 to Won 999 billion in 2013.

Anti-Dumping and Countervailing Duty Proceedings

From time to time, our exporting activities have become subject to anti-dumping and countervailing duty proceedings. In recent years, we have become subject to a number of anti-dumping duties in India, Indonesia, Australia, Thailand, Brazil, Taiwan and Malaysia and a number of anti-dumping and countervailing duty investigations in several other countries, including the U.S., India and Canada. In addition, the Mexican government initiated an anti-dumping investigation in October 2012 relating to our exports of cold rolled steel products, and the investigation was suspended until 2018 on condition that we comply with supply undertakings. Our products that are subject to anti-dumping or countervailing duty proceedings in the aggregate currently do not account for a material portion of our total sales, and such proceedings have not had a material adverse impact on our business and operations in recent years.

Pricing Policy

We determine the sales price of our products based on market conditions. In setting prices, we take into account our costs, including those of raw materials, supply and demand in the Korean market, exchange rates, and conditions in the international steel market. Our prices can fluctuate considerably over time, depending on market conditions and other factors. The prices of our higher value-added steel products in the largest markets are determined considering the prices of similar products charged by our competitors.

We gradually increased our export prices in Dollar terms in the first half of 2011. However, our export prices fell substantially in the second half of 2011 and decreased further in 2012 and the first half of 2013. Our domestic sales prices remained relatively stable in the second half of 2011 but decreased in 2012 and the first half of 2013. We may decide to adjust our future sales prices on an on-going basis subject to market demand for our products, prices of raw materials, the production outlook of the global steel industry and global economic conditions in general.

Raw Materials

Steel Production

The principal raw materials used in producing steel through the basic oxygen steelmaking method are iron ore and coal. We require approximately 1.7 tons of iron ore and 0.8 tons of coal to

 

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produce one ton of steel. We import all of the coal and virtually all of the iron ore that we use. In 2013, POSCO imported approximately 48.9 million dry metric tons of iron ore and 26.6 million wet metric tons of coal. Iron ore is imported primarily from Australia, Brazil and South Africa. Coal is imported primarily from Australia, Canada and the United States. In 2013, we purchased a substantial portion of our iron ore and coal imports pursuant to long-term contracts. The supply contracts have terms of one to ten years and the long-term contracts generally provide for periodic price adjustments to the then-market prices. The long-term contracts to purchase iron ore and coal generally provide for quarterly adjustments to the purchase prices to be determined through negotiation between the supplier and us. Such price negotiations are driven by various factors, including the global economic outlook, global market prices of raw materials and steel products, supply and demand outlook of raw materials and production costs of raw materials. Typically, globally influenced buyers and sellers of raw materials determine benchmark prices of raw materials, based on which other buyers and sellers negotiate their prices after taking into consideration the quality of raw materials and other factors. We or the suppliers may cancel the long-term contracts only if performance under the contracts is prevented by causes beyond our or their control and these causes continue for a specified period.

We also make investments in exploration and production projects abroad to enhance our ability to meet the requirements for high-quality raw materials, either as part of a consortium or through an acquisition of a minority interest. We purchased approximately 23% of our iron ore and coal imports in 2013 from foreign mines in which we have made investments. Our major investments to procure supplies of coal, iron ore and nickel are located in Australia, Brazil, New Caledonia and Canada, and our significant investments are as follows:

 

   

We made an investment of US$500 million in December 2008 to acquire a 6.48% interest in Nacional Minérios S.A., an iron ore mining company in Brazil, in a consortium with Japanese steel manufacturers and trading companies. We secured approximately 3.7 million tons of iron ore in 2013, and we have the right to secure up to 3.7 million tons of iron ore per year.

 

   

We made an initial investment of A$249 million in 2010 to acquire a 3.75% interest in Roy Hill Holdings Pty., Ltd., an iron ore mining company in Australia. We subsequently entered into a contract in March 2012 to invest an additional A$1,495 million to increase our interest to 15% but sold a 2.5% interest in April 2012 to China Steel Corporation for A$305 million. In November 2013, we invested an additional A$47 million in order to maintain our interest of 12.5% in Roy Hill Holdings Pty. Ltd. Through our ownership interest, we expect to secure up to approximately 15.1 million tons of iron ore per year starting in 2015.

 

   

In July 2010, we acquired a 24.5% interest in the Australian Premium Iron (API) iron ore joint venture in Pilbara, Australia for A$184 million, which expects to supply 7.4 million tons of iron ore per year starting in 2018.

 

   

As part of a consortium including China Steel Corporation and domestic financial investors, we made an investment of US$277 million in March 2013 to acquire a minority interest of 3.78% in an iron ore mining asset of ArcelorMittal Mines Canada Inc. in Quebec. We expect to secure additional iron ore through our investment in the mining company.

We will continue to selectively seek opportunities to enter into additional strategic relationships that would enhance our ability to meet the requirements for principal raw materials.

The average market price of coal per wet metric ton (benchmark free on board price of Australian premium hard coking coal) was US$289 in 2011, US$209 in 2012 and US$159 in 2013. The average market price of iron ore per dry metric ton (free on board price of Platts Iron Ore index with iron (Fe) 62% content) was US$160 in 2011, US$122 in 2012 and US$126 in 2013. We currently do not depend on any single country or supplier for our coal or iron ore.

 

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Stainless Steel Production

The principal raw materials for the production of stainless steel are ferronickel, ferrochrome and stainless steel scrap. We purchase a majority of our requirements for ferronickel primarily from suppliers in Korea that procure nickel ore from New Caledonia, and the remainder primarily from leading suppliers in Japan that procure nickel ore from New Caledonia and the Philippines, as well as suppliers in Indonesia. Our primary suppliers of ferrochrome are located in South Africa, India and Kazakhstan. Our stainless steel scraps are primarily supplied by domestic and overseas suppliers in Japan and the European Union. Revert scraps from the Pohang Steelworks are also used for our stainless steel production. The average market price of nickel per ton was US$22,894 in 2011, US$17,537 in 2012 and US$15,022 in 2013.

Transportation

In order to meet our transportation needs for iron ore and coal, we have entered into long-term contracts with shipping companies in Korea to retain a fleet of dedicated vessels. These dedicated vessels transported approximately 84% of the total requirements in 2013, and the remaining approximately 16% was transported by vessels retained through short to medium term contracts, depending on market conditions. Australia and Brazil are the main countries where the vessels are loaded, and they accounted for 66% and 14%, respectively, of our total requirements in 2013. We plan to continue to optimize the fleet of dedicated vessels that we use by 2020 in order to cope with changes in the global shipping environment, as well as upgrade some of the existing vessels with others that utilize more energy-efficient technologies.

The Steelmaking Process

Our major production facilities, Pohang Works and Gwangyang Works, produce steel by the basic oxygen steelmaking method. The stainless steel plant at Pohang Works produces stainless steel by the electric arc furnace method. Continuous casting improves product quality by imparting a homogenous structure to the steel. Pohang Works and Gwangyang Works produce all of their products through the continuous casting.

Steel — Basic Oxygen Steelmaking Method

First, molten pig iron is produced in a blast furnace from iron ore, which is the basic raw material used in steelmaking. Molten pig iron is then refined into molten steel in converters by blowing pure oxygen at high pressure to remove impurities. Different desired steel properties may also be obtained by regulating the chemical contents.

At this point, molten steel is made into semi-finished products such as slabs, blooms or billets at the continuous casting machine. Slabs, blooms and billets are produced at different standardized sizes and shapes. Slabs, blooms and billets are semi-finished lower margin products that we either use to produce our further processed products or sell to other steelmakers that produce further processed steel products.

Slabs are processed to produce hot rolled coil products at hot strip mills or to produce plates at plate mills. Hot rolled coils are an intermediate stage product that may either be sold to our customers as various finished products or be further processed by us or our customers into higher value-added products, such as cold rolled sheets and silicon steel sheets. Blooms and billets are processed into wire rods at wire rod mills.

Stainless Steel — Electric Arc Furnace Method

Stainless steel is produced from stainless steel scrap, chrome, nickel and steel scrap using an electric arc furnace. Stainless steel is then processed into higher value-added products by methods similar to those used for steel production. Stainless steel slabs are produced at a continuous casting mill. The slabs are processed at hot rolling mills into stainless steel hot coil, which can be further processed at cold strip mills to produce stainless cold rolled steel products.

 

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Competition

Domestic Market

We are the largest fully integrated steel producer in Korea. In hot rolled products, where we had a market share of approximately 43% on a non-consolidated basis in 2013, we face competition from a Korean steel producer that operates mini-mills and produces hot rolled coil products from slabs and from various foreign producers, primarily from China and Japan. In cold rolled products and stainless steel products, where we had a market share of approximately 46% and 48%, respectively, on a non-consolidated basis in 2013, we compete with smaller specialized domestic manufacturers and various foreign producers, primarily from China and Japan. For a discussion of domestic market shares, see “— Markets — Domestic Market.”

We may face increased competition in the future from new specialized or integrated domestic manufacturers of steel products in the Korean market. Our biggest competitors in Korea are Hyundai Steel Co., Ltd. with an annual crude steel production of approximately 17.2 million tons and Dongbu Steel Co., Ltd. with an annual crude steel production of approximately 2.0 million tons. Hyundai Steel completed construction of an integrated steel mill with an annual capacity of 4 million tons in January 2010 and added a second furnace with the same capacity in November 2010 and a third furnace with the same capacity in April 2011.

The Korean Government does not impose quotas on or provide subsidies to local steel producers. As a World Trade Organization signatory, Korea has also removed all steel tariffs.

Export Markets

The competitors in our export markets include all the leading steel manufacturers of the world. In recent years, there has been a trend toward industry consolidation among our competitors, and smaller competitors in the global steel market today may become larger competitors in the future. For example, Mittal Steel’s takeover of Arcelor in 2006 created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal S.A., and new market entrants, especially from China and India, could result in a significant increase in competition. Major competitive factors include range of products offered, quality, price, delivery performance and customer service. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.

Various export markets currently impose tariffs on different types of steel products. However, we do not believe that tariffs significantly affect our ability to compete in these markets.

Subsidiaries and Global Joint Ventures

Steel Production

In order to effectively implement our strategic initiatives and to solidify our leadership position in the global steel industry, we have established various subsidiaries and joint ventures around the world that engage in steel production activities.

Korea. POSCO Specialty Steel produces high-quality steel products for the automotive, machinery, nuclear power plant, shipbuilding, aeronautics and electronics industries. We currently hold a 72.1% interest in the company. Production facilities operated by POSCO Specialty Steel have an aggregate annual production capacity of 840 thousand tons of wire rods, round bars, steel pipes and semi-finished products. POSCO Specialty Steel Co., Ltd. produced 635 thousand tons of such products in 2013.

 

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In order to expand our sale of value-added products, we established POSCO Coated and Color Sheet Co., Ltd. by merging a coated steel manufacturer and a color sheet manufacturer in March 1999. POSCO Coated and Color Sheet has an aggregate annual production capacity of 600 thousand tons of galvanized and aluminized steel sheets widely used in the construction, automotive parts and home appliances industries. POSCO Coated and Color Sheet also has an aggregate annual production capacity of 350 thousand tons of color sheets that are mainly used for interior and exterior materials and home appliances. In 2013, POSCO Coated and Color Sheet produced 561 thousand tons of galvanized and aluminized steel sheets and 343 thousand tons of color sheets.

China. We entered into an agreement with Sagang Group Co. to establish Zhangjiagang Pohang Stainless Steel Co., Ltd., a joint venture company in China for the manufacture and sale of stainless cold rolled steel products. We have an 82.5% interest in the joint venture (including 23.9% interest held by POSCO China Holding Corporation). The plant commenced production of stainless cold rolled steel products in December 1998. The joint venture also completed the construction of new mills in July 2006 with additional annual production capacity of approximately 800 thousand tons of stainless hot rolled products. Zhangjiagang Pohang Stainless Steel produced 1,120 thousand tons of stainless steel products in 2013.

We established Qingdao Pohang Stainless Steel Co., Ltd., a wholly owned subsidiary set up to manufacture and sell stainless cold rolled steel products in China. The plant became operational in December 2004, with an annual production capacity of 180 thousand tons of stainless cold rolled steel products. Qingdao Pohang Steel produced 170 thousand tons of such products in 2013.

In August 2003, we entered into a joint venture agreement with Benxi Iron and Steel Group in China to establish Benxi Steel POSCO Cold Rolled Sheet Co., Ltd. The cold rolling mill with an annual production capacity of 1.9 million tons became operational in March 2006 and the company produced 1.9 million tons of such products in 2013. We currently hold a 25% interest in this joint venture.

Vietnam. We entered into an agreement with Nippon Steel & Sumitomo Metal Corporation to establish POSCO Vietnam Co., Ltd., a joint venture company in Vietnam for the manufacture and sale of cold rolled steel products. We have an 85% interest in the joint venture. We completed the construction of a plant in September 2009 with an annual production capacity of 1.2 million tons of cold rolled products and commenced commercial production. POSCO Vietnam produced 906 thousand tons of such products in 2013.

Thailand. In order to secure an alternative sales source for stainless cold rolled steel products and an export base for expanding into the Southeast Asia stainless steel markets, we acquired a controlling interest in Thainox Stainless Public Company Limited, a major stainless steel manufacturer in Thailand, in September 2011. We renamed the company as POSCO Thainox Public Company Limited in October 2011 and currently hold a 84.9% interest in the company. The company produced 160 thousand tons of stainless cold rolled products in 2013.

United States. We entered into a joint venture in March 2007 with US Steel and SeAH to establish United Spiral Pipe LLC to produce American Petroleum Institute-compliant pipes (“API Pipes”) and non-API pipes. We hold a 35% interest in the company. United Spiral Pipe started commercial production in May 2010 and produced 8 thousand tons of pipes in 2013.

We also entered into 50-50 joint venture between U.S. Steel Corporation and us called USS-POSCO Industries Corporation. We sell hot rolled products to USS-POSCO Industries, which uses such products to manufacture cold rolled and galvanized steel products and tin-plate products for sale in the United States. USS-POSCO Industries produced 872 thousand tons of such products in 2013.

Mexico. In Mexico, POSCO Mexico S.A. de C.V. completed the construction of a plant in August 2009 with an annual production capacity of 0.4 million tons of cold rolled products and commenced commercial production to supply automotive manufacturers in Mexico, Southeastern United States and South America. POSCO Mexico expanded its annual production capacity to 0.9 million tons of gavalvanized steel products in December 2013, and produced 323 thousand tons of cold rolled products in 2013.

 

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Indonesia. We entered into an agreement with PT. Krakatau Steel (Persero) Tbk. to establish PT. Krakatau POSCO Co., Ltd., a joint venture company in Indonesia for the manufacture and sale of plates and slabs. We have a 70% interest in the joint venture. We completed the construction of a plant in December 2013 with an annual production capacity of 3.0 million tons of plates and slabs.

Others. In addition to the above investments, we are carefully seeking out additional promising investment opportunities abroad. In June 2005, we entered into a memorandum of understanding with Orissa State Government of India for the construction of an integrated steel mill and the development of iron ore mines in Orissa State. We estimate the aggregate costs of the initial phase of construction and mine development to be approximately $3.7 billion and an additional cost of approximately $8.3 billion in order to increase the annual production capacity to 12 million tons of plates and hot rolled products. The Government of India reissued clearance for the construction of the steel mill in January 2014 and is currently in the process of preparing the land on which the integrated steel mill will be constructed. With respect to development of iron ore mines in Orissa State, we obtained a final ruling from the Indian Supreme Court in May 2013 with respect to authority of the central government to issue permission, and we are waiting for approval from the Government of India to start our exploration and development activities.

We have also established supply chain management centers around the world to provide processing and logistics services such as cutting flat steel products to smaller sizes to meet customers’ needs. In 2013, our 39 supply chain management centers recorded aggregate sales of 5.1 million tons of steel products.

Trading

Our trading activities consist primarily of trading activities of Daewoo International. We acquired a controlling interest in Daewoo International for Won 3.37 trillion on September 20, 2010, and we currently hold a 60.3% interest in Daewoo International. Our consolidated subsidiaries that also engage in trading activities include POSCO Processing & Service Co., Ltd. that primarily focuses in the domestic market, and POSCO Asia Company Limited located in Hong Kong, POSCO Japan Co., Ltd. located in Tokyo, Japan, POSCO America Corporation located in New Jersey, U.S.A. and POSCO South Asia Co., Ltd. located in Bangkok, Thailand.

Daewoo International is a global trading company that primarily engages in trading of steel and raw materials as well as investing in energy and mineral development projects. It also manufactures and sells textiles and operates a department store in Korea. Daewoo International was established in December 2000 when the international trading and construction businesses of Daewoo Corporation were spun off into three separate companies as part of a debt workout program of Daewoo Corporation.

 

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The following table sets forth a breakdown of Daewoo International’s total sales by export sales, domestic sales and third-party trades as well as product category for the periods indicated:

 

     For the Year Ended December 31,  

Product Category

   2011     2012     2013  
     (In billions of Won, except percentages)  

Export Sales

            

Trading sales:

            

Steel and metal

       6,070        31.6       6,203        35.8       5,397        31.5

Chemical and commodities

     1,654        8.6        1,686        9.7        1,535        9.0   

Automobile and machinery parts

     1,527        8.0        1,469        8.5        1,625        9.5   

Electronics and miscellaneous items

     93        0.5        120        0.7        72        0.4   

Natural resources development

                   2        0.0                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     9.344        48.7        9,480        54.7        8,630        50.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Manufactured product sales

     72        0.4        13        0.1        13        0.1   

Miscellaneous

     70        0.4        25        0.1        14        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total export sales

     9,485        49.5        9,517        54.9        8,657        50.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Domestic Sales

            

Trading sales:

            

Steel and metal

       688        3.6       609        3.5     686        3.9

Chemical and commodities

     70        0.4        69        0.4        71        0.4   

Automobile and machinery parts

     8        0.0        3        0.0        34        0.2   

Electronics and miscellaneous items

                   7        0.1        4        0.0   

Other goods

     56        0.3        58        0.3        54        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     822        4.3        746        4.3        849        5.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Miscellaneous

     7        0.0        8        0.0        12        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic sales

     830        4.3        754        4.3        861        5.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Third-Country Trades

            

Trading

       12,151        63.3       10,220        59.0       10,598        61.9   

Natural resources development

     58        0.3        78        0.5        132        0.8   

Manufactured product trading

     474        2.5        312        1.8        261        1.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total third-country trades

     12,682        66.1        10,610        61.3        10,991        64.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidation adjustments

     (3,810     (19.9     (3,561     (20.5     (3,399     (19.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

       19,188        100.0       17,320        100.0   17,109        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Trading Activities. Daewoo International’s trading activities consist of exporting and importing a wide variety of products and commodities, including iron and steel, raw materials for steel production, non-ferrous metals, chemicals, automotive parts, machinery and plant equipment, electronics products, agricultural commodities and textiles. Daewoo International is also engaged in third-country trade that does not involve exports from or imports to Korea. The products are obtained from and supplied to numerous suppliers and purchasers in Korea and overseas, which are procured through a global trading network comprised of overseas trading subsidiaries, branches and representative offices. Such subsidiaries and offices support Daewoo International’s trading activities by locating suitable local suppliers and purchasers on behalf of customers, identifying business opportunities and providing information regarding local market conditions.

In most cases, Daewoo International enters into trading transactions after the underlying sale and purchase contracts have been matched, which mitigates inventory and price risks to Daewoo International. Daewoo International has not experienced material losses related to such risks. Daewoo International typically enters into trading transactions as a principal, and in limited cases as an import or export agent. When acting as a principal or an agent, Daewoo International derives its gross trading profit from the margin between the selling price of the products and the purchase price it pays for such products. In the case of principal transactions, the selling price is recorded as sales and the purchase price is recorded as cost of sales, while only the margin is recorded as sales in the case of agency transactions in which Daewoo International does not assume the risks and rewards of ownership of the

 

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goods. In the case of principal transactions, it takes an average of approximately 80 days between Daewoo International’s payment of goods and its receipt of payment from its customers. In the instances in which it acts as an arranger for a third country transaction, Daewoo International derives its gross trading profit from, and records as sales, the commission paid to it by the customer. The sizes of margins and commissions for Daewoo International’s trading activities vary depending on a number of factors, including prevailing supply and demand conditions for the product involved, the cost of financing, insurance, storage and transport and the creditworthiness of the customer, and tends to decline as the product or market matures.

In connection with its export and import transactions, Daewoo International has accounts receivable and payable in a number of currencies, but principally in Dollars. Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is substantially mitigated by such strategies, Daewoo International also periodically enters into derivative contracts, primarily currency forward contracts, to further hedge its foreign exchange risks.

In connection with its trading activities, Daewoo International arranges insurance and product transport at the request of customers, the costs of which generally become reflected in the sales price of the relevant products, and also provides financing services to its purchasers and suppliers as necessary. In the case of trading transactions involving large-scale industrial or construction projects, Daewoo International also provides necessary project planning and organizing services to its customers.

Natural Resources Development Activities. Daewoo International also invests in energy and mineral development projects throughout the world. In particular, Daewoo International joined a consortium with Korea Gas Corporation, ONGC Videsh Ltd. and the Gas Authority of India Ltd. in November 2002, which made a successful bid in the gas exploration, development and production project in the Myanmar A-1 gas field. In October 2005, the consortium made a successful bid in the gas exploration, development and production project in the Myanmar A-3 gas field, located adjacent to the Myanmar A-1 gas field. In December 2008, the consortium entered into a sales agreement with China National United Oil Corporation to sell the gas produced from the A-1 and A-3 gas fields for a period of 30 years after the commencement of production. In August 2010, Myanmar Oil & Gas Enterprise, the national oil and gas company of Myanmar, acquired a 15% interest in each of the projects. As of December 31, 2013, Daewoo International had invested approximately US$1,103 million in the A-1 and A-3 gas field projects, approximately US$214 million in a related off-shore pipeline project and approximately US$354 million in a related on-shore pipeline project. Daewoo International plans to make further investments in these gas fields in the future. Daewoo International held a 51% interest in each of the A-1, A-3 and off-shore pipeline projects and a 25% interest in the on-shore pipeline project. Production of gas from these gas fields commenced in July 2013 and Daewoo International recognized revenue from the Myanmar gas field project starting in November 2013.

Such natural resources development projects, while entailing higher risks than the traditional trading business, offer higher potential returns. Daewoo International intends to continue to expand its operations by carefully seeking out promising energy development projects abroad. Daewoo International mitigates the risks associated with such investments through subsidies from the Special Account for Energy Related Funds that is administered, among others, by Korea National Oil Corporation and Korea Resources Corporation, government agencies that promote natural resources development activities of the fund. The fund subsidizes a portion of the investment amount in the event the investor fails to develop viable deposits. If the natural resources development activities are successful, the investor must reimburse the Fund for the subsidy amount, together with accrued interest. In most instances, Daewoo International is required to obtain consent from the Ministry of Trade, Industry & Energy prior to investing in natural resources development projects.

 

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Competition. Daewoo International competes principally with six other Korean general trading companies, each of which is affiliated with a major domestic business group, as well as global trading companies based in other countries. In the domestic market, competition for export transactions on behalf of domestic suppliers and import transactions on behalf of domestic purchasers was limited, as most affiliated general trading companies of large Korean business groups generally relied on affiliate transactions for the bulk of their trading business. However, in recent years, many of these Korean general trading companies have reduced their reliance on their affiliated business group and transactions carried out on behalf of their member companies and instead have generally evolved to focus on segments of the import and export markets in which they have a competitive advantage. As a result, competition among Korean general trading companies in the area of traditional trade has become more intense. Daewoo International’s principal competitors in the overseas trading markets include Korean trading companies that operate in various international markets, as well as foreign trading companies, particularly those based in Japan. As Daewoo International diversifies into businesses other than traditional trading such as natural resources development, it also increasingly competes with other Korean and international companies involved in these businesses.

Construction

POSCO E&C, our consolidated subsidiary in which we hold an 89.5% interest, is one of the leading engineering and construction companies in Korea, primarily engaged in the planning, design and construction of industrial plants and architectural works and civil engineering projects. In particular, POSCO E&C has established itself as one of the premier engineering and construction companies in Korea through:

 

   

its strong and stable customer base; and

 

   

its cutting-edge technological expertise obtained from construction of advanced integrated steel plants, as well as participation in numerous modernization and rationalization projects at our Pohang Works and Gwangyang Works.

Construction Services Offered. The following table sets forth a breakdown of POSCO E&C’s total sales by product category for the periods indicated:

 

     For the Year Ended December 31,  

Product Category

   2011     2012     2013  
     (In billions of Won, except percentages)  

Plant works

   1,797        23.9   3,223        37.3   3,073        30.3

Architectural works

     1,728        23.0        2,026        23.5        2,935        28.9   

Energy works

     1,465        19.5        1,411        16.3        2,128        21.0   

Civil works

     1,458        19.4        1,220        14.1        999        9.8   

Real estate services

     94        1.3        40        0.5        108        1.1   

Engineering services

     1,137        15.1        1,118        12.9        1,219        12.0   

Consolidation adjustments

     (171     (2.3     (401     (4.6     (305     (3.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

       7,508        100.0       8,637        100.0       10,155        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The tables below set out POSCO E&C’s total sales for the periods indicated by geographical area of customers that ordered the projects.

 

                 For the Year Ended  December 31,              

Region

   2012     2013  
     (In billions of Won, except percentages)  

Korea

   7,946        92.0   9,148        90.1

Southeast Asia

     475        5.5        649        6.4   

India

     56        0.6        77        0.8   

China

     170        2.0        239        2.4   

Central and South America

     261        3.0        284        2.8   

Others

     131        1.5        63        0.6   

Consolidation adjustments

     (401     (4.6     (306     (3.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total sales

       8,637        100.0       10,155        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Leveraging its technical know-how and track record of building some of the leading industrial complexes in Korea, POSCO E&C has also focused on diversifying its operations into construction of high-end apartment complexes and participating in a wider range of architectural works and civil engineering projects, as well as engaging in urban planning and development projects and expanding its operations abroad. One of its landmark urban planning and development projects includes the development of a 5.7 million-square meter area of Songdo International City in Incheon, which POSCO E&C is co-developing with Gale International, a respected real estate developer based in the United States. POSCO E&C also has substantial experience in the energy field obtained from the construction of various power plants for member companies of the POSCO Group, specializing primarily in engineering and construction of liquefied natural gas (“LNG”) and coal-fired thermal power plants. In recent years, POSCO E&C has obtained various orders for such power plants, including LNG-fired power plants in Incheon, Korea and coal-fired thermal power plants in Ventanas and Angamos, Chile. In response to increasing demand from the energy industry, POSCO E&C plans to continue to target opportunities in power plant construction, which it believes offers significant growth potential, and thereby enhance its know-how and profitability.

Competition. Competition in the construction industry is based primarily on price, reputation for quality, reliability, punctuality and financial strength of contractors. In Korea, POSCO E&C’s main competition in the construction of residential and non-residential buildings, EPC projects, urban planning and development projects and civil works projects consists of approximately ten major domestic construction companies, all of which are member companies of other large business groups in Korea and are capable of undertaking larger-scale, higher-value-added projects that offer greater potential returns. A series of measures introduced by the Government over the past few years to regulate housing prices in Korea, as well as an increasing popularity of low-bid contracts in civil works project mandates, have contributed to increased competition in the Korean construction industry in recent years. In the overseas markets, POSCO E&C faces competition from local construction companies, as well as international construction companies from other countries, including other major Korean construction companies with overseas operations. Construction companies from developed countries may be more experienced, have greater financial resources and possess more sophisticated technology than POSCO E&C, while construction companies from developing countries often have the advantage of lower wage costs.

Others

As part of our diversification efforts, we strive to identify business opportunities that supplement our steel, trading and construction segments, including power generation, LNG logistics and network and system integration.

POSCO Energy Corporation. In 2006, we acquired the largest domestic private power utility company that operates LNG combined cycle power generation facilities with total power generation capacity of 1,800 megawatts and renamed it POSCO Energy Corporation. Since our acquisition, POSCO Energy Corporation has expanded its power generation capacity by constructing additional power plants in Korea. As part of its efforts to geographically diversify its power generation facilities, POSCO Energy Corporation is constructing a 1,200 megawatts class coal power plant in Vietnam with Applied Energy Services Corporation. In Indonesia, POSCO Energy Corporation has partnered with PT. Krakatau Daya Listrik to build a 200 megawatts by-product gas power plant, which will be used to power our integrated mill. POSCO Energy Corporation’s total power generation capacity was approximately 3,481 megawatts as of December 31, 2013, and it plans to further increase its power generation capacity with the construction of additional power plants in Korea.

POSCO Energy Corporation is also selectively seeking opportunities to expand into solar, wind and other renewable energy businesses in order to become an integrated provider of energy solutions. In order to meet the increasing demand and regulatory requirements for clean energy, POSCO Energy Corporation signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global

 

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leader in the field of molten carbonate fuel cell technology, pursuant to which POSCO Energy Corporation is exploring opportunities to expand its business into the stationary fuel cell market. In consultation with FuelCell Energy, POSCO Energy Corporation completed construction of a fuel cell stack manufacturing plant with an annual production capacity of 34 megawatts in 2011 with the objective of enhancing POSCO Energy Corporation’s capability to meet the growing domestic demand for fuel cell energy.

LNG Logistics. In an effort to reduce our dependency on oil, we became the first private company in Korea to import LNG in 2005, and we have steadily increased the use of natural gas for energy generation at our steel production facilities. We operate an LNG receiving terminal that is equipped with two 100,000 kiloliters storage tanks, two 165,000 kiloliters storage tanks and additional facilities with an aggregate capacity to process up to 2.4 million tons of LNG annually in Gwangyang. In order to achieve maximum operational efficiency of our LNG terminal, we participate in the LNG trading and LNG ship gas trial businesses. We are also building a synthetic natural gas production plant with an annual capacity of 500,000 tons in Gwangyang that is scheduled for completion by the end of 2014. We believe that the synthetic natural gas production plant will provide us with a stable supply of LNG substitutes that we can utilize to meet our growing needs for energy generation.

Others. We acquired or established several subsidiaries that address specific services to support the operations of Pohang Works and Gwangyang Works. POSCO ICT Co., Ltd., founded in 1989, provides information and technology consulting and system network integration and outsourcing services. POSCO Plantec, created from the merger of POSCO Machinery & Engineering Co., Ltd. and POSCO Machinery Co., Ltd. in January 2010, provides engineering services related to plant construction and operations. Sungjin Geotec, a manufacturer of specialized equipment used in the power and energy industries, merged with POSCO Plantec in July 2013. POSCO Chemtech Company Ltd., formerly POSCO Refractories and Environment Company, Ltd., specializes in the manufacturing of refractories and lime used in steel manufacturing processes as well as a wide range of chemical products.

Insurance

We maintain property insurance for our property, plant and equipment that we believe to be consistent with market practice in Korea. As of December 31, 2013, our property, plant and equipment are insured against losses up to approximately Won 36,711 billion.

Item 4.C.  Organizational Structure

The following table sets out the jurisdiction of incorporation and our ownership interests of our significant subsidiaries:

 

Name

   Jurisdiction of
Incorporation
     Percentage of
Ownership
 

Daewoo International Corporation

     Korea         60.3

POSCO Engineering & Construction Co., Ltd

     Korea         89.5

POSCO Energy Corporation

     Korea         89.0

Zhangjiagang Pohang Stainless Steel Co., Ltd.

     China         82.5

POSCO Specialty Steel Co., Ltd.

     Korea         72.1

POSCO Processing & Service Co., Ltd.

     Korea         95.3

POSCO ICT Co., Ltd.

     Korea         65.4

Item 4.D.  Property, Plants and Equipment

Our principal properties are Pohang Works, which is located at Youngil Bay on the southeastern coast of Korea, and Gwangyang Works, which is located in Gwangyang City in the southwestern region of Korea. We expect to increase our production capacity in the future when we increase our

 

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capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. For a discussion of major items of our capital expenditures currently in progress, see “Item 5. Operating and Financial Review and Prospects — Item 5.B. Liquidity and Capital Resources — Liquidity — Capital Expenditures and Capital Expansion.”

Pohang Works

Construction of Pohang Works began in 1970 and ended in 1983. Pohang Works currently has an annual crude steel and stainless steel production capacity of 16.7 million tons. Pohang Works produces a wide variety of steel products. Products produced at Pohang Works include hot rolled sheets, plates, wire rods and cold rolled sheets, as well as specialty steel products such as stainless steel sheets and silicon steel sheets. These products can also be customized to meet the specifications of our customers.

Situated on a site of 8.9 million square meters at Youngil Bay on the southeastern coast of Korea, Pohang Works consists of 44 plants, including iron-making, crude steelmaking and continuous casting and other rolling facilities. Pohang Works also has docking facilities capable of accommodating ships as large as 200,000 tons for unloading raw materials, storage areas for up to 34 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Pohang Works consumed approximately 352 thousand tons of LNG and approximately 11,336 gigawatt hours of electricity in 2013. Pohang Works is equipped with a highly advanced computerized production-management system allowing constant monitoring and control of the production process.

The following table sets out Pohang Works’ capacity utilization rates for the periods indicated.

 

                 As of or for the  Year Ended December 31,              
     2011      2012      2013  

Crude steel and stainless steel production capacity as of end of the year (million tons per year)

     16.65         16.65         17.30   

Actual crude steel and stainless steel output (million tons)

     16.38         16.54         16.18   

Capacity utilization rate (%) (1)

     98.4         99.3         93.5   

 

 

(1) Calculated by dividing actual crude steel and stainless steel output by the actual crude steel and stainless steel production capacity for the relevant period as determined by us.

Gwangyang Works

Construction of Gwangyang Works began in 1985 on a site of 13.7 million square meters reclaimed from the sea in Gwangyang City in the southwestern region of Korea. Gwangyang Works currently has an annual crude steel production capacity of 20.8 million tons. Gwangyang Works specializes in high volume production of a limited number of steel products. Products manufactured at Gwangyang Works include both hot and cold rolled types.

Gwangyang Works is comprised of 46 plants, including iron-making plants, steelmaking plants, continuous casting plants, hot strip mills and thin-slab hot rolling plants. The site also features docking and unloading facilities for raw materials capable of accommodating ships of as large as 300,000 tons for unloading raw materials, storage areas for 38 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Gwangyang Works consumed approximately 252 thousand tons of LNG and approximately 13,524 gigawatt hours of electricity in 2013.

We believe Gwangyang Works is one of the most technologically advanced integrated steel facilities in the world. Gwangyang Works has a completely automated, linear production system that enables the whole production process, from iron-making to finished products, to take place without interruption. This advanced system reduces the production time for hot rolled products to only four hours. Like Pohang Works, Gwangyang Works is equipped with a highly advanced computerized production-management system allowing constant monitoring and control of the production process.

 

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Capacity utilization has kept pace with increases in capacity. The following table sets out Gwangyang Works’ capacity utilization rates for the periods indicated.

 

                 As of or for the  Year Ended December 31,              
     2011      2012      2013  

Crude steel production capacity as of end of the year (million tons per year)

     20.80         20.80         20.80   

Actual crude steel output (million tons)

     20.94         21.45         20.23   

Capacity utilization rate (%) (1)

     100.7         103.1         97.3   

 

 

(1) Calculated by dividing actual crude steel output by the actual crude steel production capacity for the relevant period as determined by us.

The Environment

We believe we are in compliance with applicable environmental laws and regulations in all material respects. Our levels of pollution control are higher than those mandated by Government standards. We established an on-line environmental monitoring system with real-time feedback on pollutant levels and a forecast system of pollutant concentration in surrounding areas. We also undergo periodic environmental inspection by both internal and external inspectors in accordance with ISO 14001 standards to monitor execution and maintenance of our environmental management plan. As we continue to diversify our production operations abroad and the importance of comprehensive environmental management continues to grow, we announced an integrated environmental management system in December 2010, pursuant to which all of our subsidiaries located in Korea as well as abroad acquired the ISO 14001 certification. We also operate a certification program targeting our suppliers and outsourcing partners, pursuant to which they are encouraged to establish environmental management systems of their own.

We have taken additional measures to ensure that we are appropriately addressing environmental issues. We recycle most of the by-products from the steelmaking process. A vital part of our production process requires consumption of water, and many of our operations are located on coastal sites or adjacent to major lakes and rivers. Recognizing the importance of water resources, we established mid-to-long-term water management strategies to more effectively utilize water resources, including increasing water recycling, reducing usage volume, developing substitute sources and reducing manufacturing discharge harmful to the environment. As part of our efforts to preserve biological diversity, we supply steel slag that is used in the construction of underwater facilities designed to restore marine ecosystems damaged by rising seawater temperatures. In addition, we have been developing environmentally friendly products such as chrome-free steel sheets in an effort to compete with products from the European Union, the United States and Japan and to meet strengthened environmental regulations. Anticipating the trend toward increasing regulation of chrome in various steel products, we introduced chrome-free steel products meeting international environmental standards in 2006 that are used to manufacture automotive oil tanks.

We plan to continue to invest in developing more environmentally friendly steel manufacturing processes. We commenced research and development for a new steel manufacturing technology called FINEX in 1992 jointly with the Research Institute of Industrial Science and Technology and VOEST Alpine, an Austrian company, and we completed the construction of our first FINEX plant in May 2003 with an annual steel production capacity of 0.6 million tons, a second FINEX plant in May 2007 with an annual steel production capacity of 1.5 million tons, and a third FINEX plant in January 2014 with an annual steel production capacity of 2.0 million tons. The total annual steel production capacity of our FINEX plants is 4.2 million tons. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that we believe optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages by eliminating major sources of pollution such as sinter and coke plants, as well as decreasing operating and raw material costs.

 

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Our climate change response program seeks to minimize the risks from changes in climate as well as to maximize the opportunities available in such environment by enhancing the energy efficiency of our production process. We are also involved in a forestation project in Uruguay, which was registered as the world’s first Clean Development Mechanism project sponsored by a steel producer. Clean Development Mechanism is one of the Kyoto Protocol’s project-based mechanisms designed to promote projects that reduce emissions. We have disclosed our carbon dioxide emission levels and efforts to deal with climate changes through various channels, including participating in the Carbon Disclosure Project. The Carbon Disclosure Project is an organization based in the United Kingdom that works with major corporations around the world to disclose their greenhouse gas emission levels.

POSCO spent Won 493 billion in 2011, Won 634 billion in 2012 and Won 295 billion in 2013 on anti-pollution facilities.

Item 4A.  Unresolved Staff Comments

We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.

Item 5. Operating and Financial Review and Prospects

Item 5.A.  Operating Results

The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRS, as issued by the IASB. Unless otherwise noted, the amounts included in Item 5.A. are presented on a consolidated basis.

Overview

We are the largest fully integrated steel producer in Korea. We have four reportable operating segments—a steel segment, a trading segment, an engineering and construction segment and a segment that contains operations of all other entities which fall below the reporting thresholds. The steel segment includes production of steel products and sale of such products. The trading segment consists of global trading activities of Daewoo International, exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. The construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The “others” segment includes power generation, LNG logistics, and network and system integration. See Note 41 of Notes to Consolidated Financial Statements.

One of the major factors contributing to our historical performance has been the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic conditions in Korea deteriorate.” A number of other factors have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These factors include:

 

   

our sales volume, unit prices and product mix;

 

   

costs and production efficiency; and

 

   

exchange rate fluctuations

As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.

 

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Sales Volume, Prices and Product Mix

In recent years, our net sales have been affected by the following factors:

 

   

the demand for our products in the Korean market and our capacity to meet that demand;

 

   

our ability to compete for sales in the export market;

 

   

price levels; and

 

   

our ability to improve our product mix.

Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automotive, electrical appliances and downstream steel processors, and the Korean economy in general.

In 2012, unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased. The weighted average unit price for such products decreased by 10.6% from 2011 to 2012, despite a depreciation in the average value of the Won against the Dollar in 2012 that increased our export prices in Won terms. The average exchange rate of the Won against the Dollar depreciated from Won 1,108.1 to US$1.00 in 2011 to Won 1,126.9 to US$1.00 in 2012.

The unit sales price of plates, which accounted for 13.8% of total sales volume of the principal steel products produced by us and directly sold to external customers, decreased by 16.2% in 2012. The unit sales price of hot rolled products, which accounted for 28.5% of total sales volume of such products, decreased by 15.4% in 2012. The unit sales price of stainless steel products, which accounted for 9.2% of total sales volume of such products, decreased by 14.3% in 2012. The unit sales price of silicon steel sheets, which accounted for 3.8% of total sales volume of such products, decreased by 13.4% in 2012. The unit sales price of cold rolled products, which accounted for 39.6% of total sales volume of such products, decreased by 8.4% in 2012. The unit sales price of wire rods, which accounted for 5.1% of total sales volume of such products, decreased by 6.3% in 2012.

In 2013, unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased. The weighted average unit price for such products decreased by 6.8% from 2012 to 2013, in part due to an appreciation in the average value of the Won against the Dollar in 2013 that decreased our export prices in Won terms. The average exchange rate of the Won against the Dollar appreciated from Won 1,126.9 to US$1.00 in 2012 to Won 1,095.0 to US$1.00 in 2013.

The unit sales price of cold rolled products, which accounted for 40.9% of total sales volume of such products, decreased by 13.9% in 2013. The unit sales price of wire rods, which accounted for 6.0% of total sales volume of the principal steel products produced by us and directly sold to external customers, decreased by 13.5% in 2013. The unit sales price of hot rolled products, which accounted for 26.1% of total sales volume of such products, decreased by 8.2% in 2013. The unit sales price of silicon steel sheets, which accounted for 3.9% of total sales volume of such products, decreased by 4.4% in 2013. The unit sales price of plates, which accounted for 13.2% of total sales volume of such products, decreased by 2.8% in 2013. The unit sales price of stainless steel products, which accounted for 9.9% of total sales volume of such products, decreased by 2.7% in 2013.

We gradually increased our export prices in the first half of 2011, but our export prices fell substantially in the second half of 2011 and decreased further in 2012 and the first half of 2013. We may decide to adjust our future export sales prices on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”

 

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The table below sets out the average unit sales prices for our semi-finished and finished steel products for the periods indicated.

 

                 For the Year Ended  December 31,              

Products

       2011              2012              2013      
     (In thousands of Won per ton)  

Cold rolled products

   1,051       963       829   

Hot rolled products

     871         737         677   

Stainless steel products

     3,087         2,646         2,576   

Plates

     1,043         873         849   

Wire rods

     1,328         1,245         1,076   

Silicon steel sheets

     1,571         1,362             1,302   

Average (1)

       1,198           1,071       998   

 

 

(1) “Average” prices are based on the weighted average, by sales volume, of our sales for the listed principal products produced by us and directly sold to external customers. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.” The average unit sales price calculation does not include sales results of steel products categorized as “others.”

Costs and Production Efficiency

Our major costs and operating expenses are raw material purchases, depreciation, labor and other purchases. The table below sets out our cost of sales and selling and administrative expenses as a percentage of our revenue as well as gross profit margin and operating profit margin for the periods indicated.

 

                 For the Year Ended  December 31,              
         2011             2012             2013      
     (Percentage of net sales)  

Cost of sales

     86.8     88.3     88.9

Selling and administrative expenses

     5.3        6.0        6.2   

Gross margin

     13.2        11.7        11.1   

Operating profit margin

     7.8        5.2        4.2   

Our operating profit margin decreased from 7.8% in 2011 to 5.2% in 2012 and further decreased to 4.2% in 2013, reflecting the current challenging business environment as discussed below.

We are closely monitoring changes in market conditions and we implemented the following measures in recent years to address challenges posed by the global economic downturn:

 

   

pursuing cost reduction through enhancing product designs, improving productivity and reducing transportation costs;

 

   

focusing on marketing activities to increase our domestic market share and export sales; and

 

   

establishing a special sales committee to more effectively respond to changes in market trends and preparing responses to various scenarios of future sales.

Production capacity represents our maximum production capacity that can be achieved with an optimal level of operations of our facilities. The table below sets out certain information regarding our production capacity and efficiency in the production of steel products for the periods indicated.

 

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                For the Year Ended  December 31,              
    2011     2012     2013  

Crude steel and stainless steel production capacity (million tons per year) (1)

    39.5        39.6        40.4   

POSCO

    37.5        37.5        38.1   

POSCO Specialty Steel Co., Ltd.

    1.0        1.1        1.2   

Zhangjiagang Pohang Stainless Steel Co., Ltd.

    1.0        1.0        1.1   

Actual crude steel and stainless steel output (million tons) (1)

    39.0        39.7        38.3   

POSCO

    37.3        38.0        36.4   

POSCO Specialty Steel Co., Ltd.

    0.8        0.7        0.7   

Zhangjiagang Pohang Stainless Steel Co., Ltd.

    0.9        1.0        1.1   

Capacity utilization rate (%)(1)

    98.7     100.3     94.6

POSCO

    99.7     101.4     95.5

POSCO Specialty Steel Co., Ltd.

    86.4     63.3     61.8

Zhangjiagang Pohang Stainless Steel Co., Ltd.

    99.1     103.3     100.3

 

 

(1) Reflects production capacity of POSCO, POSCO Specialty Steel Co., Ltd. and Zhangjiagang Pohang Stainless Steel Co., Ltd.

Exchange Rate Fluctuations

Our consolidated financial statements are prepared from our local currency denominated financial results, assets and liabilities and our subsidiaries around the world, which are then translated into Won. A substantial proportion of our consolidated financial results is accounted for in currencies other than the Won. Accordingly, our consolidated financial results and assets and liabilities may be materially affected by changes in the exchange rates of foreign currencies. In 2013, 51.2% of our total revenue from steel products produced and sold by us was in overseas markets outside of Korea. To the extent that we incur costs in one currency and make sales in another, our profit margins may be affected by changes in the exchange rates between the two currencies. Since the currency in which sales are recorded may not be the same as the currency in which expenses are incurred, foreign exchange rate fluctuations may materially affect our results of operations. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:

 

   

an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt;

 

   

an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated primarily in Dollars; and

 

   

foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.

Appreciation of the Won against major currencies, on the other hand, causes:

 

   

our export products to be less competitive by raising our prices in Dollar terms; and

 

   

a reduction in net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars.

We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables and our overseas subsidiaries have sought to further mitigate the adverse impact of exchange rate fluctuations by conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is partially mitigated by such strategies, we and our subsidiaries,

 

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particularly Daewoo International and POSCO E&C, also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge our foreign exchange risks. However, our results of operations have historically been affected by exchange rate fluctuations and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. Because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), depreciation of the Won generally has a negative impact on our results of operations.

Inflation

Inflation in Korea, which was 4.0% in 2011, 2.2% in 2012 and 1.3% in 2013, has not had a material impact on our results of operations in recent years.

Critical Accounting Estimates

We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require us to make certain estimates and judgments that affect the reported amounts in our consolidated financial statements. Our estimates and judgments are based on historical experience, forecasted future events and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may differ under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. We believe the critical accounting policies discussed below are the most important to the portrayal of our financial condition and results of operations. Each of them is dependent on projections of future market conditions, and they require us to make the most difficult, subjective or complex judgments.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for exposures in our receivable balances that represent our estimate of probable losses in our short-term and long-term receivable balances from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate and negatively impact their ability to make payments, additional allowances may be required. Determining the allowance for doubtful accounts requires significant management judgment and estimates including, among others, the credit worthiness of our customers, experience of historical collection patterns, potential events and circumstances affecting future collections and the ongoing risk assessment of our customer’s ability to pay.

Trade account receivables are analyzed on a regular basis and, upon our becoming aware of a customer’s inability to meet its financial commitments to us, the value of the receivable is reduced through a charge to the allowance for doubtful accounts. In addition, we record a charge to the allowance for doubtful accounts upon receipt of customer claims in connection with sales that management estimates are unlikely to be collected in full. As of December 31, 2013, the percentage of allowance for doubtful accounts to gross account receivables was 4.43%. Our allowance for doubtful accounts increased by 39.4%, or Won 187 billion, from Won 475 billion as of December 31, 2012 to Won 662 billion as of December 31, 2013 primarily due to recognition of bad debt expense related to project financing incurred by POSCO E&C. See Note 23 of Notes to Consolidated Financial Statements. Assumptions and judgments related to the allowance for doubtful accounts did not change in 2013.

Specifically, allowances for doubtful accounts are recorded when any of the following loss events occur: (i) there is objective evidence as to the uncollectibility of the account observed through bankruptcy, default or involuntary dissolution of the customer; (ii) we lose a lawsuit against the customer or our right of claim gets extinguished; (iii) our costs to collect the account exceed the payments to be received; or (iv) a dispute with the customer over the collection of the account persists for more than three years.

 

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The actual average annual uncollected percentage rate of accounts receivables resulting in write-offs for the three years in the period ended December 31, 2013 was 0.13%. These historical results, as well as current known conditions impacting the collectability of our accounts receivable balances, are significant factors for us when we estimate the amount of the necessary allowance for doubtful accounts. Historically, losses from uncollectible accounts receivables have been within expectations and in line with the allowances established. However, unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to change the timing of, and make additional allowances to, our receivable balances. In this case, our results of operations, financial condition and net worth could be materially and adversely affected.

Valuation of Financial Instruments including Debt and Equity Securities and Derivatives

We invest in various financial instruments including debt and equity securities and derivatives. Depending on the accounting treatment specific to each type of financial instrument, an estimate of fair value is required to determine the instrument’s effect on our consolidated financial statements.

If available, quoted market prices provide the best indication of fair value. We determine the fair value of our financial instruments using quoted market prices when available, including quotes from dealers trading those securities. If quoted market prices are not available, we determine the fair value based on pricing or valuation models, quoted prices of instruments with similar characteristics, or discounted cash flows. Determining the fair value of unlisted financial instruments involves a significant degree of management resources and judgment as no quoted prices exist and such securities are generally very thinly traded. Derivatives for which quoted market prices are not available are valued using valuation models such as the discounted cash flow method. The key inputs used in the valuation of such derivatives depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, foreign exchange rates, the spot price of the underlying instrument, volatility and correlation. The fair values based on pricing and valuation models and discounted cash flow analysis are subject to various assumptions used that, if changed, could significantly affect the fair value of the investments.

We assess at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the asset is impaired. As part of this impairment review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration in order to assess whether there is any objective evidence such as significant financial difficulty of the issuer.

We have estimated fair values of material non-marketable securities. We estimated these fair values based on pricing or valuation models, quoted prices of instruments with similar characteristics, or discounted cash flow models. The discounted cash flow model valuation technique is based on the estimated cash flow projections of the underlying investee. Key assumptions and estimates include market conditions, revenue growth rates, operating margin rates, income tax rates, depreciation and amortization rates, the level of capital expenditures, working capital amounts and the discount rates. These estimates are based on historical results of the investee and other market data. In these cash flows projections, the two most significant estimates are the discount rates and revenue growth rates. If the discount rates used in these valuations were increased by 1%, then the estimated fair values would have decreased by 7% in total. In addition, if the revenue growth rate assumptions were decreased by 1% in the cash flow models, then the estimated fair values would have decreased by 5% in total.

We recognized impairment losses on available-for-sale investments of Won 224 billion in 2012 and Won 280 billion in 2013. Losses on impairment of investments increased in 2013 primarily due to a significant decline in the fair value of shares of KB Financial Group and others for a prolonged period, which was considered as objective evidence of impairment.

 

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Historically, our estimates and assumptions used to evaluate impairment of investments have been within expectations. However, unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to recognize additional losses on impairment of investments. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. The use of alternative estimates and assumptions could increase or decrease the estimated fair values of our investments and potentially result in different impacts on our results of operations.

Long-lived Assets

At each reporting date, we review the carrying amounts of our tangible and intangible assets (excluding goodwill) to determine whether there is any indication that the carrying amount of those assets may not be recoverable through continuing use. If any such indication exists, the recoverable amount of the asset (or cash generating unit) is reviewed in order to determine the amount of the impairment, if any. The recoverable amount is the higher of the asset’s net selling price (fair value reduced by selling costs) and its value in use. When the book value of long-lived asset exceeds the recoverable value of the asset due to obsolescence, physical damage or a decline in market value and such amount is material, the impairment of the asset is recognized and the asset’s carrying value is reduced to its recoverable value and the resulting impairment loss is charged to current operations. Such recoverable value is based on our estimates of the future use of assets and is subject to changes in market conditions.

The depreciable lives and salvage values of our long-lived assets are estimated and reviewed each year based on industry practices and prior experience to reflect economic lives of long-lived assets. Effective January 1, 2011, we changed our estimated useful lives for certain machinery and equipment in our steel operating segment from the previous eight years to fifteen years based on an asset life study. Our depreciation expense decreased by Won 1,227 billion in 2011 as a result of such changes in our estimated useful lives.

Our estimates of the useful lives and recoverable values of long-lived assets are based on historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated from continuing use of the assets that we review for impairment and cash outflows to prepare the assets for use that can be directly attributed or allocated on a reasonable and consistent basis. If applicable, estimates also include net cash flows to be received or paid for the disposal of the assets at the end of their useful lives. As a result of the impairment review, when the sum of the discounted future cash flows expected to be generated by the assets is less than the book value of the assets, we recognize impairment losses based on the recoverable value of those assets. We make a number of significant assumptions and estimates in the application of the discounted cash flow model to forecast cash flows, including business prospects, market conditions, selling prices and sales volume of products, costs of production and funding sources. The estimated cash flow forecast amounts are derived from the most recent financial budgets for the next five years. For periods beyond the five year forecast period, we use a terminal value approach to estimate the cash flows for the remaining years based on an expected estimated growth rate. This estimated growth rate is based on actual historical results. As of December 31, 2013, we estimated an average discount rate of 7.0% and an average rate of revenue growth of 1.36%. However, given the current economic environment, it is likely that the estimates and assumptions will be more volatile than they have been in the past. Further impairment charges may be required if triggering events occur, such as adverse market conditions, that suggest deterioration in an asset’s recoverability or fair value. Assessment of the timing of when such declines become other than temporary and the amount of such impairment is a matter of significant judgment. Results in actual transactions could differ from those estimates used to evaluate the impairment of such long-lived assets. If our future cash flow projections are not realized, either because of an extended recessionary period or other unforeseen events, impairment charges may be required in future periods.

 

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If the estimated average discount rates used in these valuations were increased by 1%, then the estimated fair values would have decreased by 15% in total. If the estimated average rate of revenue growth rate were decreased by 1%, then the estimated fair values would have decreased by 13% in total. These sensitivity analyses do not affect the impairment loss due to the absence of an impairment loss indicator for our long-lived assets.

Goodwill

Goodwill is tested for impairment annually at the level of the groups of cash generating units or whenever changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts of the groups of cash-generating units are determined from the higher of their fair value less cost to sell or their value-in-use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.

Our management estimates discount rates using post-tax rates that reflect current market rates for investments of similar risk. Growth rates are based on industry growth forecasts, and changes in selling prices and direct costs are based on historical experience and expectations of future changes in the market. Cash flow forecasts are derived from the most recent financial budgets for the next five years. Beyond the specifically forecasted period, we extrapolate cash flows for the remaining years based on an estimated growth rate. This rate does not exceed the average long-term growth rate for the relevant markets. Once recognized, impairment losses recognized for goodwill are not reversed.

In validating the value in use determined for the cash generating units, the sensitivity of key assumptions used in the discounted cash-flow model such as discount rates and the terminal growth rate was evaluated. If the estimated average discount rates used in these valuations were increased by 0.25%, the estimated value-in-use would have decreased by 4.12% in total. If the estimated terminal growth rates were decreased by 0.25%, the estimated value-in-use would have decreased by 3.44% in total. If the discount rate assumptions were increased by 0.25% or the terminal growth rate assumptions were decreased by 0.25%, there would be no impact on goodwill impairment. Based on an impairment test as of December 31, 2013, we recognized impairment loss of goodwill of Won 97 billion in POSCO Thainox Public Company Limited and Won 6 billion in EPC Equities LLP. We believe that determining the existence and impairment of goodwill is a critical accounting estimate because significant management judgment is involved in the evaluation of the value of goodwill, and any reasonably possible changes in the key assumptions on which the recoverable amount is based would cause a change in impairment loss of goodwill. See Note 15 of Notes to Consolidated Financial Statements.

Inventories

Inventories are stated at the lower of cost or net realizable value. Costs of inventories are determined using the moving-weighted average or weighted average method. Materials-in-transit are determined using the specific identification method. Amounts of inventory are written down to net realizable value due to losses occurring in the normal course of business and the allowance is reported as a contra inventory account, while the related charge is recognized in cost of goods sold.

The net realizable value is determined based on the latest selling price available at the end of each quarter taking into account the directly attributable selling costs. The latest selling price is the base price which is the negotiated selling price based upon the recent transactions entered into with major customers. Considering that our inventory turnover is approximately two months and inventories at the balance sheet date would be sold during the following two months, we perform valuation of inventories using the base price as of the balance sheet date and adjust for significant changes in selling price occurring subsequent to the reporting date. The selling price range used for determining the net realizable value of our inventories ranged from the inventory cost amount less 17.8% of gross

 

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profit margin to the inventory cost amount plus 25.1% of gross profit margin. For inventories in which expected selling prices are less than the cost amount, the necessary adjustment to write-down the inventories to net realizable value is made. There was no recovery in 2011, 2012 and 2013. The valuation losses of inventories recognized within cost of goods sold were Won 140 billion in 2011, Won 76 billion in 2012 and Won 49 billion in 2013.

Employee Benefits

Our accounting of employee benefits for defined benefit plans involves judgments about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation and expected rate of return on plan assets. The discount rates are determined by reference to the yield at the reporting date on high quality corporate bonds that have maturity dates approximating the terms of our benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid. We determine the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments, net interest expense, and other expenses related to defined benefit plans that are recognized in profit or loss. Due to changing market and economic conditions, the underlying key assumptions may differ from actual developments and may lead to significant changes in our defined benefit plan. We immediately recognize all actuarial gains and losses arising from defined benefit plans in retained earnings. If the estimated average discount rates by actuarial assumptions used in these valuations were increased by 1%, then the estimated provision for severance benefits would have decreased by Won 103 billion, or 6.8% in total. If the estimated future pay inflation rates were decreased by 1%, then the estimated provision for severance benefits would have decreased by Won 102 billion, or 6.7% in total.

Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with K-IFRS as adopted by the KASB, which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea.

Beginning with our financial statements prepared in accordance with K-IFRS as of and for the year ended December 31, 2012, we are required to adopt certain amendments to K-IFRS No. 1001, Presentation of Financial Statements, as adopted by the KASB in 2012. Accordingly, beginning with our consolidated statements of comprehensive income prepared in accordance with K-IFRS for the year ended December 31, 2012, we present operating profit or loss as an amount of revenue less cost of sales and selling and administrative expenses. The amendments were applied retroactively to our consolidated statements of comprehensive income prepared in accordance with K-IFRS for the year ended December 31, 2011 and certain of the items in such consolidated statements of comprehensive income were reclassified to conform to the presentation of operating profit or loss in the consolidated statements of comprehensive income prepared in accordance with K-IFRS for the year ended December 31, 2012. Prior to the adoption of the amendments to K-IFRS No. 1001, Presentation of Financial Statements, we had presented operating profit or loss in our consolidated statements of comprehensive income prepared in accordance with K-IFRS as an amount of revenue plus other income less cost of sales, selling and administrative expenses, and other expenses.

In our consolidated statements of comprehensive income prepared in accordance with IFRS as issued by the IASB included in this annual report, such changes in presentation were not adopted. As a result, the presentation of results from operating activities in our consolidated statements of comprehensive income prepared in accordance with IFRS as issued by the IASB included in this

 

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annual report differs from the presentation of operating profit or loss in the our consolidated statements of comprehensive income prepared in accordance with K-IFRS. The table below sets forth a reconciliation of our results from operating activities as presented in our consolidated statements of comprehensive income prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2011, 2012 and 2013 to the operating profit or loss as presented in our consolidated statements of comprehensive income prepared in accordance with K-IFRS after giving effect to the amendments to K-IFRS No. 1001, Presentation of Financial Statements, for each of the corresponding years.

 

     For the Year Ended December 31,  
               2011                          2012                          2013             
     (In millions of Won)  

Operating profit under IFRS as issued by the IASB

   5,408,102      3,291,763      2,574,401   

Additions:

      

Loss on disposals of property, plant and equipment

     60,550        65,486        121,133   

Loss on disposal of investment property

     8,826        3,197        522   

Loss on disposals of assets held for sale

            9,510        26,498   

Idle tangible assets expenses

     16,881        31,297        17,624   

Impairment loss on other long-term assets

     34,544        36,453        9,000   

Impairment loss on assets held for sale

            258,451        1,814   

Impairment loss of property, plant and equipment

     26,171        12,977        9,742   

Impairment loss of investment property

     23,397        1,053        22,943   

Other bad debt expenses

     11,155        44,115        111,065   

Donations

     66,558        73,963        60,940   

Impairment losses on intangible assets

     14,959        21,776        125,316   

Penalty and default losses

     39,551        149,437        19,340   

Loss on disposal of wastes

     30,585        45,480        15,231   

Loss on disposal of investments in associates

            15,119        19,404   

Other provision expenses

                   65,896   

Others

     33,356        41,151        24,338   
  

 

 

   

 

 

   

 

 

 
     366,533        809,465        650,806   

Deductions:

      

Gain on disposals of property, plant and equipment

     (13,812     (42,290     (14,177

Rental revenues

     (6,510     (1,898     (1,588

Gain on disposals of intangible assets

     (953     (906     (801

Gain on disposals of investment in associates

     (2,247     (39,441     (7,668

Gain on disposal of assets held for sale

            (193,333     (101,611

Grant income

     (1,228     (3,198     (2,287

Reversal of other bad debt allowance

     (57,875              

Reversal of other provisions

     (35,629     (16,037       

Outsourcing income

     (42,136     (29,136     (25,428

Gain on disposal of wastes

     (11,348     (38,597     (16,541

Gain from claim compensation

     (68,853     (31,613     (14,525

Penalty income from early termination of contracts

     (38,570     (15,054     (16,477

Others

     (27,780     (36,617     (27,970
  

 

 

   

 

 

   

 

 

 
     (306,941     (448,120     (229,073
  

 

 

   

 

 

   

 

 

 

Operating profit under K-IFRS after adoption of the amendments

     5,467,694        3,653,108        2,996,134   
  

 

 

   

 

 

   

 

 

 

 

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Operating Results — 2012 Compared to 2013

The following table presents our income statement information and changes therein for 2012 and 2013.

 

                 Changes  
     For the Year Ended December 31,       2012 versus 2013    
               2012                          2013                    Amount         %  
     (In billions of Won)  

Revenue

   63,604      61,865      (1,740     (2.7 )% 

Cost of sales

         56,143            55,005            (1,138     (2.0
  

 

 

   

 

 

     

Gross profit

     7,461        6,860        (601     (8.1

Administrative expenses

     2,129        2,232        102        4.8   

Selling expenses

     1,679        1,632        (47     (2.8

Other operating income

     448        229        (219     (48.9

Other operating expenses

     809        651        (159     (19.6
  

 

 

   

 

 

     

Operating profit

     3,292        2,574        (717     (21.8

Share of loss of equity-accounted investees

     23        180        157        692.0   

Finance income

     2,897        2,381        (516     (17.8

Finance costs

     2,798        2,829        32        1.1   
  

 

 

   

 

 

     

Profit before income tax

     3,368        1,946        (1,422     (42.2

Income tax expense

     983        591        (392     (39.9
  

 

 

   

 

 

     

Profit for the period

     2,386        1,355        (1,030     (43.2

Profit for the period attributable to owners of the controlling company

     2,462        1,376        (1,086     (44.1

Loss for the period attributable to non-controlling interests

     (76     (21     55        (72.3

Revenue

The following table presents our revenue by segment and changes therein for 2012 and 2013.

 

                 Changes  
     For the Year Ended December 31,       2012 versus 2013    
               2012                          2013                    Amount         %  
     (In billions of Won)  

Steel Segment:

        

External revenue

       35,259          31,795      (3,464     (9.8 )% 

Internal revenue

     17,610        16,229        (1,381     (7.8
  

 

 

   

 

 

     

Total revenue from Steel Segment

     52,869        48,024        (4,845     (9.2
  

 

 

   

 

 

     

Trading Segment:

        

External revenue

     18,946        18,308        (638     (3.4

Internal revenue

     7,468        7,611                144        1.9   
  

 

 

   

 

 

     

Total revenue from Trading Segment

     26,414        25,919        (494     (1.9
  

 

 

   

 

 

     

Construction Segment:

        

External revenue

     4,676        6,897        2,221        47.5   

Internal revenue

     5,050        3,885        (1,165     (23.1
  

 

 

   

 

 

     

Total revenue from Construction Segment

     9,726        10,782        1,056        10.9   
  

 

 

   

 

 

     

Others Segment:

        

External revenue

     4,724        4,865        141        3.0   

Internal revenue

     2,857        3,019        162        5.7   
  

 

 

   

 

 

     

Total revenue from Others Segment

     7,581        7,885        304        4.0   
  

 

 

   

 

 

     

Total revenue prior to consolidation adjustments

     96,589        92,609        (3,980     (4.1
  

 

 

   

 

 

     

Consolidation adjustments

     (32,985     (30,745     (2,240     (6.8
  

 

 

   

 

 

     

Revenue

   63,604      61,865        (1,740     (2.7
  

 

 

   

 

 

     

 

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Our revenue decreased by 2.7%, or Won 1,740 billion, from Won 63,604 billion in 2012 to Won 61,865 billion in 2013 due to decreases in external revenues from the Steel Segment and the Trading Segment, which were offset in part by increases in external revenues from the Construction Segment and the Others Segment. Specifically:

Steel Segment. External revenue from the Steel Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 9.8%, or Won 3,464 billion, from Won 35,259 billion in 2012 to Won 31,795 billion in 2013 primarily due to a decrease in the average unit sales price per ton of the principal steel products produced by us and directly sold to external customers, as well as a decrease in our sales volume of the principal steel products produced by us and directly sold to external customers. The weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external customers decreased by 6.8% from Won 1,070,565 per ton in 2012 to Won 998,012 per ton in 2013, while the overall sales volume of the principal steel products produced by us and directly sold to external customers decreased by 2.9% from 30.0 million tons in 2012 to 29.1 million tons in 2013. Such factors were principally attributable to the following:

 

   

The unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased from 2012 to 2013, ranging from a decrease of 2.7% for stainless steel products to a decrease of 13.9% for cold rolled products. For a discussion of changes in the unit sales prices of each of our principal product lines, see “— Overview — Sales Volume, Prices and Product Mix” above.

 

   

The sales volume of hot rolled products, plates and silicon steel sheets produced by us and directly sold to external customers decreased by 11.1%, 7.1% and 0.8%, respectively, from 2012 to 2013. On the other hand, our sales volume of wire rods, stainless steel and cold rolled products produced by us and directly sold to external customers increased by 13.3%, 4.4% and 0.4%, respectively, from 2012 to 2013. For a discussion of changes in sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

Total revenue from the Steel Segment, which includes internal revenue from inter-company transactions, decreased by 9.2%, or Won 4,845 billion, from Won 52,869 billion in 2012 to Won 48,024 billion in 2013, as internal revenue from inter-company transactions decreased from 2012 to 2013 due to a decrease in reliance on sales subsidiaries for the sale of our steel products.

Trading Segment. External revenue from the Trading Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 3.4%, or Won 638 billion, from Won 18,946 billion in 2012 to Won 18,308 billion in 2013 primarily due to a decrease in external revenues of Daewoo International and our other trading subsidiaries from 2012 to 2013, reflecting market conditions related to the prolonged slowdown of the global economy that has been characterized by weaker demand and falling prices for export and import products and reduced trading volume.

Total revenue from the Trading Segment, which includes internal revenue from inter-company transactions, decreased by 1.9%, or Won 494 billion, from Won 26,414 billion in 2012 to Won 25,919 billion in 2013, primarily due to the reasons stated above, which was partially offset by an increase in reliance on sales subsidiaries by us on our steel trading activities.

Construction Segment. External revenue from the Construction Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 47.5%, or Won 2,221 billion, from Won 4,676 billion in 2012 to Won 6,897 billion in 2013 primarily due to increases in POSCO E&C’s construction activities of architectural works.

Total revenue from the Construction Segment, which includes internal revenue from inter-company transactions, increased by 10.9%, or Won 1,056 billion, from Won 9,726 billion in 2012 to

 

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Won 10,782 billion in 2013 primarily due to an increase in revenue of POSCO E&C by 17.6%, or Won 1,520 billion, from Won 8,637 billion in 2012 to Won 10,155 billion in 2013. POSCO E&C’s revenue increased primarily due to the reasons stated above, which was partially offset by a decrease in internal revenue from inter-company transactions by 23.1%, or Won 1,165 billion, from Won 5,050 billion in 2012 to Won 3,885 billion in 2013 primarily due to a decrease in the amount of construction activities for POSCO.

Others Segment. The Others Segment includes power generation, LNG production, network and system integration, logistics and magnesium coil and sheet production. External revenue from the Others Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 3.0%, or Won 141 billion, from Won 4,724 billion in 2012 to Won 4,865 billion in 2013 primarily due to an increase in revenue of POSCO Energy Corporation as it increased its power generation capacity in the second half of 2012.

Total revenue from the Others Segment, which includes internal revenue from inter-company transactions, increased by 4.0%, or Won 304 billion, from Won 7,581 billion in 2012 to Won 7,885 billion in 2013, primarily due to an increase in revenue of POSCO Energy Corporation by 3.4%, or Won 92 billion, from Won 2,809 billion in 2012 to Won 2,901 billion in 2013.

Cost of Sales

Our cost of sales decreased by 2.0%, or Won 1,138 billion, from Won 56,143 billion in 2012 to Won 55,005 billion in 2013. The decrease in cost of sales was primarily due to decreases in our sales volume of steel products and trading activities as discussed above, as well as decreases in the average price in Won terms of key raw materials that were used to manufacture our finished steel products sold, which were partially offset by increases in our construction activities and sales volume of non-steel products.

The following table presents a breakdown of our cost of sales by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2012 and 2013.

 

           Changes  
     For the Year Ended December 31,     2012 versus 2013  
               2012                          2013                    Amount         %  
     (In billions of Won)  

Steel Segment

   47,616      43,274      (4,342     (9.1 )% 

Trading Segment

     25,287        24,816        (471     (1.9

Construction Segment

     8,937        9,848        911        10.2   

Others Segment

     6,771        7,123                  353        5.2   

Consolidation adjustments

     (32,468     (30,057     2,411        (7.4
  

 

 

   

 

 

     

Cost of sales

       56,143          55,005        (1,138     (2.0
  

 

 

   

 

 

     

Steel Segment. The cost of sales of our Steel Segment, prior to consolidation adjustments, decreased by 9.1%, or Won 4,342 billion, from Won 47,616 billion in 2012 to Won 43,274 billion in 2013, primarily due to decreases in the average price in Won terms of coal and other key raw materials (other than iron ore) that were used to manufacture our finished goods sold as well as in our sales volume of the principal steel products produced by us and directly sold to external customers. For a discussion of fluctuations in prices of our key raw materials, see “Item 4.B. Business Overview — Raw Materials.”

Trading Segment. The cost of sales of our Trading Segment, prior to consolidation adjustments, decreased by 1.9%, or Won 471 billion, from Won 25,287 billion in 2012 to Won 24,816 billion in 2013, primarily due to a decrease in our trading volumes.

 

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Construction Segment. The cost of sales of our Construction Segment, prior to consolidation adjustments, increased by 10.2%, or Won 911 billion, from Won 8,937 billion in 2012 to Won 9,848 billion in 2013, primarily due to an increase in the construction activities of POSCO E&C.

Others Segment. The cost of sales of our Others Segment, prior to consolidation adjustments, increased by 5.2%, or Won 353 billion, from Won 6,771 billion in 2012 to Won 7,123 billion in 2013, primarily due to costs related to an increase in POSCO Energy Corporation’s power generation activities in 2013 resulting from an increase in its power generation capacity in the second half of 2012.

Gross Profit

Our gross profit decreased by 8.1%, or Won 601 billion, from Won 7,461 billion in 2012 to Won 6,860 billion in 2013 primarily due to a decrease in gross profit of our Steel Segment. Our gross margin decreased from 11.7% in 2012 to 11.1% in 2013.

The following table presents our gross profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2012 and 2013.

 

     For the Year Ended December 31,     Changes  
       2012 versus 2013  
             2012                     2013                 Amount         %  
     (In billions of Won)  

Steel Segment

   5,253      4,749      (504     (9.6 )% 

Trading Segment

     1,127        1,103        (24     (2.1

Construction Segment

     789        934                  145        18.4   

Others Segment

     810        761        (49     (6.1

Consolidation adjustments

     (518     (688     (170     32.9   
  

 

 

   

 

 

     

Gross profit

       7,461          6,860        (601     (8.1
  

 

 

   

 

 

     

Steel Segment. The gross profit of our Steel Segment, prior to consolidation adjustments, decreased by 9.6%, or Won 504 billion, from Won 5,253 billion in 2012 to Won 4,749 billion in 2013 primarily due to a decrease in the average unit sales price per ton of our principal steel products as well as a decrease in the overall sales volume of our principal steel products, as discussed above, which were partially offset by a decrease in the average price in Won terms of coal and other key raw materials (other than iron ore) that were used to manufacture our finished steel product sold. The gross margin of our Steel Segment, which is gross profit as a percentage of total revenue prior to consolidation adjustments, remained constant at 9.9% in 2012 and 2013.

Trading Segment. The gross profit of our Trading Segment, prior to consolidation adjustments, decreased by 2.1%, or Won 24 billion, from Won 1,127 billion in 2012 to Won 1,103 billion in 2013, reflecting market conditions related to the prolonged slowdown of the global economy as discussed above. The gross margin of our Trading Segment, prior to consolidation adjustments, remained constant at 4.3% in 2012 and 2013.

Construction Segment. The gross profit of our Construction Segment, prior to consolidation adjustments, increased by 18.4%, or Won 145 billion, from Won 789 billion in 2012 to Won 934 billion in 2013, and the gross margin increased from 8.1% in 2012 to 8.7% in 2013 primarily due to POSCO E&C’s participation in construction projects with higher margins in 2013.

Others Segment. The gross profit of our Others Segment, prior to consolidation adjustments, decreased by 6.1%, or Won 49 billion, from Won 810 billion in 2012 to Won 761 billion in 2013, and the gross margin decreased from 10.7% in 2012 to 9.7% in 2013 as POSCO Energy Corporation’s gross margin was negatively impacted in 2013 from an increase in its power generation capacity in the second half of 2012 and the ramp-up of the capacity utilization rate.

 

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Table of Contents

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2012 and 2013.

 

                   Changes  
     For the Year Ended December 31,      2012 versus 2013  
               2012                           2013                     Amount         %  
     (In billions of Won)  

Freight

   1,473       1,433       (40     (2.7 )% 

Sales commissions

     74         74         (0     (0.5

Sales promotion

     18         27         10        54.8   

Sales insurance premium

     32         27         (5     (15.7

Contract cost

     52         37         (15     (28.5

Others

     30         34         4        13.4   
  

 

 

    

 

 

      

Total selling expenses

   1,679       1,632         (47     (2.8
  

 

 

    

 

 

      

Wages and salaries

   695       755       60        8.7

Expenses related to defined benefit plan

     61         67         6        10.2   

Other employee benefits

     171         166         (5     (2.9

Depreciation

     219         228         10        4.5   

Rental

     93         110         17        18.1   

Repairs

     12         6         (6     (51.5

Advertising

     56         106             50        89.4   

Research and development

     192         193         0        0.3   

Service fees

     264         240         (24     (9.2

Vehicle maintenance

     22         12         (10     (46.0

Training

     18         12         (6     (32.2

Warranty expense

     13         19         6        45.1   

Bad debt allowance

     79         90         11        13.7   

Others

     234         227         (6     (2.7
  

 

 

    

 

 

      

Total administrative expenses

       2,129       2,232         102        4.8   
  

 

 

    

 

 

      

Total selling and administrative expenses

   3,808           3,864         56        1.5   
  

 

 

    

 

 

      

Our selling and administrative expenses increased by 1.5%, or Won 56 billion, from Won 3,808 billion in 2012 to Won 3,864 billion in 2013 primarily due to increases in labor-related expenses and advertising expense, which was partially offset by a decrease in freight expense and service fees. Such factors were principally attributable to the following:

 

   

Our labor-related expenses included in selling and administrative expenses, which consist of wages and salaries, expenses related to defined benefit plans and other employee benefits, increased by 6.6%, or Won 61 billion, from Won 927 billion in 2012 to Won 988 billion in 2013 primarily due to an increase in the number of employees and a rise in their wages.

 

   

Our advertising expense increased by 89.4%, or Won 50 billion, from Won 56 billion in 2012 to Won 106 billion in 2013 primarily due to diversification of our advertising channels.

 

   

Our freight expense decreased by 2.7%, or Won 40 billion, from Won 1,473 billion in 2012 to Won 1,433 billion in 2013 primarily due to decreases in freight rates as well as a decrease in our export volume.

 

   

Our service fees decreased by 9.2%, or Won 24 billion, from Won 264 billion in 2012 to Won 240 billion in 2013 primarily due to a decrease in professional advisory services provided to us resulting from our reduction in investment activities.

 

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Other Operating Income and Expenses

The following table presents a breakdown of our other operating income and expenses and changes therein for 2012 and 2013.

 

            Changes  
     For the Year Ended December 31,      2012 versus 2013  
             2012                      2013                  Amount         %  
     (In billions of Won)  

Gain on disposals of property, plant and equipment

   42       14               (28     (66.5 )% 

Gain on disposals of investments in associates

     39         8         (32     (80.6

Gain on disposals of assets held for sale

     193         102         (92     (47.4

Reversal of other provisions

     16                 (16     (100.0

Outsourcing income

     29         25         (4     (12.7

Gain on disposal of wastes

     39         17         (22     (57.1

Gain from claim compensation

     32         15         (17     (54.1

Penalty income from early termination of contracts

     15         16         1        9.5   

Others

     43         33         (10     (23.4
  

 

 

    

 

 

      

Total other operating income

       448           229         (219     (48.9
  

 

 

    

 

 

      

Our other operating income decreased by 48.9%, or Won 219 billion, from Won 448 billion in 2012 to Won 229 billion in 2013 primarily due to a decrease in our gain on disposal of assets held for sale. Our gain on disposal of assets held for sale decreased by 47.4%, or Won 92 billion, from Won 193 billion in 2012 to Won 102 billion in 2013. In 2012, we recognized a gain of Won 146 billion from Daewoo International’s disposal of Daewoo Cement (Shandong) Co., Ltd. to China United Cement Group Co., Ltd. in June 2012. In addition, we recognized a gain of Won 46 billion from Daewoo International’s disposal of its interest in Kyobo Life Insurance Co., Ltd. (“Kyobo Life Insurance”), subsequent to our impairment of Won 258 billion of such asset as described below. In 2013, we recognized a gain of Won 102 billion on disposal of assets held for sale primarily from our disposition of SK Telecom shares and SeAH Steel shares.

 

            Changes  
     For the Year Ended December 31,      2012 versus 2013  
             2012                      2013                  Amount         %  
     (In billions of Won)  

Loss on disposals of property, plant and equipment

   65       121               56        85.0

Loss on disposals of asset held for sale

     10         26         17        178.6   

Idle tangible assets expenses

     31         18         (14     (43.7

Impairment loss on other long-term assets

     36         9         (27     (75.3

Impairment loss on assets held for sale

     258         2         (257     (99.3

Impairment loss on investment property

     1         23         22        2,078.8   

Other bad debt expenses

     44         111         67        151.8   

Donations

     74         61         (13     (17.6

Impairment losses on intangible assets

     22         125         104        475.5   

Penalty and default losses

     149         19         (130     (87.1

Loss on disposal of wastes

     45         15         (30     (66.5

Other provision expenses

             66         66        N.A.   

Others

     72         54         (18     (25.5
  

 

 

    

 

 

      

Total other operating expenses

       809           651         (159     (19.6
  

 

 

    

 

 

      

 

N.A. means not applicable.

 

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Our other operating expenses decreased by 19.6%, or Won 159 billion, from Won 809 billion in 2012 to Won 651 billion in 2013, primarily due to significant decreases in our impairment loss on assets held for sale and penalty and default losses, which were partially offset by increases in our impairment losses on intangible assets, other bad debt expenses, other provision expenses and loss on disposals of property, plant and equipment. Such factors were principally attributable to the following:

 

   

Our impairment loss on assets held for sale decreased significantly, by Won 257 billion, from Won 258 billion in 2012 to Won 2 billion in 2013. We recognized an impairment loss on assets held for sale of Won 258 billion in 2012 related to a decrease in the market value of Daewoo International’s interest in Kyobo Life Insurance, compared to no such loss in 2013.

 

   

Our penalty and default losses decreased significantly, or Won 130 billion, from Won 149 billion in 2012 to Won 19 billion in 2013 primarily due to our payment of a fine imposed by the Korea Fair Trade Commission on us and POSCO Coated & Color Steel Co., Ltd. in 2012 for alleged antitrust violations.

 

   

Our impairment losses on intangible assets increased by more than five-fold, or Won 104 billion, from Won 22 billion in 2012 to Won 125 billion in 2013 due to impairment loss of Won 97 billion in POSCO Thainox Public Company Limited in 2013.

 

   

Our other bad debt expenses more than doubled, by Won 67 billion, from Won 44 billion in 2012 to Won 111 billion in 2013 due to increase in bad debt expenses of POSCO E&C related to some of its construction projects.

 

   

We recorded other provision expenses of Won 66 billion in 2013 compared to no such expense in 2012, as POSCO E&C recorded reserves for subrogation payments related to some of its construction projects.

 

   

Our loss on disposals of property, plant and equipment increased by 85.0%, or Won 56 billion, from Won 65 billion in 2012 to Won 121 billion in 2013 primarily due to loss resulting from the merger of Sungjin Geotec with POSCO Plantec in July 2013 as well as sale of certain assets of POSCO Energy Corporation in 2013.

Operating Profit

Due to the factors described above, our operating profit decreased by 21.8%, or Won 717 billion, from Won 3,292 billion in 2012 to Won 2,574 billion in 2013. Our operating margin decreased from 5.2% in 2012 to 4.2% in 2013.

Share of Loss of Equity-Accounted Investees

Our share of loss of equity-accounted investees increased nearly eight-fold, or by Won 157 billion, from Won 23 billion in 2012 to Won 180 billion in 2013. In 2012, we recognized a net loss for our proportionate share of equity-accounted investees of Won 23 billion primarily due to our share of loss of AMCI (WA) Pty Ltd. and Busan-Gimhae Light Rail Transit Co., Ltd., which was partially offset by our share of profit of Kyobo Life Insurance and KOBRASCO. In 2013, we recognized a net loss for our proportionate share of equity-accounted investees of Won 180 billion primarily due to our share of loss of POSCO Plantec, Roy Hill Holdings Pty Ltd. and CSF-Compania Siderurgica do Pecem, which was partially offset by our share of profit of KOBRASCO, Korea LNG Ltd. and CAML Resources Pty Ltd. For a discussion of our share of profits or losses of equity-accounted investees, see Note 11 of Notes to Consolidated Financial Statements.

 

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Finance Income and Finance Costs

The following table presents a breakdown of our finance income and costs and changes therein for 2012 and 2013.

 

                   Changes  
     For the Year Ended December 31,      2012 versus 2013  
             2012                      2013                  Amount         %  
     (In billions of Won)  

Interest income

   279       260       (18     (6.6 )% 

Dividend income

     124         59         (65     (52.5

Gain on foreign currency transactions

     935         998         62        6.6   

Gain on foreign currency translations

     937         511         (426     (45.4

Gain on transactions of derivatives

     408         370         (37     (9.2

Gain on valuations of derivatives

     94         72         (22     (23.5

Gain on disposals of available-for-sale investments

     112         106         (7     (5.8

Others

     7         4         (3     (40.0
  

 

 

    

 

 

      

Total finance income

   2,897       2,381         (516     (17.8
  

 

 

    

 

 

      

Interest expenses

                871               658       (214     (24.5 )% 

Loss on foreign currency transactions

     839         927                 88        10.5   

Loss on foreign currency translations

     243         345         102        41.9   

Loss on transactions of derivatives

     309         287         (22     (7.3

Loss on valuations of derivatives

     160         291         132        82.6   

Impairment loss on available-for-sale investments

     224         280         56        25.0   

Loss on disposals of available-for-sale investments

     36         4         (33     (89.7

Loss on Financial guarantee

     38         6         (33     (84.7

Others

     76         31         (45 )`      (58.9
  

 

 

    

 

 

      

Total finance costs

       2,798       2,829         32        1.1   
  

 

 

    

 

 

      

Our net gain on foreign currency translations decreased by 76.0%, or Won 527 billion, from Won 693 billion in 2012 to Won 166 billion in 2013, and our net gain on foreign currency transactions decreased by 27.1%, or Won 26 billion, from Won 96 billion in 2012 to Won 70 billion in 2013 as the Won appreciated against the Dollar and Yen in 2012 and 2013. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from Won 1,153.3 to US$1.00 as of December 31, 2011 to Won 1,071.1 to US$1.00 as of December 31, 2012 and appreciated further to Won 1,055.3 to US$1.00 as of December 31, 2013. The Won appreciated against the Yen from Won 1,485.2 per Yen 100 as of December 31, 2011 to Won 1,247.5 per Yen 100 as of December 31, 2012 and appreciated further to Won 1,004.7 as of December 31, 2013. Against such appreciation, we recognized a more than three-fold increase in net loss on valuation of derivatives, or by Won 154 billion, from Won 65 billion in 2012 to Won 219 billion in 2013, as well as a decrease of 15.1% in net gain on transactions of derivatives, or Won 15 billion, from Won 99 billion in 2012 to Won 84 billion in 2013.

Our impairment loss on available-for-sale investments increased by 25.0%, or Won 56 billion, from Won 224 billion in 2012 to Won 280 billion in 2013 primarily due to a significant decline in the fair value of shares of KB Financial Group and others for a prolonged period, which was considered as objective evidence of impairment.

Our interest expenses decreased by 24.5%, or Won 214 billion, from Won 871 billion in 2012 to Won 658 billion in 2013 primarily due to a decrease in the average balance of our payables and financial liabilities as well as a general decrease in interest rates in Korea.

Income Tax Expense

Our income tax expense decreased by 39.9%, or Won 392 billion, from Won 983 billion in 2012 to Won 591 billion in 2013. Our effective tax rate increased from 29.2% in 2012 to 30.4% in 2013 primarily due to an increase in the amount of unrecognized deferred tax assets caused by net loss from our subsidiaries. See Note 35 of Notes to Consolidated Financial Statements.

 

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Profit for the Period

Due to the factors described above, our profit for the period decreased by 43.2%, or Won 1,030 billion, from Won 2,386 billion in 2012 to Won 1,355 billion in 2013. Our net profit margin decreased from 3.8% in 2012 to 2.2% in 2013.

The following table presents our profit for the period by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2012 and 2013.

 

                 Changes  
     For the Year Ended December 31,     2012 versus 2013  
             2012                     2013                 Amount         %  
     (In billions of Won)  

Steel Segment

       2,246          1,449      (797     (35.5 )% 

Trading Segment

     325        10        (316     (97.1

Construction Segment

     345        147        (198     (57.4

Others Segment

     301        197        (104     (34.5

Consolidation adjustments

     (833     (448             384        (46.1
  

 

 

   

 

 

     

Profit for the period

   2,386      1,355        (1,030     (43.2
  

 

 

   

 

 

     

Operating Results — 2011 Compared to 2012

The following table presents our income statement information and changes therein for 2011 and 2012.

 

                  Changes  
     For the Year Ended December 31,     2011 versus 2012  
             2011                      2012                 Amount         %  
     (In billions of Won)  

Revenue

       68,939           63,604          (5,335     (7.7 )% 

Cost of sales

     59,824         56,143        (3,681     (6.2
  

 

 

    

 

 

     

Gross profit

     9,115         7,461        (1,654     (18.1

Administrative expenses

     2,035         2,129        94        4.6   

Selling expenses

     1,612         1,679        67        4.1   

Other operating income

     307         448        141        46.0   

Other operating expenses

     367         809        443        120.8   
  

 

 

    

 

 

     

Operating profit

     5,408         3,292        (2,116     (39.1

Share of profit (loss) of equity-accounted investees

     51         (23     (73     N.A.   

Finance income

     3,190         2,897        (293     (9.2

Finance costs

     3,867         2,798        (1,069     (27.6
  

 

 

    

 

 

     

Profit before income tax

     4,782         3,368        (1,414     (29.6

Income tax expense

     1,068         983        (85     (8.0
  

 

 

    

 

 

     

Profit for the period

     3,714         2,386        (1,329     (35.8

Profit for the period attributable to owners of the controlling company

     3,648         2,462        (1,186     (32.5

Profit (loss) for the period attributable to non-controlling interests

     66         (76     (143     N.A.   

 

N.A. means not applicable.

 

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Revenue

The following table presents our revenue by segment and changes therein for 2011 and 2012.

 

                 Changes  
     For the Year Ended December 31,     2011 versus 2012  
             2011                     2012                 Amount         %  
     (In billions of Won)  

Steel Segment:

        

External revenue

       39,152          35,259      (3,893     (9.9 )% 

Internal revenue

     17,139        17,610        471        2.7   
  

 

 

   

 

 

     

Total revenue from Steel Segment

     56,291        52,869        (3,422     (6.1
  

 

 

   

 

 

     

Trading Segment:

        

External revenue

     21,097        18,946        (2,152     (10.2

Internal revenue

     7,526        7,468        (58     (0.8
  

 

 

   

 

 

     

Total revenue from Trading Segment

     28,623        26,414        (2,209     (7.7
  

 

 

   

 

 

     

Construction Segment:

        

External revenue

     5,476        4,676        (801     (14.6

Internal revenue

     2,997        5,050                2,053        68.5   
  

 

 

   

 

 

     

Total revenue from Construction Segment

     8,473        9,726        1,253        14.8   
  

 

 

   

 

 

     

Others Segment:

        

External revenue

     3,213        4,724        1,511        47.0   

Internal revenue

     2,446        2,857        411        16.8   
  

 

 

   

 

 

     

Total revenue from Others Segment

     5,660        7,581        1,921        33.9   
  

 

 

   

 

 

     

Total revenue prior to consolidation adjustments

     99,046        96,589        (2,457     (2.5
  

 

 

   

 

 

     

Consolidation adjustments

     (30,108     (32,985     (2,878     9.6   
  

 

 

   

 

 

     

Revenue

   68,939      63,604        (5,335     (7.7
  

 

 

   

 

 

     

Our revenue decreased by 7.7%, or Won 5,335 billion, from Won 68,939 billion in 2011 to Won 63,604 billion in 2012 due to decreases in external revenues from the Steel Segment, the Trading Segment and the Construction Segment, which were offset in part by an increase in external revenue from the Others Segment. Specifically:

Steel Segment. External revenue from the Steel Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 9.9%, or Won 3,893 billion, from Won 39,152 billion in 2011 to Won 35,259 billion in 2012 primarily due to a decrease in the average unit sales price per ton of the principal steel products produced by us and directly sold to external customers, the impact of which was partially offset by an increase in our sales volume of the principal steel products produced by us and directly sold to external customers. The weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external customers decreased by 10.6% from Won 1,197,661 per ton in 2011 to Won 1,070,565 per ton in 2012, while the overall sales volume of the principal steel products produced by us and directly sold to external customers increased by 1.5% from 29.5 million tons in 2011 to 30.0 million tons in 2012. Such factors were principally attributable to the following:

 

   

The unit sales prices in Won for all of our principal product lines of steel products produced by us and directly sold to external customers decreased from 2011 to 2012, ranging from a decrease of 6.3% for wire rods to a decrease of 16.2% for plates. For a discussion of changes in the unit sales prices of each of our principal product lines, see “— Overview — Sales Volume, Prices and Product Mix” above.

 

   

The sales volume of our stainless steel products produced by us and directly sold to external customers increased by 14.3% from 2011 to 2012, and the sales volume of our cold rolled products and silicon steel sheets produced by us and directly sold to external customers increased by 7.6% and 0.8%, respectively, from 2011 to 2012. On the other hand, our sales

 

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volume of wire rods, plates and hot rolled products produced by us and directly sold to external customers decreased by 9.2%, 5.2% and 4.1%, respectively, from 2011 to 2012. For a discussion of changes in sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

Total revenue from the Steel Segment, which includes internal revenue from inter-company transactions, decreased by 6.1%, or Won 3,422 billion, from Won 56,291 billion in 2011 to Won 52,869 billion in 2012, as internal revenue from inter-company transactions increased from 2011 to 2012 due to an increased reliance on Daewoo International for our sale of steel products.

Trading Segment. External revenue from the Trading Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 10.2%, or Won 2,152 billion, from Won 21,097 billion in 2011 to Won 18,946 billion in 2012 primarily due to a decrease in external revenue of Daewoo International from 2011 to 2012, reflecting market conditions related to the prolonged slowdown of the global economy that has been characterized by weaker demand and falling prices for export and import products and reduced trading volume.

Total revenue from the Trading Segment, which includes internal revenue from inter-company transactions, decreased by 7.7%, or Won 2,209 billion, from Won 28,623 billion in 2011 to Won 26,414 billion in 2012, primarily due to the reasons stated above, which was offset in part by an increase in reliance on Daewoo International by us on our steel trading activities.

Construction Segment. External revenue from the Construction Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, decreased by 14.6%, or Won 801 billion, from Won 5,476 billion in 2011 to Won 4,676 billion in 2012 primarily due to a general slowdown in the domestic construction market resulting in weaker demand.

Total revenue from the Construction Segment, which includes internal revenue from inter-company transactions, increased by 14.8%, or Won 1,253 billion, from Won 8,473 billion in 2011 to Won 9,726 billion in 2012 primarily due to an increase in revenue of POSCO E&C by 15.0%, or Won 1,129 billion, from Won 7,508 billion in 2011 to Won 8,637 billion in 2012. POSCO E&C’s revenue increased primarily due to increases in revenues from plant works and architectural works operations, the impact of which was partially offset by a decrease in revenue from civil and environmental works operations.

Others Segment. The Others Segment includes power generation, LNG production, network and system integration, logistics and magnesium coil and sheet production. External revenue from the Others Segment, which does not include internal revenue from inter-company transactions that are eliminated during consolidation, increased by 47%, or Won 1,511 billion, from Won 3,213 billion in 2011 to Won 4,724 billion in 2012 primarily due to an increase in revenue of POSCO Energy Corporation. Revenue of POSCO Energy Corporation increased by 49.0%, or Won 939 billion, from Won 1,918 billion in 2011 to Won 2,857 billion in 2012 as it substantially increased its power generation capacity in 2012.

Total revenue from the Others Segment, which includes internal revenue from inter-company transactions, increased by 33.9%, or Won 1,921 billion, from Won 5,660 billion in 2011 to Won 7,581 billion in 2012, primarily due to the increase in revenue of POSCO Energy Corporation discussed above as well as increases in the revenues of POSCO Chemtech and POSCO M-Tech.

Cost of Sales

Our cost of sales decreased by 6.2%, or Won 3,681 billion, from Won 59,824 billion in 2011 to Won 56,143 billion in 2012. The decrease in cost of sales was primarily due to decreases in our sales volume of steel and non-steel products and trading activities as discussed above, as well as decreases in the average price in Won terms of key raw materials that were used to manufacture our finished goods sold.

 

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The following table presents a breakdown of our cost of sales by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2011 and 2012.

 

                 Changes  
     For the Year Ended December 31,     2011 versus 2012  
             2011                     2012                 Amount         %  
     (In billions of Won)  

Steel Segment

   49,459      47,616      (1,843     (3.7 )% 

Trading Segment

     27,453        25,287        (2,166     (7.9

Construction Segment

     7,706        8,937        1,231        16.0   

Others Segment

     5,301        6,771        1,470        27.7   

Consolidation adjustments

     (30,095     (32,468     (2,373     7.9   
  

 

 

   

 

 

     

Cost of sales

       59,824          56,143              (3,681     (6.2
  

 

 

   

 

 

     

Steel Segment. The cost of sales of our Steel Segment, prior to consolidation adjustments, decreased by 3.7%, or Won 1,843 billion, from Won 49,459 billion in 2011 to Won 47,616 billion in 2012, primarily due to decreases in the average price in Won terms of key raw materials that were used to manufacture our finished goods sold, the impact of which was partially offset by an increase in our sales volume of the principal steel products produced by us and directly sold to external customers as well as. For a discussion of fluctuations in prices of our key raw materials, see “Item 4.B. Business Overview — Raw Materials.”

Trading Segment. The cost of sales of our Trading Segment, prior to consolidation adjustments, decreased by 7.9%, or Won 2,166 billion, from Won 27,453 billion in 2011 to Won 25,287 billion in 2012, primarily due to a decrease in our trading volumes.

Construction Segment. The cost of sales of our Construction Segment, prior to consolidation adjustments, increased by 16.0%, or Won 1,231 billion, from Won 7,706 billion in 2011 to Won 8,937 billion in 2012, primarily due to an increase in the construction activities of POSCO E&C.

Others Segment. The cost of sales of our Others Segment, prior to consolidation adjustments, increased by 27.7%, or Won 1,470 billion, from Won 5,301 billion in 2011 to Won 6,771 billion in 2012, primarily due to costs related to substantial increase in POSCO Energy Corporation’s power generation activities in 2012.

Gross Profit

Our gross profit decreased by 18.1%, or Won 1,654 billion, from Won 9,115 billion in 2011 to Won 7,461 billion in 2012. Our gross margin decreased from 13.2% in 2011 to 11.7% in 2012 as the decrease in revenue from 2011 to 2012 more than outpaced the decrease in cost of sales from 2011 to 2012, as described above. Our gross margin was negatively affected primarily by a decrease in the gross margin of our Steel Segment as described below.

The following table presents our gross profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2011 and 2012.

 

                 Changes  
     For the Year Ended December 31,     2011 versus 2012  
             2011                     2012                 Amount         %  
     (In billions of Won)  

Steel Segment

   6,832      5,253      (1,579     (23.1 )% 

Trading Segment

     1,170        1,127        (43     (3.7

Construction Segment

     767        789        22        2.8   

Others Segment

     359        810        452        125.8   

Consolidation adjustments

     (13     (518     (505     4,025.9   
  

 

 

   

 

 

     

Gross profit

       9,115          7,461              (1,654     (18.1
  

 

 

   

 

 

     

 

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Steel Segment. As a result of the factors described above, the gross margin of our Steel Segment, which is gross profit as a percentage of total revenue prior to consolidation adjustments, decreased from 12.1% in 2011 to 9.9% in 2012.

Trading Segment. The gross margin of our Trading Segment, prior to consolidation adjustments, increased from 4.1% in 2011 to 4.3% in 2012 primarily due to Daewoo International’s efforts to streamline its trading operations to focus on higher margin trades.

Construction Segment. The gross margin of our Construction Segment, prior to consolidation adjustments, decreased from 9.1% in 2011 to 8.1% in 2012 due to further weakening of market conditions in the domestic construction industry in 2012 that resulted in an increase in competition, which in turn increased the portion of construction contracts with lower profit margins.

Others Segment. The gross margin of our Others Segment, prior to consolidation adjustments, increased from 6.3% in 2011 to 10.7% in 2012 primarily due to an increase in gross margin of POSCO Energy Corporation, which initiated operations of additional power plants and substantially increased its power generation capacity in 2012.

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2011 and 2012.

 

            Changes  
     For the Year Ended December 31,      2011 versus 2012  
             2011                      2012                  Amount         %  
     (In billions of Won)  

Freight

   1,406       1,473       67        4.7

Sales commissions

     85         74         (11     (13.0

Sales insurance premium

     20         32         12        61.0   

Contract cost

     63         52         (11     17.2   

Others

     38         47         10        26.0   
  

 

 

    

 

 

      

Total selling expenses

   1,612       1,679         67        4.1   
  

 

 

    

 

 

      

Wages and salaries

   607       695       88        14.5

Expenses related to defined benefit plan

     60         61         1        1.6   

Other employee benefits

     165         171         6        3.8   

Depreciation

     173         219         46        26.6   

Taxes and public dues

     51         60         9        17.9   

Rental

     66         93         28        42.3   

Advertising

     71         56         (15     (21.4

Research and development

     212         192         (20     (9.5

Service fees

     287         264         (22     (7.7

Bad debt allowance

     92         79         (13     (14.0

Others

     252         239         (13     (5.1
  

 

 

    

 

 

      

Total administrative expenses

   2,035       2,129         94        4.6   
  

 

 

    

 

 

      

Total selling and administrative expenses

           3,647               3,808         161        4.4   
  

 

 

    

 

 

      

Our selling and administrative expenses increased by 4.4%, or Won 161 billion, from Won 3,647 billion in 2011 to Won 3,808 billion in 2012 primarily due to increases in labor-related expenses and freight expense. Such factors were principally attributable to the following:

 

   

Our labor-related expenses included in selling and administrative expenses, which consist of wages and salaries, expenses related to defined benefit plans and other employee benefits, increased by 11.4%, or Won 95 billion, from Won 832 billion in 2011 to Won 927 billion in 2012 primarily due to an increase in the number of employees and a rise in their wages.

 

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Our freight expense increased by 4.7%, or Won 67 billion, from Won 1,406 billion in 2011 to Won 1,473 billion in 2012 primarily due to an increase in freight rates, which was offset in part by a decrease in our export volume.

Other Operating Income and Expenses

The following table presents a breakdown of our other operating income and expenses and changes therein for 2011 and 2012.

 

                   Changes  
     For the Year Ended December 31,      2011 versus 2012  
         2011              2012           Amount       %   
     (In billions of Won)  

Gain on disposals of property, plant and equipment

   14       42       28        206.2

Gain on disposals of investments in associates

     2         39                 37        1,655.3   

Gain on disposals of assets held for sale

             193         193        N.A.   

Reversal of other bad debt allowance

     58                 (58     (100.0

Reversal of other provisions

     36         16         (20     (55.0

Outsourcing income

     42         29         (13     (30.9

Gain on disposals of wastes

     11         39         27        240.1   

Gain from claim compensation

     69         32         (37     (54.1

Penalty income from early termination of contracts

     39         15         (23     (61.0

Others

     36         43         6        16.9   
  

 

 

    

 

 

      

Total other operating income

           307               448         141        46.0   
  

 

 

    

 

 

      

 

N.A. means not applicable.

Our other operating income increased by 46.0%, or Won 141 billion, from Won 307 billion in 2011 to Won 448 billion in 2012 primarily due to our gain on disposals of assets held for sale of Won 193 billion in 2012. We recognized a gain of Won 146 billion from Daewoo International’s disposal of Daewoo Cement (Shandong) Co., Ltd. to China United Cement Group Co., Ltd. in June 2012. In addition, we recognized a gain of Won 46 billion from Daewoo International’s disposal of its interest in Kyobo Life Insurance Co., Ltd. (“Kyobo Life Insurance”), subsequent to our impairment of Won 258 billion of such asset as described below.

 

                   Changes  
     For the Year Ended December 31,      2011 versus
2012
 
         2011              2012          Amount     %  
     (In billions of Won)  

Loss on disposals of property, plant and equipment

           61               65       5        8.2

Idle tangible assets expenses

     17         31                 14        85.4   

Impairment losses on other long-term assets

     35         36         2        5.5   

Impairment loss on assets held for sale

             258         258        N.A.   

Impairment loss of property, plant and equipment

     26         13         (13     (50.4

Impairment loss of investment property

     23         1         (22     (95.5

Other bad debt expenses

     11         44         33        295.5   

Donations

     67         74         7        11.1   

Penalty and default losses

     40         149         110        277.8   

Loss on disposal of wastes

     31         45         15        48.7   

Others

     57         91         34        58.8   
  

 

 

    

 

 

      

Total other operating expenses

       367           809         443        120.8   
  

 

 

    

 

 

      

 

N.A. means not applicable.

Our other operating expenses increased by Won 443 billion, from Won 367 billion in 2011 to Won 809 billion in 2012, primarily due to our impairment loss on assets held for sale in 2012 as well as an increase in our penalty and default losses. In 2012, we recorded an impairment loss on assets held

 

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for sale of Won 258 billion related to a decrease in market value of Daewoo International’s interest in Kyobo Life Insurance. Our penalty and default losses increased by Won 110 billion, from Won 40 billion in 2011 to Won 149 billion in 2012, primarily due to a fine of Won 118 billion imposed by the Korea Fair Trade Commission for price fixing galvanized steel sheets.

Operating Profit

Due to the factors described above, our operating profit decreased by 39.1%, or Won 2,116 billion, from Won 5,408 billion in 2011 to Won 3,292 billion in 2012. Our operating margin decreased from 7.8% in 2011 to 5.2% in 2012.

Share of Profit of Equity-Accounted Investees

We recognized a net profit for our proportionate share of equity-accounted investees of Won 51 billion in 2011 primarily due to our share of profit of Kyobo Life Insurance, SNNC Co., Ltd. and KOBRASCO, which were offset in part by our share of loss of Sungjin Geotec, AMCI (WA) Pty Ltd. and USS-POSCO Industries. However, we recognized a net loss for our proportionate share of equity-accounted investees of Won 23 billion in 2012 primarily due to our share of loss of AMCI (WA) Pty Ltd. and Busan-Gimhae Light Rail Transit Co., Ltd., which were offset in part by our share of profit of Kyobo Life Insurance and KOBRASCO. For a discussion of our share of profits or losses of equity-accounted investees, see Note 11 of Notes to Consolidated Financial Statements.

Finance Income and Finance Costs

The following table presents a breakdown of our finance income and costs and changes therein for 2011 and 2012.

 

                   Changes  
     For the Year Ended December 31,      2011 versus 2012  
               2011                           2012                     Amount         %  
     (In billions of Won)  

Interest income

       216           279           63        28.9

Dividend income

     144         124         (19     (13.5

Gain on foreign currency transactions

     1,454         935         (519     (35.7

Gain on foreign currency translations

     259         937                 678        261.7   

Gain on transactions of derivatives

     549         408         (142     (25.8

Gain on valuations of derivatives

     112         94         (17     (15.4

Gain on disposals of available-for-sale investments

     455         112         (342     (75.3

Others

     2         7         6        359.3   
  

 

 

    

 

 

      

Total finance income

       3,190           2,897         (293     (9.2
  

 

 

    

 

 

      

Interest expenses

       788           871           83        10.5

Loss on foreign currency transactions

     1,620         839                 (781     (48.2

Loss on foreign currency translations

     530         243         (287     (54.1

Loss on transactions of derivatives

     513         309         (204     (39.7

Loss on valuations of derivatives

     189         160         (29     (15.4

Impairment loss on available-for-sale investments

     153         224         71        46.7   

Loss on disposals of available-for-sale investments

     1         36         35        3,517.7   

Loss on Financial guarantee

     1         38         37        3,744.2   

Others

     72         76         5        6.5   
  

 

 

    

 

 

      

Total finance costs

       3,867           2,798         (1,069     (27.6
  

 

 

    

 

 

      

We recognized a net loss on foreign currency translations of Won 271 billion in 2011 compared to a net gain on foreign currency translations of Won 694 billion in 2012 and a net loss on foreign currency transactions of Won 166 billion in 2011 compared to a net gain on foreign currency transactions of Won 96 billion in 2012 as the Won depreciated against the Dollar and Yen in 2011 while it appreciated against the Dollar and Yen in 2012. In terms of the market average exchange rates

 

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announced by Seoul Money Brokerage Services, Ltd., the Won depreciated from Won 1,138.9 to US$1.00 as of December 31, 2010 to Won 1,153.3 to US$1.00 as of December 31, 2011 but appreciated to Won 1,071.1 to US$1.00 as of December 31, 2012. The Won depreciated against the Yen from Won 1,397.1 per Yen 100 as of December 31, 2010 to Won 1,485.2 per Yen 100 as of December 31, 2011 but appreciated to Won 1,247.5 per Yen 100 as of December 31, 2012. Against such fluctuations, we recognized an increase of 170.1% in net gain on transactions of derivatives, or Won 62 billion, from Won 37 billion in 2011 to Won 99 billion in 2012 as well as a decrease of 15.6% in net loss on valuation of derivatives, or Won 12 billion, from Won 77 billion in 2011 to Won 65 billion in 2012.

On the other hand, our gain on disposals of available-for-sale investments decreased significantly from Won 455 billion in 2011 to Won 112 billion in 2012 primarily due to the recognition of a Won 332 billion gain in 2011 from our disposal of a minority investment in an iron ore manufacturer in Australia, compared to no comparable disposal of available-for-sale investments in 2012.

Our interest expenses increased by 10.5%, or Won 83 billion, from Won 788 billion in 2011 to Won 871 billion in 2012 primarily due to an increase in the average balance of our payables and financial liabilities, which was partially offset by a general decrease in interest rates in Korea.

Our impairment loss on available-for-sale investments increased by 46.7%, or Won 71 billion, from Won 153 billion in 2011 to Won 224 billion in 2012 primarily due to a significant decline in the fair value of shares of Jupiter Mines Ltd., SK Telecom and others for a prolonged period, which was considered as objective evidence of impairment.

Income Tax Expense

Our income tax expense decreased by 8.0%, or Won 85 billion, from Won 1,068 billion in 2011 to Won 983 billion in 2012 primarily due to a 29.6% decrease in profit before income tax expense, which was partially offset by increases in adjustments related to difference in tax rate and unrealized deferred tax assets. See Note 35 of Notes to Consolidated Financial Statements. Our effective tax rates increased from 22.3% in 2011 to 29.2% in 2012 primarily due to our disposition of Daewoo International’s interest in Kyobo Life Insurance in September 2012.

Profit for the Period

Due to the factors described above, our profit for the period decreased by 35.8%, or Won 1,329 billion, from Won 3,714 billion in 2011 to Won 2,386 billion in 2012. Our net profit margin decreased from 5.4% in 2011 to 3.8% in 2012.

The following table presents our profit for the period by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation, and changes therein for 2011 and 2012.

 

           Changes  
     For the Year Ended December 31,     2011 versus 2012  
             2011                     2012             Amount     %  
     (In billions of Won)  

Steel Segment

       3,689          2,246      (1,443     (39.1 )% 

Trading Segment

     195        325        130        66.5   

Construction Segment

     155        345        191        123.3   

Others Segment

     155        301                146        94.3   

Consolidation adjustments

     (480     (833     (352     73.3   
  

 

 

   

 

 

     

Profit for the period

   3,714      2,386        (1,329     (35.8
  

 

 

   

 

 

     

 

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Item 5.B.  Liquidity and Capital Resources

The following table sets forth the summary of our cash flows for the periods indicated.

 

     For the Year Ended December 31,  
             2011                     2012                     2013          
     (In billions of Won)  

Net cash provided by operating activities

       1,692          7,319          4,858   

Net cash used in investing activities

     (5,517     (6,169     (8,752

Net cash provided by (used in) financing activities

     4,900        (908     3,532   

Effect of exchange rate fluctuations on cash held

     3        (161     (111

Cash and cash equivalents at beginning of period

     3,521        4,599        4,681   

Cash and cash equivalents at end of period

     4,599        4,681        4,209   

Net increase (decrease) in cash and cash equivalents

     1,078        82        (472

Capital Requirements

Historically, uses of cash consisted principally of purchases of property, plant and equipment and other assets and repayments of outstanding debt and payments of dividends. From time to time, we have also engaged in the acquisition of treasury shares.

Net cash used in investing activities was Won 5,517 billion in 2011, Won 6,169 billion in 2012 and Won 8,752 billion in 2013. These amounts included acquisition of property, plant and equipment of Won 5,331 billion in 2011, Won 7,055 billion in 2012 and Won 6,570 billion in 2013. We plan to spend between Won 6 trillion to Won 7 trillion in capital expenditures in 2014, which we may adjust on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. We may delay or not implement some of our current capital expenditure plans based on our assessment of such market conditions. We had net disposals of short-term financial instruments of Won 1,238 billion in 2011 and Won 232 billion in 2012, and net acquisition of short-term financial instruments of Won 548 billion in 2013. We also had net disposals of available-for-sale investments of Won 89 billion in 2011 and Won 393 billion in 2012, and net acquisition of available-for-sale investments of Won 40 billion in 2013.

In our financing activities, we used cash of Won 1,746 billion in 2011, Won 1,884 billion in 2012 and Won 2,846 billion in 2013 for repayments of borrowings. We paid dividends on common stock in the amount of Won 771 billion in 2011, Won 752 billion in 2012 and Won 649 billion in 2013.

In recent years, we have also selectively considered various opportunities to acquire or invest in companies that may complement our businesses, as well as invest in overseas resources development projects. For example, we acquired a controlling interest in Daewoo International on September 20, 2010 for Won 3.37 trillion, and we spent Won 390 billion in 2011 to acquire a controlling interest in Thainox Stainless Public Company Limited, a major stainless steel manufacturer in Thailand. We may require additional capital for such acquisitions or entering into other strategic relationships. Other than capital required for such activities, we anticipate that capital expenditures, repayments of outstanding debt and payments of cash dividends will represent the most significant uses of funds for the next several years.

 

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Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, as well as issue guarantees for our related companies’ indebtedness. The following table sets forth the amount of long-term debt, capital lease and operating lease obligations as of December 31, 2013.

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1 to 3 Years      4 to 5 Years      After
5 Years
 
     (In billions of Won)  

Long-term debt obligations (a)

   18,842       3,348       3,437       2,877       9,179   

Interest payments on long-term debt (b)

     1,942         499         774         386         282   

Capital lease obligations (c)

     28         9         10         10           

Operating lease obligations (d) 

     33         25         8                   

Purchase obligations (e)

     40,622         17,735         17,122         9,143         2,894   

Accrued severance benefits (f) 

     1,488         79         199         263         948   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     62,956         21,696         21,549         12,680         13,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(a) Includes the current portion and premium on bond redemption but excludes amortization of discount on debentures and issuance costs.

 

(b) As of December 31, 2013, a portion of our long-term debt carried variable interest rates. We used the interest rate in effect as of December 31, 2013 in calculating the interest payments on long-term debt for the periods indicated.

 

(c) We entered into a capital lease contract with Ilshin Shipping Co., Ltd. for a vessel for transporting plates and other products.

 

(d) We acquired certain tools and equipment under operating lease agreements with Orix Rentec Korea Co., Ltd. and others.

 

(e) Our purchase obligations include supply contracts to purchase iron ore, coal, LNG and other raw materials. These contracts generally have terms of one to ten years and the long-term contracts provide for periodic price adjustments according to the market prices. As of December 31, 2013, 193 million tons of iron ore and 14 million tons of coal remained to be purchased under long-term contracts. In addition, we entered into an agreement with Tanggun LNG Consortium in Indonesia to purchase 550 thousand tons of LNG for 20 years commencing in August 2005. The purchase price under the agreement with Tangguh LNG Consortium is variable based on the monthly standard oil price (as represented by the Japan Customs cleared Crude Price), subject to a ceiling. We used the market price and exchange rate in effect as of December 31, 2013 in calculating the iron ore, coal and LNG purchase obligations described above for the periods indicated.

 

(f) Represents, as of December 31, 2013, the expected amount of severance benefits that we will be required to pay under applicable Korean law to all of our employees when they reach their normal retirement age. The amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their retirement. These amounts do not include amounts that may be paid to employees who cease to work at the company before their normal retirement age.

Capital Resources

We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through long-term debt and short-term borrowings. We expect that these sources will continue to be our principal sources of cash in the future. From time to time, we may also generate cash through sale of treasury shares and our holdings in available-for-sale securities.

Our net cash provided by operating activities increased by 332.7%, or Won 5,628 billion, from Won 1,692 billion in 2011 to Won 7,319 billion in 2012. Our gross cash inflow from our sales activities decreased as discussed above. However, our overall net cash provided by operating activities increased as a result of a decrease in our inventory and better management of outstanding trade accounts and notes receivables. Our inventory decreased primarily due to a decrease in the price of raw materials as well as our management of inventory levels in preparation for a decrease in demand due to continuing uncertainties in the global economy.

Our net cash provided by operating activities decreased by 33.6%, or Won 2,461 billion, from Won 7,319 billion in 2012 to Won 4,858 billion in 2013. Our gross cash flow from our sales activities

 

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decreased as discussed above. In addition, we continued to manage our inventory levels in 2013 in response to a decrease in demand resulting from continuing uncertainties in the global economy. The inventory turnover was faster in 2013 compared to 2012 as we maintained a relatively lower inventory level in 2013 compared to 2012. Our outstanding trade accounts and notes receivables also increased in 2013, as we extended payment terms for some of our key customers, which in turn negatively impacted our net cash provided by operating activities.

Net proceeds from borrowings, after deducting for repayment of borrowings, were Won 5,322 billion in 2011, Won 1,123 billion in 2012 and Won 2,253 billion in 2013. Net proceeds from short-term borrowings, after deducting for repayment of short-term borrowings, were Won 52 billion in 2011 and Won 87 billion in 2013. We had net repayments of short-term borrowings of Won 1,412 billion in 2012. We also raised Won 1,495 billion from our issuances of hybrid bonds in 2013, which are accounted for as part of our equity. Long-term borrowings, excluding current installments, were Won 16,020 billion as of December 31, 2011, Won 14,412 billion as of December 31, 2012 and Won 15,533 billion as of December 31, 2013. Total short-term borrowings and current installments of long-term borrowings were Won 10,792 billion as of December 31, 2011, Won 10,509 billion as of December 31, 2012 and Won 10,714 billion as of December 31, 2013. Outstanding hybrid bonds were Won 997 billion as of December 31, 2013. Our net borrowings-to-equity ratio, which is calculated by deducting cash and cash equivalents from total borrowings and dividing the net amount with our total equity, was 54.54% as of December 31, 2011, 47.70% as of December 31, 2012 and 48.09% as of December 31, 2013.

We periodically increase our short-term borrowings and adjust our long-term debt financing levels depending on changes in our capital requirements. We also generated cash of Won 164 billion in 2011 and Won 14 billion in 2013 from the sale of our treasury shares. We also generated cash of Won 580 billion from our disposal of a portion of our holdings of shares in SK Telecom, KB Financial Group and Hana Financial Group in 2012 and Won 128 billion from our disposal of additional shares in SK Telecom in 2013. In addition, we generated cash of Won 1,151 billion in September 2012 from Daewoo International’s disposal of its interest in Kyobo Life Insurance.

We believe that we have sufficient working capital for our current requirements and that we have a variety of alternatives available to us to satisfy our liquidity requirements to the extent that they are not met by funds generated by operations, including the issuance of debt and equity securities and bank borrowings denominated in Won and various foreign currencies. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings.

Liquidity

We had working capital (current assets minus current liabilities) of Won 13,952 billion as of December 31, 2011, Won 11,791 billion as of December 31, 2012 and Won 11,425 billion as of December 31, 2013. Our holding of cash and cash equivalents were Won 4,599 billion as of December 31, 2011, Won 4,681 billion as of December 31, 2012 and Won 4,209 billion as of December 31, 2013. Our holding of other receivables and other short-term financial assets were Won 3,656 billion as of December 31, 2011, Won 3,846 billion as of December 31, 2012 and Won 4,861 billion as of December 31, 2013. As of December 31, 2013, approximately 24.4% of our cash and cash equivalents, other receivables and other short-term financial assets were held outside of Korea, which we expect to use in our operations abroad, including capital expenditure activities. In the event that such assets are needed for our operations in Korea, such amounts are typically not restricted under local laws from being used in Korea. In addition, we believe that there are no material tax implications in the event our foreign subsidiaries elect to grant cash dividends to us. POSCO had total available credit lines of Won 2,533 billion as of December 31, 2013, none of which was used as of such date. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.

 

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Our liquidity is affected by exchange rate fluctuations. See “— Overview — Exchange Rate Fluctuations.”

Capital Expenditures and Capacity Expansion

Cash used for acquisitions of property, plant and equipment was Won 5,331 billion in 2011, Won 7,055 billion in 2012 and Won 6,570 billion in 2013. We plan to spend between Won 6 trillion to Won 7 trillion in capital expenditures in 2014, which we may adjust on an on-going basis subject to market demand for our products, the production outlook of the global steel industry and global economic conditions in general. We may delay or not implement some of our current capital expenditure plans based on our assessment of such market conditions.

Our current plan for capital investment in production facilities emphasizes capacity rationalization, increased production of higher value-added products and improvements in the efficiency of older facilities in order to reduce operating costs. The following table sets out the major items of our capital expenditures as of December 31, 2013:

 

Project

   Expected
 Completion Date 
   Total Cost
of Project
     Estimated
Remaining Cost of
Completion
as of December 31,
2013
 
     (In billions of Won)  

Steel Segment:

        

Miscellaneous capital expenditures, including rationalization of furnace no. 2 and construction of production infrastructure for new businesses

   December 2016      3,534         173   

Optimization of Pohang Works facilities

   January 2014      2,212         169   

Construction of no. 4 hot rolling mill at Gwangyang Works

   October 2014      1,626         448   

Upgrading of raw materials treatment and transportation facilities

   September 2016      1,301         247   

Construction of cold rolling mill by POSCO Maharashtra Steel Private Limited

   June 2014      629         108   

Construction of steel manufacturing plant by POSCO SS-VINA

   December 2014      617         174   

Construction of off-gas power plant by POSCO Energy

   March 2014      292         26   

Rationalization of rolling mill by POSCO Specialty Steel

   May 2014      167         17   

Trading Segment:

        

Construction of under-sea pipeline and on-land gas terminal by Daewoo International

   April 2014      236         11   

Acquisition of Northeast Asia Trade Tower by Daewoo International

   July 2014      208         187   

Others Segment:

        

Construction of backup power plant no. 1 and no. 2 in Incheon by POSCO Energy

   January 2015      1,063         433   

Construction of power plant in Pohang by POSCO Energy

   March 2014      595         29   

Item 5.C.  Research and Development, Patents and Licenses, Etc.

We maintain a research and development program to carry out basic research and applied technology development activities. As of December 31, 2013, POSCO Technical Research Laboratories employed 1,049 personnel, including 462 researchers. Our technology development department also works closely with the Pohang University of Science & Technology, Korea’s first research-oriented college founded by us in 1986, and the Research Institute of Industrial Science and Technology, Korea’s first private comprehensive research institute founded by us in 1987. We also established POSCO Research Institute (POSRI) in 1994, which engages in research activities and consulting services.

 

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We recorded research and development expenses of Won 380 billion as cost of sales in 2011, Won 385 billion in 2012 and Won 370 billion in 2013, as well as research and development expenses of Won 212 billion as selling and administrative expenses in 2011, Won 192 billion in 2012 and Won 193 billion in 2013.

Our research and development program has filed over thirty-two thousand industrial rights applications relating to steel-making technology, approximately one-third of which were registered as of December 31, 2013, and has successfully applied many of these to the improvement of our manufacturing process.

Item 5.D.  Trend Information

These matters are discussed under Item 5.A. and Item 5.B. above where relevant.

Item 5.E.  Off-balance Sheet Arrangements

As of December 31, 2012 and 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 5.F.  Tabular Disclosure of Contractual Obligations

These matters are discussed under Item 5.B. above where relevant.

Item 5.G.  Safe Harbor

See “Item 3. Key Information — Item 3.D. Risk Factors — This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.

Item 6.  Directors, Senior Management and Employees

Item 6.A.  Directors and Senior Management

Board of Directors

Our board of directors has the ultimate responsibility for the management of our business affairs. Our board consists of five directors who are our executive officers (“Inside Directors”) and seven directors who are outside directors (“Outside Directors”). Our shareholders elect both the Inside Directors and Outside Directors at a general meeting of shareholders. Candidates for Inside Directors are recommended to shareholders by the board of directors after the board reviews such candidates’ qualifications, and candidates for Outside Directors are recommended to the shareholders by a separate board committee consisting of three Outside Directors and one Inside Director (“Director Candidate Recommendation Committee”) after the committee reviews such candidates’ qualifications. Any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.

Our board of directors maintains the following six sub-committees:

 

   

the Director Candidate Recommendation Committee;

 

   

the Evaluation and Compensation Committee;

 

   

the Finance and Operation Committee;

 

   

the Executive Management Committee;

 

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the Audit Committee; and

 

   

the Related Party Transactions Committee.

Our board committees are described in greater detail below under “— Item 6.C. Board Practices.”

Under the Commercial Code and our articles of incorporation, one Chairman should be elected among the Outside Directors and several Representative Directors may be elected among the Inside Directors by our board of directors’ resolution.

Inside Directors

Our current Inside Directors are:

 

Name

   Position    Responsibilities and
Division
     Years
as
Director
     Years
with
POSCO
     Age      Expiration
of Term of
Office

Kwon, Oh-Joon

   Chief Executive Officer
and Representative
Director
     —                             0         25         63       March
2017

Kim, Jin-Il

   President and
Representative Director
    
 
Head of Steel Production
Division
  
  
     2         37         61       March
2015

Chang, In-Hwan

   Senior Executive Vice
President and
Representative Director
    
 
Head of Steel Business
Division
  
  
     1         31         59       March
2015

Yoon, Dong-Jun

   Senior Executive Vice
President
    
 
Head of Corporate
Infrastructure Division
  
  
     0         27         55       March
2016

Lee, Young-Hoon

   Senior Executive Vice
President
    
 
Head of Finance and
Investment Division
  
  
     0         27         54       March
2015

All Inside Directors are engaged in our business on a full-time basis.

Outside Directors

Our current Outside Directors are set out in the table below. Each of our Outside Directors meets the applicable independence standards set forth under the rules of the Financial Investment Services and Capital Markets of Korea (the “FSCMA”).

 

Name

   Position    Principal Occupation    Years
as
Director
     Age      Expiration of
Term of Office
 

Lee, Chang-Hee

   Chairman    Professor, Seoul National University      5         53         March 2015   

Bemowski, James B.

   Director    Vice Chairman, Doosan Co., Ltd.      2         60         March 2015   

Shin, Chae-Chol

   Director    Former Chairman and CEO, IBM
Korea Inc.
     1         66         March 2015   

Lee, Myoung-Woo

   Director    President, Dongwon Industries      1         60         March 2016   

Kim, Il-Sup

   Director    President, Seoul School of
Integrated Sciences & Technologies
     0         67         March 2017   

Sunwoo, Young

   Director    Representative Lawyer, Rhi &
Partners
     0         58         March 2017   

Ahn, Dong-Hyun

   Director    Professor, Seoul National University      0         50         March 2017   

The term of office of the Directors elected in March 2014 is up to three (3) years. Each Director’s term expires at the close of the ordinary general meeting of shareholders convened in respect of the fiscal year that is the last one to end during such Director’s tenure.

 

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Senior Management

In addition to the Inside Directors who are also our executive officers, we have the following executive officers:

 

Name

  

Position

  

Responsibility and Division

   Years
with
POSCO
     Age  

Baek, Sung-Kwan

   Senior Executive Vice President    General Superintendent, Gwangyang Works      33         58   

Lee, Jung-Sik

   Senior Executive Vice President    General Superintendent, Pohang Works      34         59   

Park, Sung-Ho

   Executive Vice President    Head of Technical Research Laboratories      31         57   

Oh, In-Hwan

   Executive Vice President    Department Manager of Steel Business Strategy Dept.      31         55   

Yim, Chang-Hee

   Executive Vice President    General Manager of Europe Office      28         57   

Kim, Won-Ki

   Executive Vice President    Department Manager of Global Marketing Coordination Dept.      32         57   

Ko, Suk-Bum

   Executive Vice President    Department Manager of Labor and Outside Services Dept.      29         56   

Kim, Jhi-Yong

   Executive Vice President    Center Manager of Steel Solution Center      21         52   

Lee, Young-Ki

   Executive Vice President    President, POSCO-Japan Co., Ltd.      28         54   

Kim, Se-Hyun

   Executive Vice President    Department Manager of Corporate Project Management Dept.      4         54   

Chang, In-Hwa

   Executive Vice President    Department Manager of New Business Development Dept.      3         58   

Min, Kyung-Zoon

   Senior Vice President    President, PT Krakatau POSCO Co., Ltd.      30         55   

Shim, Tong-Wook

   Senior Vice President    Department Manager of Corporate Audit Dept.      28         54   

Kwon, Suk-Chul

   Senior Vice President    President, POSCO-China Co., Ltd.      30         57   

Lee, Tae-Ju

   Senior Vice President    Department Manager of Steel Production Strategy Dept.      31         56   

Yun, Ki-mok

   Senior Vice President    Department Manager of Raw Materials Dept.      30         56   

Kim, Jae-Yeol

   Senior Vice President    President, Zhangjiagang Pohang Stainless Steel Co., Ltd.      28         54   

Kim, Hong-Soo

   Senior Vice President    Department Manager of Steel Investment & Technology Planning Dept.      31         56   

Son, Chang Hwan

   Senior Vice President    Department Manager of Automotive Materials Marketing Dept.      29         53   

Sung, Gee-Woong

   Senior Vice President    President, POSCO-India Private Ltd.      19         54   

Jeong, Tak

   Senior Vice President    Department Manager of Energy and Shipbuilding Materials Marketing Dept.      2         54   

Chung, Chang-Hwa

   Senior Vice President    Department Manager of Public Relations Dept.      18         52   

Kim, Kwan Young

   Senior Vice President    Deputy General Superintendent (Administration, Pohang Works)      26         52   

Yi, Kyung-Jo

   Senior Vice President    Deputy General Superintendent (Hot and Cold Rolling, Gwangyang Works)      28         53   

Ha, Young-Sul

   Senior Vice President    Department Manager of Plant, Equipment and Materials Procurement Dept.      27         55   

Nam, Cheol-Soon

   Senior Vice President    Department Manager of Stainless Steel Marketing Dept.      1         53   

Hwangbo, Won

   Senior Vice President    President, POSCO-Mexico Co., Ltd.      24         50   

Kim, Byung-Hwi

   Senior Vice President    President, POSCO-South Asia Co., Ltd.      24         50   

Choi, Seung-Deug

   Senior Vice President    Department Manager of New Business Investment & Technology Planning Dept.      6         52   

 

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Name

  

Position

  

Responsibility and Division

   Years
with
POSCO
     Age  

Kim, Jun-Hyung

   Senior Vice President    Deputy General Superintendent (Hot and Cold Rolling, Pohang Works)      28         51   

Oh, Hyoung-Soo

   Senior Vice President    President, POSCO-Thainox Co., Ltd.      28         53   

Park, Joo-Cheul

   Senior Vice President    Deputy General Superintendent (Maintenance, Pohang Works)      27         53   

Park, Young-Kwan

   Senior Vice President    Deputy General Superintendent (Iron and Steel Making, Pohang Works)      28         55   

Son, Geon-Jae

   Senior Vice President    Deputy General Superintendent (Maintenance, Gwangyang Works)      26         52   

Joo, Sang-Hoon

   Senior Vice President    General Manager of Gwangyang Research Lab.      23         54   

Kim, Dong-Ho

   Senior Vice President    President, CSP      29         54   

Yun, Han-Kuen

   Senior Vice President    General Manager of Pohang Research Lab      31         55   

Choi, Jong-Jin

   Senior Vice President    Department Manager of Human Resources Dept.      26         50   

Choi, Joo

   Senior Vice President    Deputy General Superintendent (Iron and Steel Making, Gwangyang Works)      30         55   

Kang, Seog-Beom

   Senior Vice President    Department Manager of Wire Rod Marketing Dept.      28         53   

Kwon, Woo-Taeck

   Senior Vice President    Department Manager of Investment Planning & Engineering Dept.      28         54   

Bang, Gil-Ho

   Senior Vice President    Department Manager of Hot Rolled and Construction Steel Materials Marketing Dept.      25         52   

Yun, Yang-Su

   Senior Vice President    President, POSCO-Vietnam Co., Ltd      25         50   

Yang, Weon-Jun

   Senior Vice President    Deputy General Superintendent (Administration, Gwangyang Works)      25         48   

Lee, Won-Hwi

   Senior Vice President    Department Manager of Electrical and Electronic Materials Marketing Dept.      24         50   

Noh, Min-Yong

   Senior Vice President    Department Manager of Finance Dept.      24         50   

Lee, Eun-Seok

   Senior Vice President    Deputy General Superintendent (Stainless Steel Production, Pohang Works)      28         53   

Song, Se-Bin

   Executive Vice President    Legal Affairs Dept.      3         51   

Lee, Hoo-Geun

   Executive Vice President    Finance and Investment Division      31         56   

An, Tong-Il

   Executive Vice President    Steel Production Division      27         54   

Jeong, Chul-Gyu

   Executive Vice President    Steel Production Division      31         58   

Yu-Seong

   Executive Vice President    Finance and Investment Division      28         57   

Hwang, Seok-Joo

   Executive Vice President    Corporate Infrastructure Division      28         51   

Cho, Chung-Myong

   Executive Vice President    Value Management Department      24         53   

Kim, Myoung- Kyun

   Senior Vice President    Public Relations Department      35         59   

Kim, Jeong-Sik

   Senior Vice President    Steel Production Division      31         57   

Lee, Yun-Yong

   Senior Vice President    Finance and Investment Division      26         56   

Chon, Jung-Son

   Senior Vice President    Value Management Department      27         51   

Chin, Kwang-Geun

   Senior Vice President    Technical Research Laboratories      29         56   

Cho, Yong-Doo

   Senior Vice President    Value Management Department      4         53   

Shin, Geon

   Senior Vice President    Technical Research Laboratories      32         56   

Kim, Jae-Seok

   Senior Vice President    Finance and Investment Division      29         56   

Moon, Hee-Kyung

   Senior Vice President    Steel Production Division      31         56   

Cho, Il-Hyun

   Senior Vice President    Steel Production Division      27         52   

Lee, Jong-Sub

   Senior Vice President    Steel Business Division      30         57   

 

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Name

  

Position

  

Responsibility and Division

   Years
with
POSCO
     Age  

Park, Yong-Kyu .

   Senior Vice President    Steel Production Division      29         54   

Yoo, Sun-Hee

   Senior Vice President    Corporate Infrastructure Division      2         52   

Kwak Jeong-Shik

   Senior Vice President    Value Management Department      26         56   

Lee, Young-Woo

   Senior Vice President    Steel Business Division      25         53   

Lee, Chang-Sun

   Senior Vice President    Technical Research Laboratories      26         56   

Kim, Gyo-Sung

   Senior Vice President    Steel Business Division      29         52   

Yi, Sang-Ho

   Senior Vice President    Technical Research Laboratories      29         53   

Oh, Sung-Chel

   Senior Vice President    Value Management Department      27         54   

Hong, Moon-Hi

   Senior Vice President    Steel Production Division      27         48   

Yang, Seong-Sik

   Senior Vice President    Steel Business Division      28         52   

Yoo, Byeong-Og

   Senior Vice President    Raw Materials Department      25         51   

Shin, Hak Kyun

   Senior Vice President    Raw Materials Department      2         51   

Han Chan-Hee

   Senior Vice President    Technical Research Laboratories      28         55   

Lee, Ju-Tae

   Senior Vice President    Secretariat Department      26         50   

Bae, Jae-Tak

   Senior Vice President    Steel Business Division      26         49   

Ha, Kyung-Sik

   Senior Vice President    Raw Materials Department      24         51   

Won, Hyung-Il

   Senior Vice President    Legal Affairs Department      2         45   

Item 6.B.  Compensation

Compensation of Directors and Officers

Salaries and bonuses for Inside Directors and salaries for Outside Directors are paid in accordance with standards decided by the board of directors within the limitation of directors remuneration approved by the annual general meeting of shareholders. In addition, executive officers’ compensation is paid in accordance with standards decided by the board of directors. The aggregate compensation paid and accrued to all Directors and executive officers was approximately Won 31.4 billion in 2013 and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 6.3 billion in 2013.

The compensation of our directors and executive officers who received total annual compensation exceeding Won 500 million in 2013 were as follows:

 

Name

   Position    Total Compensation
in 2013
    

Long-term Incentive Compensation
for Payment Subsequent to  2013

          (In millions of Won)

Chung, Joon-Yang

   Chief Executive Officer
and Representative Director
   1,954       343 in 2014 and 343 in 2015

Park, Ki-Hong

   President and
Representative Director
     809      

Kim, Joon-Sik

   President and
Representative Director
     809      

Chang, In-Hwan

   Senior Executive Vice
President and
Representative Director
     588      

Kim, Yeung Gyu

   Senior Executive Vice
President
     576      

Park, Han-Yong (1)

   President and
Representative Director
     1,204       225 in 2014 and 225 in 2015

Cho, Noi-Ha (2)

   Senior Executive Vice
President
     1,298       68 in 2014 and 68 in 2015

 

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(1) Includes severance payment of Won 580 million.

 

(2) Includes severance payment of Won 1,027 million.

We have also granted stock options to some of our Directors and executive officers. See “— Item 6.E. Share Ownership” for a list of stock options granted to our Directors and executive officers. At the annual shareholders’ meeting held in February 2006 our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.

Item 6.C.  Board Practices

Director Candidate Recommendation Committee

The Director Candidate Recommendation Committee is composed of three Outside Directors, Lee, Myoung-Woo (committee chair), Kim, Il-Sup, Ahn, Dong-Hyun and one Inside Director, Yoon, Dong-Jun. The Director Candidate Recommendation Committee reviews the qualifications of potential candidates and proposes nominees to serve on our board of directors as an Outside Director. Any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is composed of four Outside Directors, Shin, Chae-Chol (committee chair), Lee, Chang-Hee, Lee, Myoung-Woo and Sunwoo, Young. The Evaluation and Compensation Committee’s primary responsibilities include establishing evaluation procedures and compensation plans for executive officers and taking necessary measures to execute such plans.

Finance and Operation Committee

The Finance and Operation Committee is composed of three Outside Directors, Shin, Chae-Chol (committee chair), James B. Bemowski, Ahn, Dong-Hyun and two Inside Directors, Chang, In-Hwan and Lee, Young-Hoon. This committee is an operational committee that oversees decisions with respect to finance and operational matters, including making assessments with respect to potential capital investments and evaluating prospective capital-raising activities.

Executive Management Committee

The Executive Management Committee is composed of five Inside Directors, Kwon, Oh-Joon (committee chair), Kim, Jin-Il, Chang, In-Hwan, Yoon, Dong-Jun and Lee, Young-Hoon. This committee oversees decisions with respect to our operational and management matters, including review of management’s proposals of new strategic initiatives, as well as deliberation over critical internal matters related to organization structure and development of personnel.

Audit Committee

Under Korean law and our articles of incorporation, we are required to have an Audit Committee. The Audit Committee may be composed of three or more directors; all members of the Audit Committee must be Outside Directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. Members of the Audit Committee are elected by the shareholders at the ordinary general meeting of shareholders. We currently have an Audit Committee composed of three Outside Directors. Members of our Audit Committee are Kim, Il-Sup (committee chair), Lee, Chang-Hee and Sunwoo, Young.

 

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The duties of the Audit Committee include:

 

   

engaging independent auditors;

 

   

approving independent audit fees;

 

   

approving audit and non-audit services;

 

   

reviewing annual financial statements;

 

   

reviewing audit results and reports, including management comments and recommendations;

 

   

reviewing our system of controls and policies, including those covering conflicts of interest and business ethics; and

 

   

examining improprieties or suspected improprieties.

In addition, in connection with general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors at each general meeting of stockholders. Our internal and external auditors report directly to the Audit Committee. The committee holds regular meetings at least once each quarter, and more frequently as needed.

Related Party Transactions Committee

The Related Party Transaction Committee is composed of three Outside Directors, Kim, Il-Sup (committee chair), Lee, Chang-Hee and Sunwoo, Young. This committee reviews related party and other internal transactions and ensures compliance with the Monopoly Regulation and Fair Trade Act.

Item 6.D.  Employees

As of December 31, 2013, we had 34,713 employees, including 16,881 persons employed by our subsidiaries, almost all of whom were employed within Korea. Of the total number of employees, approximately 80% are technicians and skilled laborers and 20% are administrative staff. We use subcontractors for maintenance, cleaning and transport activities. We had 35,094 employees, including 17,471 persons employed by our subsidiaries, as of December 31, 2012, and 34,936 employees, including 17,383 persons employed by our subsidiaries, as of December 31, 2011. To improve operational efficiency and increase labor productivity, we plan to reduce the number of our employees in future years through natural attrition. However, we expect the number of persons employed by our subsidiaries in growth industries to increase in the future.

We consider our relations with our work force to be excellent. We have never experienced a work stoppage or strike. Wages of our employees are among the highest of manufacturing companies in Korea. In addition to a base monthly wage, employees receive periodic bonuses and allowances. Base wages are determined annually following consultation between the management and employee representatives, who are currently elected outside the framework of the POSCO labor union. A labor union was formed by our employees in June 1988. Union membership peaked at 19,026 employees at the beginning of 1991, but has steadily declined since then. As of December 31, 2013, only 12 of our employees were members of the POSCO labor union.

In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard monthly wages, into his or her personal pension account. Our employees, including executive officers as well as non-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees

 

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are paid from their pension accounts. Prior to 2011, our executive and non-executive employees were subject to a lump-sum severance payment system, under which they were entitled to receive a lump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced such lump-sum severance payment system with our current pension insurance system in the form of either a defined benefit plan or a defined contribution plan, with a total unfunded portion of Won 133 billion as of December 31, 2013. Our employees have the option of choosing either the defined benefit plan or the defined contribution plan. Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, and cultural and athletic facilities.

As of December 31, 2013, our employees owned, through our employee stock ownership association, approximately 0.01% of our common stock in their association accounts and 1.70% of our common stock in their employee accounts.

Item 6.E.  Share Ownership

Common Stock

The persons who are currently our Directors or executive officers held, as a group, 21,850 common shares as of March 28, 2014, the most recent practicable date for which this information is available. The table below shows the ownership of our common shares by our Directors and executive officers.

 

Kwon, Oh-Joon

     1,250   

Lee, Hoo-Geun

     672   

Park, Joo-Chul

     650   

Park, Yong-Gyu

     620   

Shim, Tong-Wook

     520   

Yim, Chang-Hee

     509   

Lee, Yun-Yong

     494   

Hwang, Seok-Joo

     480   

Kwon, Suk-Chul

     480   

Kim, Jeong-Sik

     464   

Lee, Jung-Sik

     453   

Jeong, Chul-Gyu

     450   

Park, Sung-Ho

     446   

Min, Kyung-Zoon

     430   

Kim, Kwan-Young

     420   

Kwon, Woo-Taeck

     420   

Song, Sebin

     400   

Yoon, Dong-Jun

     381   

Baek, Sung-Kwan

     381   

Chang, In-Hwan

     374   

Kim, Won-Ki

     372   

Kim, Hong-Soo

     371   

Kim, Jae-Seok

     370   

Lee, Young-Ki

     360   

Lee, Tae-Ju

     347   

Yang, Seong-Sik

     343   

Lee, Chang-Sun

     340   

Kim, Myung-Kyun

     325   

Kim, Dong-Ho

     320   

Yi, Sang-Ho

     320   

Han, Chan-Hee

     320   

Lee, Eun-Seok

     320   

 

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Ko, Suk-Bum

     306   

Kim, Jin-Il

     300   

Yang, Weon-Jun

     280   

Yu, Seong

     268   

Yoo, Byeong-Og

     265   

Kang, Seog-Beom

     264   

Lee, Jong-Seob

     261   

Lee, Young-Woo

     252   

Cho, Il-Hyun

     251   

Choi, Joo

     251   

An, Tong-Il

     250   

Sung, Gee-Woong

     247   

Kim, Jhi-Yong

     243   

Park, Young-Kwan

     221   

Bae, Jae-Tak

     212   

Kwak, Jeong-Shik

     209   

Hwangbo, Won

     202   

Chon, Jung-Son

     194   

Lee, Young-Hoon

     178   

Kim, Gyo-Sung

     175   

Yun, Ki-Mok

     172   

Oh, In-Hwan

     150   

Shin, Geon

     144   

Moon, Hee-Kyung

     143   

Oh, Hyoung-Soo

     143   

Choi, Jong-Jin

     141   

Joo, Sang-Hoon

     140   

Yi, Kyung-Jo

     130   

Chung, Chang-Hwa

     128   

Chin, Kwang-Geun

     112   

Son, Chang-Hwan

     104   

Kim, Se-hyun

     100   

Chang, In-Hwa

     100   

Kim, Jae-Yeol

     100   

Yun, Yang-Su

     100   

Kim, Byung-Hwi

     99   

Kim, Jun-Hyung

     99   

Hong, Moon-Hi

     76   

Oh, Sung-Chel

     59   

Ha, Young-Sul

     52   

Cho, Yong-Doo

     50   

Jeong, Tak

     50   

Choi, Seung-Duk

     50   

Noh, Min-Yong

     50   

Yoo, Sun-Hee

     49   

Yun, Han-Keun

     36   

Nam, Cheol-Soon

     30   

Bang, Gil-Ho

     12   

Cho, Chung-Myong

       

Son, Geon-Jae

       

Shin, Hak-Kyun

       

Lee, Ju-Tae

       

Ha, Kyung-Sik

       

Lee, Won-Hwi

       

Won, Hyung-Il

       
  

 

 

 

Total

     21,850   
  

 

 

 

Stock Options

With respect to the options granted, we may elect either to issue shares of common stock, distribute treasury stock or to pay in cash the difference between the exercise and the market price at the date of exercise. The options may be exercised by a person who has continued employment with

 

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POSCO for two or more years from the date on which the options are granted. Expiration date of options is seven years from the date on which the options are granted. All of the stock options below relate to our common stock.

At the annual shareholders’ meeting held in February 2006, our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option. Currently, there are no outstanding exercisable stock options. The following table sets forth information regarding the stock options we have granted to our current Directors and executive officers as of May 9, 2014.

 

    Grant Date     Exercise Period     Exercise
Price
    Granted
Options
    Exercised
Options
    Exercisable
Options
 

Director

    From     To          

Kwon, Oh-Joon

    April 26, 2003        4/27/2005        4/26/2010        102,900        9,604        9,604        0   

Kim, Jin-II

    April 25, 2003        4/27/2005        4/26/2010        102,900        9,604        9,604        0   

Item 7.  Major Shareholders and Related Party Transactions

Item 7.A.  Major Shareholders

The following table sets forth certain information relating to the shareholders of our common stock issued as of December 31, 2013.

 

Shareholders

   Number of
Shares
Owned
     Percentage  

National Pension Service

     6,577,907         7.54

Nippon Steel & Sumitomo Metal Corporation (1)

     4,394,712         5.04   

Hyundai Heavy Industries

     2,197,707         2.52   

Pohang University of Science and Technology

     1,905,000         2.18   

KB Financial Group Inc. and subsidiaries

     1,846,994         2.12   

Directors and executive officers as a group

     20,618         0.02   

Public (2)

     62,840,686         72.08   

POSCO (held in the form of treasury stock)

     7,403,211         8.49   
  

 

 

    

 

 

 

Total issued shares of common stock

     87,186,835         100.00
  

 

 

    

 

 

 

 

 

(1) Held in the form of ADRs.

 

(2) Includes ADRs.

As of December 31, 2013, there were 13,437,266 shares of common stock outstanding in the form of ADRs, representing 15.41% of the total issued shares of common stock.

Item 7.B.  Related Party Transactions

We have issued guarantees of Won 7,366 billion as of December 31, 2011, Won 9,140 billion as of December 31, 2012 and Won 9,704 billion as of December 31, 2013, in favor of affiliated and related companies. We have also engaged in various transactions with our subsidiaries and affiliated companies. See Notes 37 and 38 of Notes to Consolidated Financial Statements.

As of December 31, 2011, 2012 and 2013, we had no loans outstanding to our executive officers and Directors.

Item 7.C.  Interests of Experts and Counsel

Not applicable

 

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Item 8.  Financial Information

Item 8.A.  Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through F-125.

Legal Proceedings

In recent years, we have become subject to a number of anti-dumping duties in India, Indonesia, Australia, Thailand, Brazil, Taiwan and Malaysia and a number of anti-dumping and countervailing duty investigations in several other countries, including the U.S., India and Canada. In addition, the Mexican government initiated an anti-dumping investigation in October 2012 relating to our exports of cold rolled steel products, and the investigation was suspended until 2018 on condition that we comply with supply undertakings. Our products that are subject to anti-dumping or countervailing duty proceedings in the aggregate currently do not account for a material portion of our total sales, and such proceedings have not had a material adverse impact on our business and operations in recent years. However, there can be no assurance that increases in, or new impositions of, anti-dumping duties, countervailing duties, quotas or tariffs on our exports of products abroad may not have a material adverse impact on our exports in the future. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”

In 2012, the Korea Fair Trade Commission imposed a fine of Won 118 billion on us and POSCO Coated & Color Steel Co., Ltd., our consolidated subsidiary, for alleged antitrust violations, including price fixing of galvanization surcharge rates. We intend to vigorously defend against such administrative action and filed for judicial review of such administrative action in the Seoul High Court on February 28, 2013, which ruling is currently pending.

In April 2012, Nippon Steel & Sumitomo Metal Corporation filed civil lawsuits in Japan and the United States relating to claims of alleged improper acquisition and infringement of intellectual property rights related to production of grain oriented electrical steel sheets. Nippon Steel & Sumitomo Metal Corporation is seeking an injunction to prohibit us from manufacturing and selling the allegedly infringing products as well as seeking compensation of Won 991 billion. We plan to vigorously defend against such claims. With respect to the lawsuit in Japan, we have not recorded any provisions because we do not believe that we have any present obligations. With respect to the lawsuit in the United States, estimates of possible loss cannot be reliably determined because the lawsuit is still in the discovery stage and no claim amount has been specified. Since we do not believe that we have any present obligations, we have not recorded any provision for this lawsuit.

The National Tax Service conducts periodic audits of tax payments and refunds of corporations in Korea. The latest round of such audit on us began in September 2013 and is scheduled to be completed by the end of April 2014. As part of such audit, the National Tax Service completed its initial round of investigation in March 2014 and assessed payment of Won 190 billion. We accounted for such payments in the first quarter of 2014. The National Tax Service may assess additional payment upon completion of its audit. We cannot predict the ultimate outcome of such investigation, and we plan to review the merit of any additional tax assessment made by the National Tax Service.

In May 2002, Industrial Development Bank of India Limited filed lawsuits against Daewoo International, Daewoo Motors India Ltd., Daewoo Co., Ltd. and Daewoo Engineering & Construction Co., Ltd. in the India Delhi Mumbai Court, seeking judgment relating to its loans to Daewoo Motors India Ltd. guaranteed by Daewoo Co., Ltd. (predecessor of Daewoo International). The total claim amount of such lawsuits is Won 76 billion, and Daewoo International recorded provision of Won 18 billion relating to its portion of the guarantee. The outcome of such lawsuits remains uncertain and Daewoo International’s provision is classified as a non-current liability as of December 31, 2013.

Except as described above, we are not involved in any pending or threatened legal or arbitration proceedings that may have, or have had during the last 12 months, a material adverse effect on our results of operations or financial position.

 

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Dividends

The amount of dividends paid on our common stock is subject to approval at the annual general meeting of shareholders, which is typically held in February or March of the following year. In addition to our annual dividends, our board of directors is authorized to declare and distribute interim dividends once a year under our articles of incorporation. If we decide to pay interim dividends, our articles of incorporation authorize us to pay them in cash, shares or other form of property to the shareholders of record as of June 30 of the relevant fiscal year. We may pay cash dividends out of retained earnings that have not been appropriated to statutory reserves.

The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated. A total of 87,186,835 shares of common stock were issued as of December 31, 2013. Of these shares and as of such date, 79,783,624 shares were outstanding and 7,403,211 shares were held by us in treasury. The annual dividends set out for each of the years below were paid in the immediately following year.

 

Year

   Annual Dividend per
Common Stock to
Public
   Interim Dividend
per Common Stock
   Average Total
Dividend per
Common Stock
 
     (In Won)  

2009

   6,500    1,500      8,000   

2010

   7,500    2,500      10,000   

2011

   7,500    2,500      10,000   

2012

   6,000    2,000      8,000   

2013

   6,000    2,000      8,000   

Owners of the ADSs are entitled to receive any dividends payable in respect of the underlying shares of common stock.

Historically, we have paid to holders of record of our common stock an annual dividend. However, we can give no assurance that we will continue to declare and pay any dividends in the future.

Item 8.B.  Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our Consolidated Financial Statements included in this annual report.

Item 9. The Offer and Listing

Item 9.A. Offer and Listing Details

Market Price Information

Notes

Not applicable

 

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Common Stock

The principal trading market for our common stock is the KRX KOSPI Market. Our common stock, which is in registered form and has a par value of Won 5,000 per share, has been listed on the first section of the KRX KOSPI Market since June 1988 under the identifying code 005490. The table below shows the high and low trading prices and the average daily volume of trading activity on the KRX KOSPI Market for our common stock.

 

     Price      Average Daily
    Trading
Volume    
 
     High      Low     
     (In Won)      (Number of
Shares)
 

2009

        

First Quarter

     430,000         303,000         389,081   

Second Quarter

     435,000         369,000         390,866   

Third Quarter

     519,000         420,000         324,403   

Fourth Quarter

     619,000         472,500         293,724   

2010

        

First Quarter

     625,000         516,000         255,173   

Second Quarter

     560,000         434,500         343,367   

Third Quarter

     524,000         460,500         257,784   

Fourth Quarter

     538,000         448,500         299,776   

2011

        

First Quarter

     517,000         450,500         345,785   

Second Quarter

     565,000         421,000         282,070   

Third Quarter

     480,000         358,500         277,876   

Fourth Quarter

     351,000         308,000         235,063   

2012

        

First Quarter

     424,000         376,000         198,239   

Second Quarter

     385,000         351,500         169,135   

Third Quarter

     391,000         353,500         159,508   

Fourth Quarter

     367,000         308,000         202,895   

2013

        

First Quarter

     371,000         321,500         169,232   

Second Quarter

     326,000         292,500         182,277   

Third Quarter

     340,000         292,500         225,474   

Fourth Quarter

     338,000         307,500         183,055   

October

     321,500         307,500         178,051   

November

     330,000         317,000         181,486   

December

     338,000         326,500         189,957   

2014

        

First Quarter

     328,500         268,500         215,243   

January

     322,000         297,500         181,589   

February

     295,500         284,000         214,757   

March

     303,000         272,500         268,821   

Second Quarter (through May 9)

     328,500         268,500         216,869   

April

     321,000         290,000         213,465   

May (through May 9)

    
307,000
  
    
299,500
  
     149,802   

ADSs

Our common stock is also listed on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange in the form of ADSs. The ADSs have been issued by The Bank of New York Mellon as ADR depositary and are listed on the New York Stock Exchange under the symbol “PKX.” One ADS represents one-fourth of one share of common stock. As of December 31, 2013, 53,749,064 ADSs representing 13,437,266 common shares were outstanding, representing 15.41% shares of common stock.

 

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The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs.

 

     Price      Average Daily
Trading Volume
 
     High      Low     
     (In US$)      (Number of
ADSs)
 

2009

        

First Quarter

     79.11         47.14         212,268   

Second Quarter

     89.00         69.23         168,527   

Third Quarter

     108.08         80.73         491,455   

Fourth Quarter

     131.47         100.00         458,775   

2010

        

First Quarter

     140.10         108.23         429,700   

Second Quarter

     124.83         88.78         559,765   

Third Quarter

     113.98         94.67         344,102   

Fourth Quarter

     120.47         95.34         376,905   

2011

        

First Quarter

     117.57         100.50         403,646   

Second Quarter

     116.83         95.86         348,986   

Third Quarter

     112.41         76.01         344,454   

Fourth Quarter

     89.16         72.51         366,073   

2012

        

First Quarter

     94.06         80.28         268,347   

Second Quarter

     85.09         74.82         262,176   

Third Quarter

     85.55         77.21         190,260   

Fourth Quarter

     82.97         71.85         187,932   

2013

        

First Quarter

     86.69         72.41         258,130   

Second Quarter

     74.82         63.23         252,261   

Third Quarter

     78.75         64.29         186,347   

Fourth Quarter

     80.40         72.19         177,415   

October

     75.67         72.19         159,424   

November

     77.49         74.50         142,124   

December

     80.40         77.17         230,730   

2014

        

First Quarter

     75.88         64.03         298,320   

January

     75.88         67.97         301,742   

February

     69.90         66.40         275,099   

March

     70.05         64.03         315,906   

Second Quarter (through May 9)

     76.56         69.60         271,052   

April

     76.56         69.60         296,096   

May (through May 9)

     74.50         73.76         195,920   

Item 9.B.  Plan of Distribution

Not applicable

Item 9.C.  Markets

The Korean Securities Market

On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act by consolidating the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc., or the KOSDAQ, and the KOSDAQ Committee of the Korea Securities Dealers Association, which had formerly managed the KOSDAQ. There are three different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, and the KRX Derivatives Market. The Korea Exchange has two trading floors located in Seoul, one for the KRX KOSPI Market and one for the KRX KOSDAQ Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) investment brokers and investment dealers that were formerly members of the Korea Futures Exchange or the Korea Stock Exchange and (ii) the stockholders of the KOSDAQ. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean investment brokers and investment dealers and some Korean branches of foreign investment brokers and investment dealers.

 

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According to data published by the Korea Exchange, as of December 31, 2013, the aggregate market value of equity securities listed on the KRX KOSPI Market and the KRX KOSDAQ Market was approximately Won 1,304 trillion, and the average daily trading volume of equity securities for 2013 was approximately 723 million shares with an average transaction value of Won 5,816 billion. The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security pursuant to the Regulation on Listing on the Korea Exchange. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semi-annually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community that can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.

The Korea Exchange publishes the Korea Composite Stock Price Index, or KOSPI, every ten seconds, which is an index of all equity securities listed on the Korea Exchange. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios.

 

                                 Period Average  

Year

   Opening      High      Low      Closing      Dividend
Yield (1)(2)
(Percent)
     Price
Earnings
Ratio (2)(3)
 

1985

     139.53         163.37         131.40         163.37         5.3         5.2   

1986

     161.40         279.67         153.85         272.61         4.3         7.6   

1987

     264.82         525.11         264.82         525.11         2.6         10.9   

1988

     532.04         922.56         527.89         907.20         2.4         11.2   

1989

     919.61         1,007.77         844.75         909.72         2.0         13.9   

1990

     908.59         928.82         566.27         696.11         2.2         12.8   

1991

     679.75         763.10         586.51         610.92         2.6         11.2   

1992

     624.23         691.48         459.07         678.44         2.2         10.9   

1993

     697.41         874.10         605.93         866.18         1.6         12.7   

1994

     879.32         1,138.75         855.37         1,027.37         1.2         16.2   

1995

     1,027.45         1,016.77         847.09         882.94         1.2         16.4   

1996

     882.29         986.84         651.22         651.22         1.3         17.8   

1997

     647.67         792.29         350.68         376.31         1.5         17.0   

1998

     374.41         579.86         280.00         562.46         1.9         10.8   

1999

     565.10         1,028.07         498.42         1,028.07         1.1         13.5   

2000

     1,028.33         1,059.04         500.60         504.62         1.6         18.6   

2001

     503.31         704.50         468.76         693.70         2.0         14.2   

2002

     698.00         937.61         584.04         627.55         1.4         17.8   

2003

     633.03         822.16         515.24         810.71         2.2         10.9   

2004

     821.26         936.06         719.59         895.92         2.1         15.8   

2005

     896.00         1,379.37         870.84         1,379.37         1.7         11.0   

2006

     1,383.32         1,464.70         1,203.86         1,434.46         1.7         11.4   

2007

     1,438.89         2,015.48         1,345.08         1,897.13         1.4         16.8   

2008

     1,891.45         1,888.88         938.75         1,124.47         2.6         8.9   

2009

     1,132.87         1,718.88         1,018.81         1,682.77         1.2         23.7   

2010

     1,681.71         2,052.97         1,552.79         2,051.00         1.1         19.0   

2011

     2,063.69         2,231.47         1,644.11         1,825.12         1.3         13.1   

2012

     1,831.69         2,057.28         1,758.99         1,997.05         1.3         12.9   

2013

     2,031.10         2,059.58         1,780.63         2,011.34         1.1         15.0   

2014 (through May 9)

     2,013.11         2,013.89         1,885.53         1,956.55         1.2         15.2   

 

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Source: The KRX KOSPI Market

 

(1) Dividend yields are based on daily figures. Before 1983, dividend yields were calculated at the end of each month. Dividend yields after January 3, 1984 include cash dividends only.

 

(2) Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the KRX KOSPI Market. Starting in April 2000, KOSPI 200 excludes classified companies, companies which did not submit annual reports to the KRX KOSPI Market, and companies which received qualified opinion from external auditors.

 

(3) The price earnings ratio is based on figures for companies that record a profit in the preceding year.

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. Since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:

 

Previous Day’s Closing Price (Won)

   Rounded
Down
to (Won)
 

Less than 5,000

     5   

5,000 to less than 10,000

     10   

10,000 to less than 50,000

     50   

50,000 to less than 100,000

     100   

100,000 to less than 500,000

     500   

500,000 or more

     1,000   

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Exchange by the financial investment companies with a brokerage license. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. An agricultural and fishery special surtax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10. Additional Information — Item 10.E. Taxation — Korean Taxation.”

The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:

 

     Market Capitalization on the Last
Day of Each Period
     Average Daily Trading Volume, Value  

Year

   Number of
Listed
Companies
     (Billions
of Won)
     (Millions of
US$) (1)
     Thousands
of Shares
     (Millions
of Won)
     (Thousands
of US$) (1)
 

1985

     342       6,570       US$ 7,381         18,925       12,315       US$ 13,834   

1986

     355         11,994         13,924         31,755         32,870         38,159   

1987

     389         26,172         33,033         20,353         70,185         88,583   

1988

     502         64,544         94,348         10,367         198,364         289,963   

1989

     626         95,477         140,490         11,757         280,967         414,430   

 

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     Market Capitalization on the Last
Day of Each Period
     Average Daily Trading Volume, Value  

Year

   Number of
Listed
Companies
     (Billions
of Won)
     (Millions
of US$)  (1)
     Thousands
of Shares
     (Millions
of Won)
     (Thousands
of US$) (1)
 

1990

     669         79,020         110,301         10,866         183,692         256,411   

1991

     686         73,118         96,107         14,022         214,263         281,629   

1992

     688         84,712         107,448         24,028         308,246         390,977   

1993

     693         112,665         139,420         35,130         574,048         710,367   

1994

     699         151,217         191,730         36,862         776,257         984,223   

1995

     721         141,151         182,201         26,130         487,762         629,613   

1996

     760         117,370         139,031         26,571         486,834         576,680   

1997

     776         70,989         50,162         41,525         555,759         392,707   

1998

     748         137,799         114,091         97,716         660,429         546,803   

1999

     725         349,504         305,137         278,551         3,481,620         3,039,655   

2000

     704         188,042         149,275         306,163         2,602,211         2,065,739   

2001

     689         255,850         192,934         473,241         1,997,420         1,506,237   

2002

     683         258,681         215,496         857,245         3,041,598         2,533,815   

2003

     684         355,363         296,679         542,010         2,216,636         1,850,589   

2004

     683         412,588         395,275         372,895         2,232,109         2,138,445   

2005

     702         655,075         646,158         467,629         3,157,662         3,114,679   

2006

     731         704,588         757,948         279,096         3,435,180         3,695,331   

2007

     745         951,900         1,016,770         363,741         5,539,653         5,917,168   

2008

     763         576,888         458,758         352,599         3,211,039         2,553,510   

2009

     770         887,935         762,503         485,657         5,595,552         4,976,859   

2010

     777         1,141,885         1,006,243         380,859         5,619,768         4,952,210   

2011

     791         1,041,999         904,670         353,760         6,836,146         5,935,185   

2012

     930         1,154,294         1,078,578         486,479         4,823,642         4,507,234   

2013

     777         1,185,974         1,123,720         328,425         3,993,422         3,783,800   

2014 (through May 9)

     770         1,165,867         1,138,098         205,209         3,484,373         3,401,380   

 

 

Source: The Korea Exchange

 

(1) Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate, as the case may be, at the end of the periods indicated.

The Korean securities markets are principally regulated by the Financial Services Commission and under the regulations set forth in the FSCMA. In July 2007, the National Assembly of Korea enacted the FSCMA. The FSCMA, which came into effect on February 4, 2009, comprehensively regulates the Korean capital markets, the financial investment business (including collective investment businesses and trust businesses) and financial investment products (such as securities and derivatives). The FSCMA imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests. The FSCMA regulates the operation and monitoring of the securities and derivatives markets.

Protection of Customer’s Interest in Case of Insolvency of Investment Brokers or Investment Dealers

Under Korean law, the relationship between a customer and an investment broker or an investment dealer in connection with a securities sell or buy order is deemed to be a consignment and the securities acquired by a consignment agent (i.e., the investment broker or the investment dealer) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving an investment broker or an investment dealer, the customer of the investment broker or the investment dealer is entitled to the proceeds of the securities sold by the investment broker or the investment dealer.

 

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When a customer places a sell order with an investment broker or an investment dealer that is not a member of the KRX KOSPI Market or the KRX KOSDAQ Market and this investment broker or investment dealer places a sell order with another investment broker or investment dealer that is a member of the KRX KOSPI Market or the KRX KOSDAQ Market, the customer is still entitled to the proceeds of the securities sold and received by the non- member company from the member company regardless of the bankruptcy or reorganization of the non-member company.

Under the FSCMA, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by members of the KRX KOSPI Market or the KRX KOSDAQ Market. If an investment broker or an investment dealer that is a member of the KRX KOSPI Market or the KRX KOSDAQ Market breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.

When a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

As the cash deposited with an investment broker or an investment dealer is regarded as belonging to the investment broker or investment dealer, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the investment broker or the investment dealer if a bankruptcy or rehabilitation procedure is instituted against the investment broker or the investment dealer and, therefore, can suffer from loss or damage as a result. However, in case of the investment broker or the investment dealer’s bankruptcy, liquidation, cancellation of investment broker or investment dealer license or other insolvency events, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay each investor up to a total of Won 50 million, which shall represent both actual cash deposited and any interest accrued thereon. Pursuant to the FSCMA, as amended, investment brokers or investment dealers are required to deposit the cash received from its customers at the securities finance company established pursuant to the FSCMA. Set-off or attachment of cash deposits by investment brokers or investment dealers is prohibited. The premiums related to this insurance are paid by investment brokers or investment dealers.

Clearance and Settlement

The settlement of trades on the Korea Exchange is required to be handled by a settlement agency of the Korea Exchange. The Korea Securities Depository is the institution commissioned by the Korea Exchange to handle all such settlement of trades. The settlement of trades on the Korea Exchange takes place through a clearance and settlement procedure. The Korea Exchange has adopted the multilateral netting system and carries out the clearance of the trades by netting the sales and purchases of each Korea Securities Depository participant. The Korea Exchange is required to provide the daily net settlement results of the trades to the Korea Securities Depository one business day after the day of the sale and purchase contract. The Korea Securities Depository then handles settlement of the securities and the funds based on the information received from the Korea Exchange. The securities are settled through book-entry changes in the accounts of Korea Securities Depository participants and the funds are settled by transfer to an account at a bank designated by the Korea Securities Depository. Settlement of trades is generally required to take place on the third day following the day of the sale and purchase contract.

Item 9.D.  Selling Shareholders

Not applicable

 

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Item 9.E.  Dilution

Not applicable

Item 9.F.  Expenses of the Issuer

Not applicable

Item 10.  Additional Information

Item 10.A.  Share Capital

Currently, our authorized share capital is 200,000,000 shares, which consists of shares of common stock, par value Won 5,000 per share (“Common Shares”) and shares of non-voting stock, par value Won 5,000 per share (“Non-Voting Preferred Shares”). Our Non-Voting Preferred Shares have a preferential right to dividend payments. Common Shares and Non-Voting Preferred Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Preferred Shares up to the limit prescribed by applicable law, the aggregate of which currently is one-quarter of our total issued and outstanding capital stock. As of December 31, 2013, 87,186,835 Common Shares were issued, of which 7,403,211 shares were held by us in treasury. We have never issued any Non-Voting Preferred Shares. All of the issued and outstanding Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 3, 4, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Item 10.B. Memorandum and Articles of Association

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Commercial Code and related laws, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA and the Commercial Code. We have filed copies of our articles of incorporation and these laws (except for the newly enacted the FSCMA) as exhibits to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.

Holders of Non-Voting Preferred Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount not less than 9% of the par value of the Non-Voting Preferred Shares as determined by the board of directors at the time of their issuance. If the amount available for dividends is less than the aggregate amount of such minimum dividend, we do not have to declare dividends on the Non-Voting Preferred Shares.

We may declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash, Shares or other form of property. However, a dividend of Shares must be distributed at par value. Dividends in Shares may not exceed one-half of the annual dividend. In addition, we may declare, and distribute in cash, interim dividends pursuant to a board resolution once a fiscal year. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.

 

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Under the Commercial Code, we may pay an annual dividend only to the extent the net asset amount in our balance sheets exceeds the sum of the following: (i) our stated capital, (ii) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period, (iii) the legal reserve to be set aside for annual dividend, and (iv) unrealized profits determined in the Presidential Decree to the Commercial Code. We may not pay an annual dividend unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of the annual dividend or unless we have accumulated earned surplus reserve of not less than one-half of our stated capital. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.

Distribution of Free Shares

In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at the times and, unless otherwise provided in the Commercial Code, on the terms our board of directors may determine. All our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give public notice of the preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.

Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:

 

   

offered publicly or to underwriters for underwriting pursuant to the FSCMA;

 

   

issued to members of our employee stock ownership association pursuant to the FSCMA;

 

   

represented by depositary receipts pursuant to the FSCMA;

 

   

issued in a general public offering pursuant to a board resolution in accordance with the FSCMA, the amount of which is no more than 10% of the outstanding Shares;

 

   

issued to our creditors pursuant to a debt-equity swap;

 

   

issued to domestic or foreign corporations pursuant to a joint venture agreement, strategic coalition or technology inducement agreement when deemed necessary for management purposes; or

 

   

issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.

In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 2 trillion, to persons other than existing shareholders.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20% of the Shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of

 

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Shares so acquired and held by members of our employee stock ownership association does not exceed 20% of the total number of Shares then issued. As of December 31, 2013, our employees owned, through our employee stock ownership association, approximately 0.01% of our common stock in their association accounts and 1.70% of our common stock in their employee accounts.

General Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year. The record date of the register of shareholders is December 31 of each year, and such shareholders listed on the register of shareholder as of the record date are entitled to exercise their right at the general meeting of shareholders. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

   

as necessary;

 

   

at the request of holders of an aggregate of 3% or more of our outstanding Shares;

 

   

at the request of shareholders holding an aggregate of 1.5% or more of our outstanding Shares for at least six months; or

 

   

at the request of our audit committee.

Holders of Non-Voting Preferred Shares may request a general meeting of shareholders only after the Non-Voting Preferred Shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of 1% or less of the total number of issued and outstanding voting Shares, we may give notice by placing at least two public notices in at least two daily newspapers or by notices to be posted on the electronic disclosure database system maintained by the Financial Supervisory Service or the Korea Exchange at least two weeks in advance of the meeting. Currently, we use The Seoul Shinmun published in Seoul, The Maeil Shinmun published in Taegu and The Kwangju Ilbo published in Kwangju for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Preferred Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings. Our general meetings of shareholders are held either in Pohang or Seoul.

Voting Rights

Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10% owned by us either directly or indirectly, may not be exercised. The Commercial Code permitted cumulative voting, under which voting method each shareholder would have multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting Shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting Shares then issued and outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting Shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting Shares then issued and outstanding:

 

   

amending our articles of incorporation;

 

   

removing a director;

 

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effecting any dissolution, merger or consolidation of us;

 

   

transferring the whole or any significant part of our business;

 

   

acquisition of all or a part of the business of any other company that may have a material impact on our business;

 

   

issuing any new Shares at a price lower than their par value; or

 

   

approving matters required to be approved at a general meeting of shareholders, which have material effects on our assets, as determined by the Board of Directors.

In general, holders of Non-Voting Preferred Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Preferred Shares, approval of the holders of Non-Voting Preferred Shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the Non-Voting Preferred Shares present or represented at a class meeting of the holders of Non-Voting Preferred Shares, where the affirmative votes also represent at least one-third of our total issued and outstanding Non-Voting Preferred Shares.

Shareholders may exercise their voting rights by proxy. When a shareholder is a corporate entity, such shareholder may give proxies to its officers or directors.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Common Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Common Shares underlying their ADSs.

Rights of Dissenting Shareholders

In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. Only the shareholders who have executed a share purchase agreement evidencing their acquisition of the relevant Shares on or prior to the day immediately following the public disclosure of the board resolutions approving any of the aforementioned transactions have the rights to require us to purchase their Shares. To exercise this right, shareholders, including holders of Non-Voting Preferred Shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the Korea Exchange for the two-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the Korea Exchange for the one month period before the date of the adoption of the relevant resolution and (3) the weighted average of the daily Share price on the Korea Exchange for the one week period before such date of the adoption of the relevant resolution. However, the court may determine this price if we or dissenting shareholders do not accept the purchase price. Holders of ADSs will not be able to exercise dissenter’s rights unless they have withdrawn the underlying common stock and become our direct shareholders.

Register of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of Shares on the register of shareholders on presentation of the Share certificates.

 

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The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from January 1 to January 15 of each year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.

Annual Report

At least one week before the annual general meeting of shareholders, we must make our annual report and audited financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the FSCMA, we must file with the Financial Services Commission and the Korea Exchange (1) an annual business report within 90 days after the end of our fiscal year, (2) a half-year report within 45 days after the end of the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the Korea Exchange.

Transfer of Shares

Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. However, to assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.

Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a brokerage, dealing or collective investment license and internationally recognized custodians may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”

Our transfer agent is Kookmin Bank, located at 26, Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Acquisition of Shares by Us

We may acquire our own Shares, subject to the approval by the general meeting of shareholders. In addition, we may acquire Shares through purchases on the Korea Exchange or through a tender offer or by acquiring the interests in a trust account holding our own Shares through agreements with trust companies and asset management companies. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends available at the end of the preceding fiscal year less the amount of dividends and mandatory reserves required to be set aside for that fiscal year, subject to certain procedural requirements.

In accordance with the Commercial Code, we may resell or transfer any Shares acquired by us to a third party, subject to the approval by the Board of Directors. In general, corporate entities in which we own more than 50% equity interest may not acquire our Shares. Under the FSCMA, we are subject to certain selling restrictions for the Shares acquired by us.

 

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Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders of Non-Voting Preferred Shares have no preference in liquidation.

Item 10.C.  Material Contracts

None.

Item 10.D.  Exchange Controls

Shares and ADSs

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively, “Foreign Exchange Transaction Laws”) and the Foreign Investment Promotion Law regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities subject to procedural requirements in accordance with these laws. The Financial Services Commission has also adopted, pursuant to its authority under the FSCMA, regulations that restrict investment by foreigners in Korean securities.

Subject to certain limitations, the Ministry of Strategy and Finance has the authority to take the following actions under the Foreign Exchange Transaction Laws:

 

   

if the Government deems it necessary on account of war, armed conflict, natural disaster or grave and sudden and significant changes in domestic or foreign economic circumstances or similar events or circumstances, the Ministry of Strategy and Finance may temporarily suspend performance under any or all foreign exchange transactions, in whole or in part, to which the Foreign Exchange Transaction Laws apply (including suspension of payment and receipt of foreign exchange) or impose an obligation to deposit, safe-keep or sell any means of payment to The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies; and

 

   

if the Government concludes that the international balance of payments and international financial markets are experiencing or are likely to experience significant disruption or that the movement of capital between Korea and other countries is likely to adversely affect the Won, exchange rates or other macroeconomic policies, the Ministry of Strategy and Finance may take action to require any person who intends to effect a capital transaction to obtain permission or to require any person who effects a capital transaction to deposit a portion of the means of payment acquired in such transactions with The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies.

Government Review of Issuance of ADSs

In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with our designated foreign exchange bank or the Ministry of Strategy and Finance, depending on the issuance amount. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required.

 

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Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of shares with voting rights, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5% or more of the total outstanding Equity Securities is required to report the status and the purpose (whether or not to exert an influence on management control over the issuer) of the holdings to the Financial Services Commission and the Korea Exchange within five business days after reaching the 5% ownership interest. In addition, any change in the purpose of holding such ownership interest or a change in the ownership interest subsequent to the report which equals or exceeds 1% of the total outstanding Equity Securities is required to be reported to the Financial Services Commission and the Korea Exchange within five business days from the date of the change. However, the reporting deadline of such reporting requirement is extended to the tenth day of the month immediately following the month of such change in their shareholding for (1) certain professional investors, as specified under the FSCMA, or (2) persons who hold shares for purposes other than management control. Those who report the purpose of shareholding as management control of the issuer are prohibited from exercising their voting rights and acquiring additional shares for five days subsequent to their report under the FSCMA.

Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of Equity Securities exceeding 5%. Furthermore, the Financial Services Commission may issue an order to dispose of non-reported Equity Securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of a company’s shares accounts for 10% or more of the total issued and outstanding shares with voting rights (a “major stockholder”) must report the status of his or her shareholding to the Securities and Futures Commission and the Korea Exchange within five business days after he or she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange by the fifth business day of any changes in his or her shareholding. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment.

Under the KRX regulations, if a company listed on the KRX KOSPI Market has submitted public disclosure of material matters to a foreign financial investment supervisory authority pursuant to the laws of the foreign jurisdiction, then it must submit a copy of the public disclosure and a Korean translation thereof to the Korea Exchange. In addition, if a company listed on the KRX KOSPI Market is approved for listing on a foreign stock exchange or determined to be de-listed from the foreign stock exchange or actually lists on, or de-lists from, a foreign stock exchange, then it must submit to the Korea Exchange a copy, together with a Korean translation thereof, of all documents submitted to, or received from, the relevant foreign government, supervisory authority or stock exchange.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service as described below. The acquisition of the shares by a foreigner must be immediately reported by the foreigner or his standing proxy in Korea to the Governor of the Financial Supervisory Service (“Governor”).

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

 

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In addition, under the Financial Services Commission regulations, effective as of November 30, 2006, we are required to file a securities registration statement with the Financial Services Commission and such securities registration statement has to become effective pursuant to the FSCMA in order for us to issue shares represented by ADSs, except in certain limited circumstances.

Restrictions Applicable to Shares

Under the Foreign Exchange Transaction Laws and the Financial Services Commission regulations (together, the “Investment Rules”), foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including, among others:

 

   

odd-lot trading of shares;

 

   

acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;

 

   

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

   

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded with certain exceptions;

 

   

shares acquired by direct investment as defined in the Foreign Investment Promotion Law;

 

   

disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

 

   

disposal of shares in connection with a tender offer;

 

   

acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;

 

   

acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange; and

 

   

arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.

The Investment Rules require a foreign investor who wishes to invest in shares for the first time on the Korea Exchange (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in an over-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Foreign Investment Promotion Law. Upon registration, the Financial Supervisory Service will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a financial investment company with a brokerage license or dealing license in Korea. Foreigners eligible to obtain an investment registration card include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal

 

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authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by the Enforcement Decree to the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the Korea Exchange, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Korea Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale by it of shares outside the Korea Exchange in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the Korea Securities Depository, financial investment companies with a dealing or brokerage license or securities finance companies engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks) financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians which will act as a standing proxy to exercise shareholders’ rights or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and those of the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license, the Korea Securities Depository and internationally recognized custodians are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person according to its articles of incorporation. We set this ceiling at 3% until the discontinuation of our designation as a public corporation on September 28, 2000. As a result, we currently do not have any ceiling on the acquisition of shares by a single person or by foreigners in the aggregate. Furthermore, an investment by a foreign investor of not less than 10% of the outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Trade, Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be

 

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transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened in the name of a financial investment company with a dealing, brokerage or collective investment license. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s financial investment company with a dealing, brokerage or collective investment license or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with a dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these financial investment companies and asset management companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, as counterparty to foreign investors, without the investors having to open their own accounts with foreign exchange banks.

Item 10.E.  Taxation

The following summary is based upon tax laws of the United States and Korea as in effect on the date of this annual report on Form 20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the shares of common stock or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any foreign, state or local tax laws.

Korean Taxation

The following is a summary of the principal Korean tax consequences to owners of the common shares or ADSs, as the case may be, who are non-resident individuals or non-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable or with which the relevant income is effectively connected (“Non-resident Holders”). The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date hereof. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and disposition of the common shares or ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their own tax advisers.

Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to a Non-resident Holder will be subject to Korean withholding taxes at the rate of 22% (including local income tax) or such lower rate as is applicable under a treaty between Korea and such Non-resident Holder’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

 

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The tax is withheld by the payer of the dividend. Since the payer is required to withhold the tax, Korean law does not entitle the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld, even if it subsequently produces evidence that it was entitled to have tax withheld at a lower rate, except in certain limited circumstances.

Tax on Capital Gains

As a general rule, capital gains earned by Non-resident Holders upon transfer of the common shares or ADSs are subject to Korean withholding tax at the lower of (i) 11% (including local income tax) of the gross proceeds realized or (ii) 22% (including local income tax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs), unless exempt from Korean income taxation under the effective Korean tax treaty with the Non-resident Holder’s country of tax residence.

However, a Non-resident Holder will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the KRX KOSPI Market if the Non-resident Holder (i) has no permanent establishment in Korea and (ii) did not or has not owned (together with any shares owned by any entity with a specified special relationship with such Non-resident Holder) 25% or more of the total issued and outstanding shares of us at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

It should be noted that capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation, provided that the ADSs are deemed to have been issued overseas. If and when an owner of the underlying common shares transfers the ADSs following the conversion of the underlying shares for ADSs, such person will not be exempt from Korean income taxation.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (1) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea and (2) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. The taxes are imposed if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.

Under Korean inheritance and gift tax laws, securities issued by a Korean corporation are deemed to be located in Korea irrespective of where they are physically located or by whom they are owned.

Securities Transaction Tax

Securities transaction tax is imposed on the transfer of shares issued by a Korean corporation or the right to subscribe for such shares generally at the rate of 0.5% of the sales price. In the case of the transfer of shares listed on the KRX KOSPI Market (such as the common shares), the securities transaction tax is imposed generally at the rate of (i) 0.3% of the sales price of such shares (including agricultural and fishery special surtax thereon) if traded on the KRX KOSPI Market or (ii) subject to certain exceptions, 0.5% of the sales price of such shares if traded outside the KRX KOSPI Market.

Securities transaction tax or the agricultural and fishery special surtax is not applicable if (i) the shares or rights to subscribe for shares are listed on a designated foreign stock exchange and (ii) the sale of the shares takes place on such exchange.

Securities transaction tax, if applicable, must be paid by the transferor of the shares or rights, in principle. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay (to the tax authority) the tax, and when such

 

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transfer is made through a financial investment company with a brokerage license only, such company is required to withhold and pay the tax. Where the transfer is effected by a Non-resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company with a brokerage license, the transferee is required to withhold the securities transaction tax. Failure to do so will result in the imposition of penalties equal to the sum of (i) between 10% to 40% of the tax amount due, depending on the nature of the improper reporting, and (ii) 10.95% per annum on the tax amount due for the default period.

Tax Treaties

Currently, Korea has income tax treaties with a number of countries, inter alia, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Luxembourg, Ireland, the Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States of America under which the rate of withholding tax on dividend and interest is reduced, generally to between 5% and 16.5% (including local income tax), and the tax on capital gains derived by a non-resident from the transfer of securities issued by a Korean company is often eliminated.

Each Non-resident Holder of common shares should inquire for itself whether it is entitled to the benefits of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of interest, dividend, capital gains or “other income” to submit to us (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, prior to or at the time of payment, such evidence of tax residence of the party claiming the treaty benefit as the Korean tax authorities may require in support of its claim for treaty protection. In the absence of sufficient proof, we (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, must withhold tax at the normal rates.

Furthermore, in order for a non-resident of Korea to obtain the benefits of tax exemption on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agent) to submit to the payer of such Korean source income an application for a tax exemption along with a certificate of tax residency of such non-resident issued by a competent authority of the non-resident’s country of tax residence, subject to certain exceptions. The payer of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

For a non-resident of Korea to obtain the benefits of treaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires such non-resident (or its agents) to submit to the payer of such Korean source income an application for treaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is a non-resident of Korea is not required to submit such application, if the Korean source income on the ADSs is paid through an account opened at the Korea Securities Depository by a foreign depository.

At present, Korea has not entered into any tax treaty relating to inheritance or gift tax.

United States Taxation

This summary describes the material U.S. federal income tax consequences for a U.S. holder (as defined below) of owning our shares of common stock or ADSs. This summary applies to you only if you hold shares of common stock or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

   

a dealer in securities or currencies;

 

   

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

 

   

a bank;

 

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a life insurance company;

 

   

a tax-exempt organization;

 

   

a person that holds shares of common stock or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

   

a person that holds shares of common stock or ADSs as part of a straddle or conversion transaction for tax purposes;

 

   

a person whose functional currency for tax purposes is not the Dollar;

 

   

a person that owns or is deemed to own 10% or more of any class of our stock; or

 

   

a partnership that holds shares of common stock or ADSs, or partners therein.

This summary is based on laws, treaties and regulatory interpretations in effect on the date hereof, all of which are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local and other foreign tax consequences of purchasing, owning and disposing of shares of common stock or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of a share of common stock or ADS that is:

 

   

a citizen or resident of the United States;

 

   

a U.S. domestic corporation; or

 

   

subject to U.S. federal income tax on a net income basis with respect to income from the share of common stock or ADS.

Shares of Common Stock and ADSs

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the shares of common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the shares of common stock represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income. Dividends paid in Won will be included in your income in a Dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into Dollars. If such a dividend is converted into Dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisers regarding the treatment of any foreign currency gain or loss on any Won received by U.S. holders that are converted into Dollars on a date subsequent to receipt.

Subject to certain exceptions for short-term and hedged positions, the Dollar amount of dividends received by an individual with respect to the ADSs and common stock will be subject to taxation at a preferential rate applicable to long-term capital gains if the dividends are “qualified dividends.” Dividends paid on the ADSs and common stock will be treated as qualified dividends if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the

 

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Internal Revenue Service has approved for the purposes of the qualified dividend rules and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The income tax treaty between Korea and the United States (“Treaty”) has been approved for the purposes of the qualified dividend rules, and we believe we are eligible for benefits under the Treaty. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2012 or 2013 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2014 taxable year. You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in the light of your own particular circumstances.

Distributions of additional shares in respect of shares of common stock or ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

Sales and Other Dispositions

For U.S. federal income tax purposes, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of common stock or ADSs equal to the difference, if any, between the amount realized (Dollars) on the sale or exchange and your adjusted tax basis in the common stock or ADSs. Any gain realized by a U.S. holder on the sale or other disposition of common stock or ADSs generally will be treated as U.S. source income for U.S. foreign tax credit purposes. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shares of common stock or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at a reduced rate.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you generally may claim a credit, up to any applicable reduced rates provided under the Treaty, against your U.S. federal income tax liability for Korean taxes withheld from dividends on shares of common stock or ADSs, so long as you have owned the shares of common stock or ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Instead of claiming a credit, you may, at your election, deduct such Korean taxes in computing your taxable income, provided that you do not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant tax year and subject to generally applicable limitations under U.S. tax law. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain hedged positions in securities and may not be allowed in respect of arrangements in which your expected economic profit is insubstantial. You may not be able to use the foreign tax credit associated with any Korean withholding tax imposed on a distribution of additional shares that is not subject to U.S. tax unless you can use the credit against United States tax due on other foreign-source income.

Any Korean securities transaction tax or agriculture and fishery special tax that you pay will not be creditable for foreign tax credit purposes.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involves the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

 

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U.S. Information Reporting and Backup Withholding Rules

Payments in respect of the notes, shares of common stock or ADSs that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

Item 10.F.  Dividends and Paying Agents

See “Item 8.A. Consolidated Statements and Other Financial Information — Dividends” above for information concerning our dividend policies and our payment of dividends. See “Item 10.B. Memorandum and Articles of Association — Dividends” for a discussion of the process by which dividends are paid on shares of our common stock. The paying agent for payment of our dividends on ADSs in the United States is the Bank of New York Mellon.

Item 10.G.  Statements by Experts

Not applicable

Item 10.H.  Documents on Display

We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

Item 10.I.  Subsidiary Information

Not applicable

Item 11.  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to foreign exchange rate and interest rate risk primarily associated with underlying liabilities, and to changes in the commodity prices of principal raw materials. Following evaluation of these positions, we selectively enter into derivative financial instruments to manage the related risk exposures, primarily with respect to foreign exchange rate and interest rate risks, which are entered into with major financial institutions in order to minimize the risk of credit loss. Our market risk management policy determines the market risk tolerance level, measuring period, controlling responsibilities, management procedures, hedging period and hedging ratio very specifically. We also prohibit all speculative hedging transactions and evaluate and manage foreign exchange exposures to receivables and payables.

None of our loss exposures related to derivative contracts are unlimited, and we do not believe that our net derivative positions could result in a material loss to our profit before income tax or total equity due to significant fluctuations of major currencies against the Korean Won. Due to the nature of our derivative contracts primarily as hedging instruments that manage foreign exchange risks, net gain or net loss on derivatives transactions and valuation of derivatives are typically offset by net loss or net gain on foreign currency transaction and translation. We recorded net gain on derivatives transactions

 

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of Won 98 billion and net loss on valuation of derivatives of Won 65 billion in 2012, and we recorded net gain on derivatives transactions of Won 84 billion and net loss on valuation of derivatives of Won 219 billion in 2013.

Exchange Rate Risk

Korea is our most important market and, therefore, a substantial portion of our cash flow is denominated in Won. Most of our exports are denominated in Dollars. Japan is also an important market for us, and we derive significant cash flow denominated in Yen. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, which represent a substantial sum and are mostly denominated in Dollars, relate primarily to imported raw material costs and freight costs. Foreign currency denominated liabilities relate primarily to foreign currency denominated debt.

We strive to naturally offset our foreign exchange risk by matching foreign currency receivables with our foreign currency payables and our overseas subsidiaries have sought to further mitigate the adverse impact of exchange rate fluctuations by conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, Daewoo International’s exposure to fluctuations in exchange rates, including the Won/Dollar exchange rate, is limited because trading transactions typically involve matched purchase and sale contracts, which result in limited settlement exposure, and because Daewoo International’s contracts with domestic suppliers of products for export and with domestic purchasers of imported products are generally denominated in Dollars. Although the impact of exchange rate fluctuations is partially mitigated by such strategies, we and our subsidiaries, particularly Daewoo International and POSCO E&C, also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge our foreign exchange risks.

Our foreign currency exposure and changes in gain or loss resulting from a 10% foreign exchange rate change against the Korean Won are as follows:

 

     For the Years Ended December 31,  
     2011      2012      2013  
     Increase     Decrease      Increase     Decrease      Increase     Decrease  
     (In billions of Won)  

US Dollars

       (706   706           (519       519           (503   503   

Japanese Yen

     (212         212         (178     178         (4     4   

Euro

     (34     34         (1     1         (125         125   

Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. In particular, we are exposed to interest rate risk on our existing floating rate borrowings and on additional debt financings that we may periodically undertake for various reasons, including capital expenditures and refinancing of our existing borrowings. A rise in interest rates will increase the cost of our existing variable rate borrowings. If interest rates on borrowings with floating rates had been 1% higher or lower with all other variables held constant, the impact on the gain or loss of the applicable period would be as follows:

 

     For the Years Ended December 31,  
             2011                      2012                      2013          
     (In billions of Won)  

Increase or decrease in annual profit and net equity

       26           96           106   

A reduction of interest rates also increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. From time to time, we use, to a limited extent, interest rate swaps to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt.

 

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The following table summarizes the carrying amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 2013 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.

 

    Maturities  
          December 31, 2013     December 31, 2012  
  2014     2015     2016     2017     2018     Thereafter       Total       Fair
  Value  
      Total       Fair
  Value  
 
    (In billions of Won except rates)  

Local currency:

                   

Fixed rate

    3,026        666        707        568        573        3,900        9,439        9,523        6,995        7,113   

Average weighted rate (1)

    4.83     3.93     3.83     4.66     3.73     4.20     4.35       3.68  

Variable rate

    920        84        33        20        0        268        1,327        1,345        3,316        3,316   

Average weighted rate (1)

    3.71     4.50     4.93     2.03     2.69     2.27     3.47       2.56  
             

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    3,946        750        740        588        573        4,169        10,766        10,868        10,311        10,429   
             

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency, principally Dollars and Yen:

                   

Fixed rate

    2,283        155        846        169        928        2,533        6,913        6,988        7,666        8,069   

Average weighted rate (1)

    4.50     1.88     2.58     4.72     3.16     3.64     3.72       2.90  

Variable rate

    4,485        512        442        265        361        2,501        8,568        8,634        6,182        6,089   

Average weighted rate (1)

    1.64     2.36     1.34     2.08     1.99     2.03     1.81       2.12  
             

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

    6,768        667        1,288        434        1,289        5,034        15,481        15,623        13,848        14,158   
             

 

 

   

 

 

   

 

 

   

 

 

 

Total

    10,714        1,417        2,028        1,023        1,862        9,203        26,247        26,490        24,159        24,587   
             

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Weighted average rates of the portfolio at the period end.

Item 12.  Description of Securities Other than Equity Securities

Not applicable

Item 12.A. Debt Securities

Not applicable

Item 12.B. Warrants and Rights

Not applicable

Item 12.C. Other Securities

Not applicable

 

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Item 12.D. American Depositary Shares

Fees and Charges

We switched our depositary from The Bank of New York Mellon to Citibank, N.A. in July 2013. Holders of our ADSs are required to pay the following service fees to the depositary:

 

Services

  

Fees

Issuance of ADSs upon deposit of shares

   Up to $5.00 per 100 ADSs issued

Delivery of deposited shares against surrender of ADSs

   Up to $5.00 per 100 ADSs surrendered

Distributions of cash dividends or other cash distributions

   None

Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs

   None

Distribution of securities other than ADSs or rights to purchase additional ADSs

   None

General depositary services

   None

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

 

   

fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares);

 

   

expenses incurred for converting foreign currency into Dollars;

 

   

expenses for cable, telex and fax transmissions and for delivery of securities;

 

   

taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit);

 

   

fees and expenses incurred in connection with compliance with exchange control regulations and other regulatory requirements; and

 

   

fees and expenses incurred in connection with the delivery or servicing of shares on deposit.

Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Korea Securities Depositary, or KSD), the depositary generally collects its fees through the systems provided by KSD (whose nominee is the registered holder of the ADSs held in KSD) from the brokers and custodians holding ADSs in their KSD accounts. The brokers and custodians who hold their clients’ ADSs in KSD accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.

 

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The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

In 2013, we received the following payments from the depositary

 

Reimbursement of NYSE listing fees:

   $ 50,289.00   

Reimbursement of London Stock Exchange listing fees:

   $ 5,773.80   

Reimbursement of proxy process expenses (printing, postage and distribution):

   $ 73,997.19   

Contributions toward our investor relations efforts:

   $ 108,820.97   

In addition, as part of its service to us, the depositary waives its fees for the standard costs associated with the administration of the ADS facility, associated operating expenses, investor relations advice and access to an internet-based tool used in our investor relations activities.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable

Item 15. Controls and Procedures

a. Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2013. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

b. Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

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Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management has completed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 based on criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2013.

c. Report of the Independent Registered Public Accounting Firm

KPMG Samjong Accounting Corp. (“KPMG Samjong”), an independent registered public accounting firm, which audited our consolidated financial statements as of, and for the year ended, December 31, 2013, has issued an audit report on the effectiveness of our internal control over financial reporting, which report is included in Item 18 of this Form 20-F.

d. Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit Committee Financial Expert

The board of directors has approved the members of our audit committee. Kim, Il-Sup is an audit committee financial expert and is independent within the meaning of applicable SEC rules.

Item 16B. Code of Ethics

We have adopted a code of business conduct and ethics, as defined in Item 16B. of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of business conduct and ethics, called Code of Conduct, applies to our chief executive officer and chief financial officer, as well as to our directors, other officers and employees. Our Code of Conduct is available on our web site at www.posco.com. If we amend the provisions of our Code of Conduct that apply to our chief executive officer or chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at the same address.

 

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Item 16C. Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by our independent auditor, KPMG, in 2011, 2012 and 2013:

 

     For the Year Ended December 31,  
         2011              2012              2013      
     (In millions of Won)  

Audit fees

   5,846       6,501       5,356   

Audit-related fees

     946         170         90   

Tax fees

     687         1,730         1,110   

Other fees

     222         48         25   
  

 

 

    

 

 

    

 

 

 

Total fees

   7,701       8,449       6,581   
  

 

 

    

 

 

    

 

 

 

Audit fees in 2013 as set forth in the above table are the aggregate fees billed by KPMG in connection with the audit of our annual financial statements and the annual financial statements of other related companies and review of interim financial statements.

Audit-related fees in 2013 as set forth in the above table are the aggregate fees billed by KPMG for comfort letter services related to our securities offering.

Tax fees in 2013 as set forth in the above table are fees billed by KPMG for our tax compliance and tax planning, as well as tax planning and preparation of other related companies.

Other fees in 2013 as set forth in the above table are fees billed by KPMG primarily related to agreed-upon procedures for sales transactions of certain products.

Audit Committee Pre-Approval Policies and Procedures

Our audit committee has not established pre-approval policies and procedures for the engagement of our independent auditors for services. Our audit committee expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or us.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable

 

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of common shares by us or any affiliated purchasers during the fiscal year ended December 31, 2013:

 

Period

   Total Number of
Shares
Purchased
     Average Price
Paid Per Share (In
Won)
     Total
Number of
Shares
Purchased

as Part of
Publicly
Announced
Plans
     Maximum
Number

of Shares
that May
Yet Be
Purchased
Under the
Plans
 

January 1 to January 31

                               

February 1 to February 29

                               

March 1 to March 31

                               

April 1 to April 30

                               

May 1 to May 31

                               

June 1 to June 30

                               

July 1 to July 31

                               

August 1 to August 31

                               

September 1 to September 30

                               

October 1 to October 31

                               

November 1 to November 30

                               

December 1 to December 31

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

Pursuant to the rules of the New York Stock Exchange applicable to foreign private issuers like us that are listed on the New York Stock Exchange, we are required to disclose significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law and in accordance with our own internal procedures. The following is a summary of such significant differences.

 

NYSE Corporate Governance Standards

  

POSCO’s Corporate Governance Practice

Director Independence

  
Listed companies must have a majority of independent directors   

Our articles of incorporation provide that our board of directors must comprise no less than a majority of Outside Directors. Our Outside Directors must meet the criteria for outside directorship set forth under the Korean Securities and Exchange Act.

 

The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 6 out of 12 directors are Outside Directors. Under our articles of incorporation, we may have up to five Inside Directors and seven Outside Directors.

Nomination/Corporate Governance Committee   
A nomination/corporate governance committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee    We have not established a separate nomination corporate governance committee. However, we maintain a Director Candidate Recommendation Committee composed of three Outside Directors and one Inside Director.

 

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NYSE Corporate Governance Standards

  

POSCO’s Corporate Governance Practice

Compensation Committee   

A compensation committee of independent directors is required. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the U.S. Securities and Exchange Commission rules adopted pursuant to Section 952 of the Dodd-Frank Act, the New York Stock Exchange listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company that will materially affect that member’s duties to the compensation committee.

 

Additionally, the committee may obtain or retain the advice of a compensation adviser only after taking into consideration all factors relevant to determining that adviser’s independence from management

  

We maintain an Evaluation and Compensation Committee composed of four Outside Directors.

Executive Session   
Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year    Our Outside Directors hold meetings solely attended by Outside Directors in accordance with operation guidelines of our board of directors.

Audit Committee

  
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website    We maintain an Audit Committee comprised of three Outside Directors who meet the applicable independence criteria set forth under Rule 10A-3 under the Exchange Act.

Audit Committee Additional Requirements

  
Listed companies must have an audit committee that is composed of at least three directors.    Our Audit Committee has three members, as described above.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan   

We currently have an Employee Stock Ownership Program.

We previously provided a stock options program for officers and directors, as another equity compensation plan. However, during our annual shareholders’ meeting in February 2006, our shareholders resolved to terminate the stock option program and amended our articles of incorporation to delete the provision allowing grant of stock options to officers and directors. Consequently, since February 24, 2006, we have not granted stock options to officers and directors. Matters related to the Employee Stock Ownership Program are not subject to shareholders’ approval under Korean law.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines    We have adopted a Corporate Governance Charter setting forth our practices with respect to relevant corporate governance matters. Our Corporate Governance Charter is in compliance with Korean law but does not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Charter is available on our website at www.posco.com.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers    We have adopted a Code of Conduct for all directors, officers and employees. A copy of our Code of Conduct is available on our website at www.posco.com.

Item 16H. Mine Safety Disclosure

Not applicable

 

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PART III

Item 17. Financial Statements

Not applicable

Item 18. Financial Statements

 

     Page  

Report of Independent Registered Public Accounting Firm, KPMG Samjong Accounting Corp., on Consolidated Financial Statements

     F-1   

Report of Independent Registered Public Accounting Firm, KPMG Samjong Accounting Corp., on Internal Control over Financial Reporting

     F-2   

Consolidated Statements of Financial Position as of December 31, 2012 and 2013

     F-3   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2012 and 2013

     F-5   

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2011, 2012 and 2013

     F-6   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2012 and 2013

     F-9   

Notes to Consolidated Financial Statements

     F-11   

Item 19. Exhibits

 

  1.1          Articles of Incorporation of POSCO (English translation)
  2.1          Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 333-189473)*
  2.2          Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 33-84318) on Form F-6)*
  8.1          List of consolidated subsidiaries
  12.1          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  12.2          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  13.1          Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

* Filed previously

 

114


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

POSCO:

We have audited the accompanying consolidated statements of financial position of POSCO and subsidiaries as of December 31, 2012 and 2013 and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of POSCO’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of POSCO and subsidiaries as of December 31, 2012 and 2013 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of POSCO’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992), and our report dated May 9, 2014 expressed an unqualified opinion on the effectiveness of POSCO’s internal control over financial reporting.

/s/    KPMG Samjong Accounting Corp.

Seoul, Korea

May 9, 2014

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting

The Board of Directors and Stockholders

POSCO:

We have audited POSCO’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992). POSCO’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on POSCO’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, POSCO maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of POSCO and subsidiaries as of December 31, 2012 and 2013, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated May 9, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/    KPMG Samjong Accounting Corp.

Seoul, Korea

May 9, 2014

 

F-2


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2012 and 2013

 

 

 

      Notes      December 31,
2012
     December 31,
2013
 
     (in millions of Won)  

Assets

        

Cash and cash equivalents

     4,5,23       4,680,526         4,208,562   

Trade accounts and notes receivable, net

     6,17,23,28,29,37         11,037,973         11,492,601   

Other receivables, net

     7         1,997,152         1,890,423   

Other short-term financial assets

     8,23,37         1,849,281         2,970,665   

Inventories

     9         10,584,646         9,798,381   

Current income tax assets

     35         17,168         32,417   

Assets held for sale

     10         1,190         2,494   

Other current assets

     16         1,398,180         1,270,668   
     

 

 

    

 

 

 

Total current assets

        31,566,116         31,666,211   
     

 

 

    

 

 

 

Long-term trade accounts and notes receivable, net

     6,23         142,204         97,000   

Other receivables, net

     7         808,903         797,455   

Other long-term financial assets

     8,23         3,860,966         4,465,730   

Investments in associates and joint ventures

     11         3,039,261         3,808,693   

Investment property, net

     13         521,191         425,229   

Property, plant and equipment, net

     14         32,276,379         35,760,119   

Intangible assets, net

     15         5,662,361         5,929,840   

Deferred tax assets

     35         994,684         1,139,932   

Other long-term assets

     16         393,786         365,198   
     

 

 

    

 

 

 

Total non-current assets

        47,699,735         52,789,196   
     

 

 

    

 

 

 

Total assets

      79,265,851         84,455,407   
     

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-3


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Financial Position, Continued

As of December 31, 2012 and 2013

 

 

 

     Notes      December 31, 2012     December 31, 2013  
     (in millions of Won)  

Liabilities

       

Trade accounts and notes payable

     23,37       4,389,195        4,231,322   

Short-term borrowings and current installments of long-term borrowings

     4,17,23         10,509,348        10,713,646   

Other payables

     18         1,834,904        2,128,854   

Other short-term financial liabilities

     19,23,37         92,741        135,904   

Current income tax liabilities

     35         559,328        358,930   

Provisions

     20         77,831        107,329   

Other current liabilities

     22,29         2,311,654        2,565,174   
     

 

 

   

 

 

 

Total current liabilities

        19,775,001        20,241,159   
     

 

 

   

 

 

 

Long-term trade accounts and notes payable

     23,37         2,593        559   

Long-term borrowings, excluding current installments

     4,17,23         14,412,085        15,532,959   

Other payables

     18         243,922        206,634   

Other long-term financial liabilities

     19,23         117,713        260,021   

Net defined benefit liabilities

     21         345,688        273,160   

Deferred tax liabilities

     35         1,461,519        1,711,762   

Long-term provisions

     20         100,098        146,272   

Other long-term liabilities

     22         377,814        260,851   
     

 

 

   

 

 

 

Total non-current liabilities

        17,061,432        18,392,218   
     

 

 

   

 

 

 

Total liabilities

        36,836,433        38,633,377   
     

 

 

   

 

 

 

Equity

       

Share capital

     24         482,403        482,403   

Capital surplus

     24         1,104,814        1,078,266   

Hybrid bonds

     25                996,919   

Reserves

     26         (88,150     (23,076

Treasury shares

     27         (2,391,406     (1,579,124

Retained earnings

        40,346,481        41,090,649   
     

 

 

   

 

 

 

Equity attributable to owners of the controlling company

        39,454,142        42,046,037   

Non-controlling interests

     25         2,975,276        3,775,993   
     

 

 

   

 

 

 

Total equity

        42,429,418        45,822,030   
     

 

 

   

 

 

 

Total liabilities and equity

      79,265,851        84,455,407   
     

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-4


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2011, 2012 and 2013

 

 

 

      Notes      2011     2012     2013  
     (in millions of Won, except per share information)  

Revenue

     28,29,37       68,938,725        63,604,151        61,864,650   

Cost of sales

     29,31,34,37         (59,823,850     (56,142,892     (55,004,591
     

 

 

   

 

 

   

 

 

 

Gross profit

        9,114,875        7,461,259        6,860,059   

Selling and administrative expenses

     30,34          

Administrative expenses

     31         (2,035,053     (2,129,463     (2,231,805

Selling expenses

        (1,612,128     (1,678,688     (1,632,120
     

 

 

   

 

 

   

 

 

 
        (3,647,181     (3,808,151     (3,863,925

Other operating income

     32         306,941        448,120        229,073   

Other operating expenses

     32,34,37         (366,533     (809,465     (650,806
     

 

 

   

 

 

   

 

 

 

Operating profit

        5,408,102        3,291,763        2,574,401   

Share of gain (loss) of equity-accounted investees, net

     11         50,569        (22,702     (179,809

Finance income

     23,33         3,190,419        2,897,063        2,380,838   

Finance costs

     23,33         (3,866,695     (2,797,638     (2,829,253
     

 

 

   

 

 

   

 

 

 

Profit before income taxes

        4,782,395        3,368,486        1,946,177   

Income tax expense

     35         (1,068,109     (982,879     (590,997
     

 

 

   

 

 

   

 

 

 

Profit for the period

        3,714,286        2,385,607        1,355,180   
     

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

         

Items that will not be reclassified subsequently to profit or loss:

         

Remeasurements of defined benefit pension plans

     21         (30,577     (62,527     6,224   

Items that are or may be reclassified subsequently to profit or loss :

         

Capital adjustment arising from investments in equity-method investees

        (11,240     (130,836     (183,836

Net changes in the unrealized fair value of available-for-sale investments

     23         (1,231,758     (81,471     412,346   

Foreign currency translation differences

        1,666        (363,088     (220,464
     

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        (1,271,909     (637,922     14,270   
     

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

      2,442,377        1,747,685        1,369,450   
     

 

 

   

 

 

   

 

 

 

Profit (loss) attributable to:

         

Owners of the controlling company

      3,648,136        2,462,081        1,376,396   

Non-controlling interests

        66,150        (76,474     (21,216
     

 

 

   

 

 

   

 

 

 

Profit for the period

      3,714,286        2,385,607        1,355,180   
     

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to:

         

Owners of the controlling company

      2,530,437        1,911,506        1,444,262   

Non-controlling interests

        (88,060     (163,821     (74,812
     

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

      2,442,377        1,747,685        1,369,450   
     

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

     36       47,224        31,874        17,409   

See accompanying notes to the consolidated financial statements.

 

F-5


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2011, 2012 and 2013

 

 

 

    Attributable to owners of the controlling company     Non-controlling
interests
    Total  
    Share
capital
     Capital
surplus
    Hybrid
bonds
    Reserves     Treasury
shares
    Retained
earnings
    Sub total      
    (in millions of Won)  

Balance as of January 1, 2011

   482,403         1,101,561               1,507,288        (2,403,263     35,887,697        36,575,686        1,961,481        38,537,167   

Comprehensive income:

                  

Profit for the period

                                        3,648,136        3,648,136        66,150        3,714,286   

Net changes in accumulated comprehensive income of investments in associates, net of tax

                          (12,276                   (12,276     1,036        (11,240

Net changes in the unrealized fair value of available-for-sale investments, net of tax

                          (1,227,050                   (1,227,050     (4,708     (1,231,758

Foreign currency translation differences, net of tax

                          146,622                      146,622        (144,956     1,666   

Remeasurements of defined benefit pension plans, net of tax

                                        (24,995     (24,995     (5,582     (30,577
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                          (1,092,704            3,623,141        2,530,437        (88,060     2,442,377   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the controlling company, recognized directly in equity:

                  

Year-end dividends

                                        (577,747     (577,747     (16,831     (594,578

Interim dividends

                              (193,111     (193,111            (193,111

Changes in subsidiaries

                                                      247,483        247,483   

Changes in ownership interests in subsidiaries

            (20,694                                 (20,694     266,643        245,949   

Acquisition of treasury shares

                                 (61,296            (61,296            (61,296

Disposal of treasury shares

            69,153                      73,153               142,306               142,306   

Others

            432               (9,158            (30,505     (39,231     2,854        (36,377
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the controlling company

            48,891               (9,158     11,857        (801,363     (749,773     500,149        (249,624
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

  482,403         1,150,452               405,426        (2,391,406     38,709,475        38,356,350        2,373,570        40,729,920   
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-6


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity, Continued

For the years ended December 31, 2011, 2012 and 2013

 

 

 

    Attributable to owners of the controlling company           Total  
    Share
capital
    Capital
surplus
    Hybrid
bonds
    Reserves     Treasury
shares
    Retained
earnings
    Sub total     Non-controlling
interests
   
    (in millions of Won)  

Balance as of January 1, 2012

  482,403        1,150,452               405,426        (2,391,406     38,709,475        38,356,350        2,373,570        40,729,920   

Comprehensive income:

                 

Profit for the period

                                       2,462,081        2,462,081        (76,474     2,385,607   

Net changes in accumulated comprehensive income of investments in associates, net of tax

                         (112,974                   (112,974     (17,862     (130,836

Net changes in the unrealized fair value of available-for-sale investments, net of tax

                         (86,661                   (86,661     5,190        (81,471

Foreign currency translation differences, net of tax

                         (292,015                   (292,015     (71,073     (363,088

Remeasurements of defined benefit pension plans, net of tax

                                       (58,925     (58,925     (3,602     (62,527
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                         (491,650            2,403,156        1,911,506        (163,821     1,747,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the controlling company, recognized directly in equity:

                 

Year-end dividends

                                       (579,333     (579,333     (19,751     (599,084

Interim dividends

                                       (154,489     (154,489            (154,489

Changes in subsidiaries

                                                     35,870        35,870   

Changes in ownership interests in subsidiaries

           (41,924                                 (41,924     715,148        673,224   

Others

           (3,714            (1,926            (32,328     (37,968     34,260        (3,708
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the controlling company

           (45,638            (1,926            (766,150     (813,714     765,527        (48,187
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

   482,403        1,104,814               (88,150     (2,391,406     40,346,481        39,454,142        2,975,276        42,429,418   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-7


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Changes in Equity, Continued

For the years ended December 31, 2011, 2012 and 2013

 

 

 

     Attributable to owners of the controlling company           Total  
     Share
capital
     Capital
surplus
    Hybrid
bonds
     Reserves     Treasury
shares
    Retained
earnings
    Sub total     Non-controlling
interests
   
     (in millions of Won)  

Balance as of January 1, 2013

   482,403         1,104,814                (88,150     (2,391,406     40,346,481        39,454,142        2,975,276        42,429,418   

Comprehensive income:

                    

Profit for the period

                                          1,376,396        1,376,396        (21,216     1,355,180   

Net changes in accumulated comprehensive income of investments in associates, net of tax

                            (166,787                   (166,787     (17,049     (183,836

Net changes in the unrealized fair value of available-for-sale investments, net of tax

                            412,453                      412,453        (107     412,346   

Foreign currency translation differences, net of tax

                            (180,839                   (180,839     (39,625     (220,464

Remeasurements of defined benefit pension plans, net of tax

                                          3,039        3,039        3,185        6,224   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                            64,827               1,379,435        1,444,262        (74,812     1,369,450   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transactions with owners of the controlling company, recognized directly in equity:

                    

Year-end dividends

                                          (463,467     (463,467     (30,544     (494,011

Interim dividends

                                          (154,490     (154,490            (154,490

Changes in subsidiaries

                                                        40,506        40,506   

Changes in ownership interests in subsidiaries

             (31,417                                  (31,417     373,963        342,546   

Issuance of hybrid bonds

                    996,919                              996,919        498,468        1,495,387   

Interest of hybrid bonds

                                          (24,161     (24,161     (6,228     (30,389

Disposal of treasury shares

             5,348                       812,282               817,630               817,630   

Others

             (479             247               6,851        6,619        (636     5,983   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transactions with owners of the controlling company

             (26,548     996,919         247        812,282        (635,267     1,147,633        875,529        2,023,162   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

   482,403         1,078,266        996,919         (23,076     (1,579,124     41,090,649        42,046,037        3,775,993        45,822,030   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-8


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2011, 2012 and 2013

 

 

 

     Note    2011     2012     2013  
          (in millions of Won)  

Cash flows from operating activities

         

Profit for the period

      3,714,286        2,385,607        1,355,180   

Adjustments for:

         

Depreciation

        2,133,010        2,405,769        2,505,536   

Amortization

        133,289        157,991        180,014   

Finance income

        (1,734,280     (1,553,200     (1,012,281

Finance costs

        2,245,957        1,605,414        1,585,778   

Income tax expense

        1,068,109        982,879        590,997   

Gain on disposal of property, plant and equipment

        (13,812     (42,290     (14,177

Loss on disposal of property, plant and equipment

        60,550        65,486        121,133   

Share of loss of equity-accounted investees

        (50,569     22,702        179,809   

Cost for defined benefit plans

        236,999        226,132        247,748   

Warranty expense

        (7,202     25,127        111,364   

Bad debt expenses

        45,477        123,373        201,185   

Loss on valuation of inventories

        140,361        76,484        49,172   

Impairment loss of assets held for sale

               258,451        1,814   

Impairment loss of goodwill and intangible assets

        14,959        21,776        125,316   

Gain on disposals of assets held for sale

               (193,333     (101,611

Gain on disposals of investments in associates

        (2,247     (39,441     (7,668

Loss on disposals of investments in associates

               15,119        19,404   

Impairment loss of property, plant and equipment

        26,171        12,977        9,742   

Others, net

        (32,406     (2,314     19,343   
     

 

 

   

 

 

   

 

 

 
        4,264,366        4,169,102        4,812,618   
     

 

 

   

 

 

   

 

 

 

Changes in operating assets and liabilities

   39      (4,850,747     1,933,358        (116,432

Interest received

        218,682        238,231        227,989   

Interest paid

        (745,111     (874,711     (797,316

Dividends received

        308,692        178,317        193,008   

Income taxes paid

        (1,218,602     (710,448     (816,912
     

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

        1,691,566        7,319,456        4,858,135   
     

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

         

Acquisitions of short-term financial instruments

        (4,556,340     (3,616,118     (4,449,312

Proceeds from disposal of short-term financial instruments

        5,794,770        3,847,682        3,901,527   

Increase in loans

        (962,099     (434,156     (575,343

Collection of loans

        896,656        318,745        417,971   

Acquisitions of available-for-sale investments

        (322,046     (307,712     (309,469

Proceeds from disposal of available-for-sale investments

        411,061        700,686        269,363   

Acquisitions of investments of equity-accounted investees

        (740,971     (492,681     (1,076,763

Proceeds from disposal of investments of equity-accounted investees

        2,404        18,428        89,533   

Acquisitions of property, plant and equipment

        (5,330,968     (7,054,543     (6,569,613

Proceeds from disposal of property, plant and equipment

        140,221        272,948        82,153   

Acquisitions of intangible assets

        (574,753     (448,214     (543,666

Proceeds from disposal of intangible assets

        55,899        10,945        5,429   

Proceeds from disposal of assets held for sale

               1,268,545        126,809   

Acquisitions of other investment assets

        (450     (128     (9,258

Proceeds from disposal of other investment assets

        137,116        19,566        31,295   

Cash received from (paid in) acquisition of business, net of cash acquired

        (437,464     (98,880     5,729   

Cash received from disposal of business

               13,041        5,962   

Acquisition of investment property

        (157,072     (29,689     (20,945

Disposal of investment property

        107,443        42,616        8,464   

Acquisition of long-term financial instruments

        (34,374     (178,163     (123,703

Other, net

        54,101        (21,921     (17,833
     

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

      (5,516,866     (6,169,003     (8,751,670
     

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-9


Table of Contents

POSCO and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the years ended December 31, 2011, 2012 and 2013

 

 

 

     Note    2011     2012     2013  
          (in millions of Won)  

Cash flows from financing activities

         

Proceeds from borrowings

      7,068,322        3,007,017        5,098,702   

Repayment of borrowings

        (1,746,487     (1,884,140     (2,845,957

Proceeds from (repayment of) short-term borrowings, net

        51,808        (1,412,138     86,475   

Proceeds from disposal of treasury shares

        164,384               14,019   

Payment of cash dividends

        (770,858     (751,908     (648,580

Proceeds from issuance of hybrid bonds

                      1,495,387   

Payment of interest of hybrid bonds

                      (26,088

Increase in non-controlling interests

        146,264        208,187        363,044   

Government grant received

        64,603        1,631        6,371   

Repayment of government grants

               (64,263     (139

Other, net

        (78,151     (12,013     (10,898
     

 

 

   

 

 

   

 

 

 

Net cash provided (used in) by financing activities

        4,899,885        (907,627     3,532,336   
     

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash held

        3,052        (160,982     (110,765
     

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

        1,077,637        81,844        (471,964

Cash and cash equivalents at beginning of the period

        3,521,045        4,598,682        4,680,526   
     

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

      4,598,682        4,680,526        4,208,562   
     

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-10


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements

As of December 31, 2011, 2012 and 2013

 

 

 

1. General Information

General information about POSCO, its 39 domestic subsidiaries including POSCO Engineering & Construction Co., Ltd., 172 foreign subsidiaries including POSCO America Corporation (collectively, “the Company”) and its 100 associates and joint ventures are as follows:

(a) The controlling company

POSCO, the controlling company, was incorporated on April 1, 1968, under the Commercial Code of the Republic of Korea to manufacture and sell steel rolled products and plates in the domestic and foreign markets.

The shares of POSCO have been listed on the Korea Exchange since 1988. POSCO owns and operates two steel plants (Pohang and Gwangyang) and one office in Korea and it also operates internationally through eight of its overseas liaison offices.

As of December 31, 2012 and 2013, POSCO’s shareholders are as follows:

 

     2012      2013  

Shareholder’s name

   Number of shares      Ownership (%)      Number of shares      Ownership (%)  

National Pension Service

     5,225,654         5.99         6,577,907         7.54   

Nippon Steel & Sumitomo Metal Corporation (*1)

     4,394,712         5.04         4,394,712         5.04   

Hyundai Heavy Industries Co., Ltd. and subsidiaries (*2)

     2,183,997         2.50         2,197,707         2.52   

Pohang University of Science and Technology

     1,905,000         2.18         1,905,000         2.18   

KB Financial Group Inc. and subsidiaries (*2)

     1,919,773         2.20         1,846,994         2.12   

Others

     71,557,699         82.09         70,264,515         80.60   
  

 

 

    

 

 

    

 

 

    

 

 

 
     87,186,835         100.00         87,186,835         100.00   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(*1) Nippon Steel & Sumitomo Metal Corporation owns American Depository Receipts (ADRs) of the Company, each of which represents 0.25 share of POSCO’s common share which has par value of 5,000 per share.

 

(*2) Includes shares held by subsidiaries pursuant to Articles of Incorporation.

As of December 31, 2013, the shares of the Company are listed on the Korea Exchange, while its depository shares are listed on the New York, Tokyo and London Stock Exchanges.

 

F-11


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Consolidated subsidiaries

Details of consolidated subsidiaries as of December 31, 2012 and 2013 are as follows:

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

[Domestic]

               

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

  Engineering and construction     89.53               89.53        89.53               89.53      Pohang

POSCO Processing & Service

  Steel sales and service     95.31               95.31        95.31               95.31      Seoul

POSCO COATED & COLOR STEEL Co., Ltd.

  Coated steel manufacturing     56.87               56.87        56.87               56.87      Pohang

POSCO PLANTEC Co., Ltd.

  Steel work maintenance and machinery installation     100.00               100.00                           Pohang

POSCO ICT

  Computer hardware and software distribution     72.54               72.54        65.38               65.38      Seongnam

POSCO Research Institute

  Economic research and consulting     100.00               100.00        100.00               100.00      Seoul

POSMATE (former Seoung Gwang Co., Ltd.)

  Business facility maintenance     69.38        30.62        100.00        54.46        11.77        66.23      Suncheon

POSCO A&C

  Architecture and consulting     100.00               100.00        100.00               100.00      Seoul

POSCO Specialty Steel Co., Ltd.

  Steel manufacturing and sales     94.74               94.74        72.09               72.09      Changwon

POSTECH Venture Capital Co., Ltd.

  Investment in venture companies     95.00               95.00        95.00               95.00      Pohang

eNtoB Corporation

  Electronic commerce     32.19        30.20        62.39        32.19        30.20        62.39      Seoul

POSCO CHEMTECH

  Manufacturing and sellings of refractories     60.00               60.00        60.00               60.00      Pohang

POSCO-Terminal Co., Ltd.

  Transporting and warehousing     51.00               51.00        51.00               51.00      Gwangyang

POSCO M-TECH (*1)

  Packing materials manufacturing     48.85               48.85        48.85               48.85      Pohang

POSCO ENERGY CO., LTD.

  Generation of electricity     89.02               89.02        89.02               89.02      Seoul

Postech 2006 Energy Fund (*2)

  Investment in new technologies            22.11        22.11                           Seoul

POSCO TMC Co., Ltd.

  Component manufacturing     34.20        33.56        67.76        34.20        40.36        74.56      Cheonan

POSCO NIPPON STEEL RHF JOINT VENTURE.CO., Ltd.

  Steel manufacturing and sales     70.00               70.00        70.00               70.00      Pohang

MegaAsset Co., Ltd.

  Real estate rental and sales            100.00        100.00               100.00        100.00      Cheonan

POSCO Engineering CO., Ltd

  Construction and engineering service            95.56        95.56               95.56        95.56      Seongnam

Pohang SPFC Co., Ltd.

  Steel manufacturing            90.00        90.00                           Pohang

POSWITH Co., Ltd.

  Industrial clean service     100.00               100.00                           Pohang

POSCO AST

  Steel manufacturing and sales     100.00               100.00        100.00               100.00      Ansan

POSHIMETAL Co., Ltd.

  Steel manufacturing and sales     65.00               65.00        65.00               65.00      Gwangyang

Poscoene

  Handling & disposal of waste matter            100.00        100.00               100.00        100.00      Seoul

POSFINE Co., Ltd.

  Non metallic minerals manufacturing     69.23               69.23        69.23               69.23      Gwangyang

POSCO Humans

  Construction     85.25               85.25        90.30               90.30      Pohang

Mapo Hibroad Parking co., Ltd.

  Construction            71.00        71.00               71.00        71.00      Seoul

Dakos Co., Ltd.

  Railway equipment manufacturing            81.00        81.00                           Seongnam

 

F-12


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

Steel Processing and Fabricating Center Co., LTD

  Steel manufacturing            65.84        65.84               70.52        70.52      Gwangyang

POSCALCIUM Company, Ltd.

  Non metallic minerals manufacturing            86.87        86.87                           Pohang

Plant Engineering service Technology Co., Ltd.

  Engineering service            100.00        100.00               100.00        100.00      Pohang

9Digit Co., Ltd.

  Steel manufacturing            86.48        86.48                           Incheon

Postech Early Stage Fund (*2)

  Financial investment            10.00        10.00                           Pohang

Busan E&E Co,. Ltd.

  Handling & disposal of waste matter     70.00               70.00        70.00               70.00      Busan

POSCO Family Strategy Fund

  Financial investment     60.79        39.21        100.00        60.79        39.21        100.00      Pohang

POREKA Co., Ltd.

  Advertising agency     100.00               100.00        100.00               100.00      Seoul

Daewoo International Corporation

  Trading and Energy & Resource development     60.31               60.31        60.31               60.31      Seoul

POSCO LED Co., Ltd.

  LED lightening     16.70        63.30        80.00        16.70        63.30        80.00      Seongnam

Gunsan SPFC Co., Ltd.

  Steel processing and sales            70.09        70.09                           Gunsan

Pohang Scrap Recycling Distribution Center Co., Ltd.

  Steel processing and sales            51.00        51.00               51.00        51.00      Pohang

PSC Energy Global Co., Ltd.

  Investment in energy industry            100.00        100.00               100.00        100.00      Pohang

Suncheon Eco Trans Co., Ltd

  Train manufacturing & management     100.00               100.00        100.00               100.00      Suncheon

Reco Metal Co., Ltd.

  Smelting of metal            100.00        100.00                           Hwasung

New Altec Co., Ltd

  Aluminum products manufacturing and sales            60.10        60.10               60.10        60.10      Incheon

PONUTech Co., Ltd.

  Nuclear power plant design and repair service            100.00        100.00               100.00        100.00      Ulsan

BLUE O&M Co., Ltd.

  Service            100.00        100.00                           Ulsan

Tamra Offshore Wind Power Co., Ltd

  Cogeneration plant operation            64.00        64.00               64.00        64.00      Jeju

POS-HiAL

  Aluminum products manufacturing and sales            65.30        65.30               51.00        51.00      Youngam

MCM Korea

  Iron ore sales & mine development            100.00        100.00                           Seoul

Tancheonene Co., Ltd

  Sewage heat energy supply     5.00        95.00        100.00                           Seoul

IT Engineering (*2)

  Automotive engineering service                                 17.00        17.00      Seoul

[Foreign]

               

POSCO America Corporation

  Steel trading     99.45        0.55        100.00        99.45        0.55        100.00      USA

POSCO AUSTRALIA PTY LTD

  Iron ore sales & mine development     100.00               100.00        100.00               100.00      Australia

POSCO Canada Ltd.

  Coal sales            100.00        100.00               100.00        100.00      Canada

POSCAN Elkveiw Coal Ltd.

  Coal sales            100.00        100.00               100.00        100.00      Canada

POSCO Asia Co., Ltd.

  Steel and raw material trading     100.00               100.00        100.00               100.00      Hong Kong

Dalian POSCO Steel Co., Ltd

  Steel manufacturing     30.00        55.00        85.00                           China

POSCO-CTPC Co., Ltd.

  Steel manufacturing     56.60        43.40        100.00        56.60        43.40        100.00      China

POSCO-JKPC Co., Ltd.

  Steel manufacturing            95.00        95.00               95.00        95.00      Japan

INTERNATIONAL BUSINESS CENTER CORPORATION

  Leasing service            60.00        60.00               60.00        60.00      Vietnam

POSCO E&C Vietnam Co., Ltd.

  Steel manufacturing            100.00        100.00               100.00        100.00      Vietnam

 

F-13


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

Zhangjiagang Pohang Stainless Steel Co., Ltd.

  Stainless steel manufacturing     58.60        23.88        82.48        58.60        23.88        82.48      China

POSCO (Guangdong) Steel Co., Ltd.

  Plating steel sheet manufacturing     87.04        10.04        97.08        87.04        10.04        97.08      China

POSCO (Thailand) Company Limited

  Steel manufacturing     85.62        14.38        100.00        85.62        14.38        100.00      Thailand

Myanmar POSCO Steel Co., Ltd

  Zinc relief manufacturing     70.00               70.00        70.00               70.00      Myanmar

POSCO-JOPC Co., Ltd.

  Steel manufacturing            56.84        56.84               56.84        56.84      Japan

POSCO Investment Co., Ltd.

  Financial Service     100.00               100.00        100.00               100.00      Hong Kong

POSCO-MKPC SDN BHD

  Steel manufacturing     44.69        25.31        70.00        44.69        25.31        70.00      Malaysia

Qingdao Pohang Stainless Steel Co., Ltd.

  Stainless steel manufacturing     70.00        30.00        100.00        70.00        30.00        100.00      China

POSCO (Suzhou) Automotive Processing Center Co., Ltd.

  Steel manufacturing     90.00        10.00        100.00        90.00        10.00        100.00      China

POSCO BIOVENTURES I, L.P.

  Bio tech Industry            100.00        100.00               100.00        100.00      USA

PT. POSNESIA Stainless Steel Industry

  Steel manufacturing     70.00               70.00        70.00               70.00      Indonesia

POSEC Hawaii, Inc.

  Real estate Industry            100.00        100.00               100.00        100.00      USA

POSCO-China Qingdao Processing Center Co., Ltd.

  Steel manufacturing            100.00        100.00               100.00        100.00      China

POS-ORE PTY LTD

  Iron ore sales & mine development            100.00        100.00               100.00        100.00      Australia

POSCO-China Holding Corp.

  Holding company     100.00               100.00        100.00               100.00      China

POSCO JAPAN Co., Ltd.

  Steel trading     100.00               100.00        100.00               100.00      Japan

POS-CD PTY LTD

  Coal sales            100.00        100.00               100.00        100.00      Australia

POS-GC PTY LTD

  Coal sales            100.00        100.00               100.00        100.00      Australia

POSCO-India Private Limited

  Steel manufacturing     100.00               100.00        100.00               100.00      India

POSCO-India Pune Processing Center. Pvt. Ltd.

  Steel manufacturing     65.00               65.00        65.00               65.00      India

POSCO-JEPC Co., Ltd.

  Steel manufacturing            88.02        88.02               88.02        88.02      Japan

POSCO-CFPC Co., Ltd.

  Steel manufacturing     39.60        60.40        100.00        39.60        60.40        100.00      China

POSCO E&C CHINA Co., Ltd.

  Construction and civil engineering            100.00        100.00               100.00        100.00      China

POSCO MPPC S.A. de C.V.

  Steel manufacturing            95.00        95.00               95.00        95.00      Mexico

Zhangjigang Pohang Port Co., Ltd.

  Loading and unloading service            100.00        100.00               100.00        100.00      China

Qingdao Pos-metal Co., Ltd.

  Steel manufacturing            100.00        100.00               100.00        100.00      China

POSCO-VIETNAM Co., Ltd.

  Steel manufacturing     85.00               85.00        85.00               85.00      Vietnam

POSCO MEXICO S.A. DE C.V.

  Automotive steel sheet manufacturing     84.84        15.16        100.00        84.84        15.16        100.00      Mexico

POSCO India Delhi Steel Processing Centre Private Limited

  Steel manufacturing     66.40        10.00        76.40        66.40        10.00        76.40      India

POSCO-Poland Wroclaw Processing Center Sp. z o. o.

  Steel manufacturing     60.00               60.00        60.00               60.00      Poland

POS-NP PTY LTD

  Coal sales            100.00        100.00               100.00        100.00      Australia

POSCO-Vietnam Processing Center Co., Ltd.

  Steel manufacturing     91.63               91.63        91.63               91.63      Vietnam

POSCO (Chongqing) Automotive Processing Center Co., Ltd.

  Steel manufacturing     90.00        10.00        100.00        90.00        10.00        100.00      China

 

F-14


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

SUZHOU POSCO-CORE TECHNOLOGY CO., LTD.

  Component manufacturing            100.00        100.00               100.00        100.00      China

POSCO-Malaysia SDN. BHD.

  Steel manufacturing     80.07        13.34        93.41        80.07        13.34        93.41      Malaysia

POS-Minerals Corporation

  Mine development & sales            100.00        100.00               100.00        100.00      USA

POSCO (Wuhu) Automotive Processing Center Co., Ltd.

  Steel manufacturing     68.57        31.43        100.00        68.57        31.43        100.00      China

POSCO Engineering and Construction India Private Limited

  Construction and engineering            100.00        100.00               100.00        100.00      India

POSCO E&C SMART S DE RL DE CV

  Construction and engineering            100.00        100.00               100.00        100.00      Mexico

POSCO Philippine Manila Processing Center, Inc.

  Steel manufacturing            100.00        100.00               100.00        100.00      Philippines

POSCO Gulf SFC LLC

  Steel manufacturing            81.93        81.93               81.93        81.93      UAE

Dalian POSCO ICT-DONGFANG Engineering Co., Ltd.

  Electric control equipment manufacturing            100.00        100.00               100.00        100.00      China

SANPU TRADING Co., Ltd.

  Raw material trading            70.00        70.00               70.00        70.00      China

Zhangjiagang BLZ Pohang International Trading

  Steel transit trading            100.00        100.00               100.00        100.00      China

POSCO MEXICO HUMAN TECH S.A. de C.V.

  Service     80.00        20.00        100.00        80.00        20.00        100.00      Mexico

POSCO MESDC S.A. DE C.V.

  Steel product sales            56.80        56.80               56.80        56.80      Mexico

POSCO ICT-China

  IT service and DVR business            100.00        100.00               100.00        100.00      China

DWEMEX, S.A. DE. C.V.

  Construction            99.00        99.00               99.00        99.00      Mexico

POSCO MPC Servicios S.A. de C.V.

  Steel manufacturing            61.00        61.00               61.00        61.00      Mexico

POSCO-Uruguay S.A

  Lumber manufacturing & sales     98.00               98.00        98.00               98.00      Uruguay

Pos-Sea Pte Ltd

  Steel transit trading            67.54        67.54               67.54        67.54      Singapore

POSCO Europe Steel Distribution Center

  Steel product sales     50.00        20.00        70.00        50.00        20.00        70.00      Slovenia

VECTUS LIMITED

  PRT test track construction            99.57        99.57               99.57        99.57      England

Zeus (Cayman)

  Service     100.00               100.00        100.00               100.00      Cayman
                Islands

POSCO VST CO., LTD.

  Stainless steel manufacturing     95.65               95.65        95.65               95.65      Vietnam

POSCO Maharashtra Steel Private Limited

  Steel manufacturing     100.00               100.00        100.00               100.00      India

POSCO India Chennai Steel Processing Centre Pvt. Ltd.

  Steel manufacturing     100.00               100.00        100.00               100.00      India

POSCO TNPC Otomotiv Celik San. Ve Tic. A.S

  Steel manufacturing     100.00               100.00        100.00               100.00      Turkey

POSCO Vietnam Ha Noi Processing Center Co., Ltd.

  Steel manufacturing     70.00               70.00        70.00               70.00      Vietnam

POSCO (Liaoning) Automotive Processing Center Co., Ltd.

  Steel manufacturing     90.00        10.00        100.00        90.00        10.00        100.00      China

POSCO-Indonesia Jakarta Processing Center

  Steel manufacturing     65.00        20.00        85.00        65.00        20.00        85.00      Indonesia

POSCO E&C VENEZUELA C.A.

  Construction and engineering            100.00        100.00               100.00        100.00      Venezuela

Motta Resources Indonesia

  Mine development     65.00               65.00        65.00               65.00      Indonesia

 

F-15


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

POSCO TMC INDIA PRIVATE LIMITED

  Steel manufacturing            100.00        100.00               100.00        100.00      India

POSCO America Alabama Processing Center Co., Ltd.

  Steel manufacturing            100.00        100.00               100.00        100.00      USA

PT PEN INDONESIA

  Construction            95.00        95.00               95.00        95.00      Indonesia

POSCO (Yantai) Automotive Processing Center Co., Ltd.

  Steel manufacturing     90.00        10.00        100.00        90.00        10.00        100.00      China

POSCO India Steel Distribution Center Private Ltd.

  Steel logistics            100.00        100.00               100.00        100.00      India

POSCO China Dalian Plate Processing Center Co., Ltd.

  Steel manufacturing     80.00        10.00        90.00        80.00        10.00        90.00      China

POSCO-South Asia Company Limited

  Steel product sales     100.00               100.00        100.00               100.00      Thailand

POSCO SS-VINA

  Steel manufacturing            100.00        100.00               100.00        100.00      Vietnam

POSCO-NCR Coal Ltd.

  Coal sales            100.00        100.00               100.00        100.00      Canada

POSCO WA PTY LTD

  Iron ore sales & mine development     100.00               100.00        100.00               100.00      Australia

POSCO Engineering and Construction — UZ

  Construction            100.00        100.00               100.00        100.00      Uzbekistan

POSCO AUSTRALIA GP PTY LIMITED

  Resource development            100.00        100.00               100.00        100.00      Australia

Daewoo International (America) Corp.

  Trading business            100.00        100.00               100.00        100.00      USA

Daewoo International (Deutschland) GmbH.

  Trading business            100.00        100.00               100.00        100.00      Germany

Daewoo International Japan Corp.

  Trading business            100.00        100.00               100.00        100.00      Japan

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

  Trading business            100.00        100.00               100.00        100.00      Singapore

Daewoo Italia S.r.l.

  Trading business            100.00        100.00               100.00        100.00      Italy

Daewoo (China) Co., Ltd.

  Trading business            100.00        100.00               100.00        100.00      China

DAEWOO TEXTILE FERGANA LLC

  Textile manufacturing            100.00        100.00               100.00        100.00      Uzbekistan

DAEWOO TEXTILE BUKHARA LLC

  Textile manufacturing            100.00        100.00               100.00        100.00      Uzbekistan

DAEWOO INTERNATIONAL AUSTRALIA HOLDINGS PTY LTD

  Resource development            100.00        100.00               100.00        100.00      Australia

Daewoo Paper Manufacturing Co., Ltd.

  Paper manufacturing            66.70        66.70               66.70        66.70      China

Tianjin Daewoo Paper Manufacturing Co., Ltd.

  Paper manufacturing            68.30        68.30               68.30        68.30      China

POSCO MAURITIUS LIMITED

  Mine development & sales            100.00        100.00               100.00        100.00      Mauritius

PT. KRAKATAU POSCO

  Steel manufacturing     70.00               70.00        70.00               70.00      Indonesia

Myanmar Daewoo Limited

  Trading business            100.00        100.00               100.00        100.00      Myanmar

DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.

  Trading business            100.00        100.00               100.00        100.00      Mexico

Daewoo International Guangzhou Corp.

  Trading business            100.00        100.00               100.00        100.00      China

DAEWOO STC VINA LTD.

  Textile manufacturing            100.00        100.00                           Vietnam

Daewoo (M) SDN. BHD.

  Trading business            100.00        100.00               100.00        100.00      Malaysia

Daewoo CANADA LTD.

  Trading business            100.00        100.00                           Canada

Daewoo EL SALVADOR S.A. DE C.V.

  Trading business            88.00        88.00               88.00        88.00      El Salvador

GEZIRA TANNERY CO., LTD.

  Leather manufacturing            60.00        60.00                           Sudan

 

F-16


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

POSCO (Zhangjiagang) STS Processing Center Co., Ltd

  Steel manufacturing            100.00        100.00               100.00        100.00      China

Daewoo International (M) SDN BHD

  Trading business            100.00        100.00               100.00        100.00      Malaysia

Daewoo International SHANGHAI CO., LTD.

  Trading business            100.00        100.00               100.00        100.00      China

DAEWOO POWER AND INFRA (PTY) LTD.

  Electricity                                 100.00        100.00      Republic of
South Africa

PGSF, L.P.

  Investment in Bio tech Industry            100.00        100.00               100.00        100.00      USA

Xenesys Inc.

  Power generation equipment manufacturing     29.58        21.35        50.93        29.58        21.35        50.93      Japan

Daewoo International INDIA Private Ltd.

  Trading business            100.00        100.00               100.00        100.00      India

TECHREN Solar, LLC

  Electrical Industry            99.92        99.92               99.92        99.92      USA

PT. POSCO E&C INDONESIA

  Construction            100.00        100.00               100.00        100.00      Indonesia

HUME COAL PTY LTD

  Raw material manufacturing            70.00        70.00               100.00        100.00      Australia

Daewoo HANDELS GmbH

  Trading business            100.00        100.00                           Germany

POSCO FOUNDATION

  Non-profit charitable organization            100.00        100.00               100.00        100.00      India

EPC EQUITIES LLP

  Construction            70.00        70.00               70.00        70.00      England

SANTOS CMI CONSTRUCTION TRADING LLP

  Construction            99.90        99.90               99.90        99.90      England

SANTOS CMI INC. USA

  Construction            100.00        100.00               100.00        100.00      USA

SANTOS CMI ENGENHARIA E CONSTRUCOES LTDA

  Construction            99.98        99.98               99.98        99.98      Brazil

SANTOS CMI PERU S.A.

  Construction            99.99        99.99               99.99        99.99      Peru

SANTOS CMI COSTA RICA S.A.

  Construction            100.00        100.00                           Coasta
Rica

SANTOS CMI CONSTRUCCIONES S.A.

  Construction            100.00        100.00               100.00        100.00      Uruguay

GENTECH INTERNATIONAL INC.

  Construction            90.00        90.00               90.00        90.00      Panama

EPC INVESTMENTS C.V.

  Construction            99.99        99.99               99.99        99.99      Netherlands

INGENIERiA Y CONSTRUCCION HOLAND CO S.A.

  Construction            99.90        99.90                           Ecuador

ASESORiA Y SERVICIOS EPC S.A CHILE

  Construction            99.00        99.00                           Chile

SANTOSCMI S.A.

  Construction            70.00        70.00               70.00        70.00      Ecuador

SANTOSCMI CONSTRUCCIONES DE CHILE S.A.

  Construction            99.00        99.00               99.00        99.00      Chile

S&K -SANTOSCMI S.A. DE C.V.

  Construction            99.00        99.00               99.00        99.00      Mexico

COMPANIADEAUTOMATI
ZACION & CONTROL, GENESYS S.A.

  Construction            90.00        90.00               90.00        90.00      Ecuador

VAUTIDAMERICAS S.A.

  Construction            51.00        51.00               51.00        51.00      Ecuador

SANTOS CMI Constructions Argentina S.A.

  Construction            95.00        95.00                           Argentina

POSCO ENGINEERING & CONSTRUCTION DO BRAZIL LTDA.

  Construction            100.00        100.00               100.00        100.00      Brazil

 

F-17


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

POSCO Electrical Steel India Private Limited

  Electrical Steel manufacturing     100.00               100.00        100.00               100.00      India

Daewoo International Cameroon S.A.

  Resource Development            100.00        100.00               100.00        100.00      Cameroon

POSCO ASSAN TST STEEL INDUSTRY

  Steel manufacturing     60.00        10.00        70.00        60.00        10.00        70.00      Turkey

HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.

  Investment            100.00        100.00               100.00        100.00      Hong Kong

POSCO Klappan Coal Ltd.

  Coal sales            100.00        100.00               100.00        100.00      Canada

DAESAN (CAMBODIA) Co., Ltd.

  Investment            100.00        100.00               100.00        100.00      Cambodia

Brazil Sao Paulo Steel Processing Center

  Steel manufacturing            76.00        76.00               76.00        76.00      Brazil

POSCO(Dalian) IT Center Development Co., Ltd.

  Investment            100.00        100.00               100.00        100.00      China

PT. POSCO RESOURCES INDONESIA

  Mine development     100.00               100.00        100.00               100.00      Indonesia

PT.POSCO ICT INDONESIA

  IT service and Electric Control Engineering            66.99        66.99               66.99        66.99      Indonesia

PT. POSCO MTECH INDONESIA

  Steel manufacturing            60.00        60.00               60.00        60.00      Indonesia

PT. KRAKATAU POSCO ENERGY

  Manufacturing & management            90.00        90.00               90.00        90.00      Indonesia

POSCO RUS LLC

  Trading business     90.00        10.00        100.00        90.00        10.00        100.00      Russia

POSCO Thainox Public Company Limited

  Steel manufacturing     84.93               84.93        84.93               84.93      Thailand

DAEWOO INTERNATIONAL SHANGHAI WAIGAOQIAO CO., LTD.

  Merchandising trade            100.00        100.00               100.00        100.00      China

PT. Bio Inti Agrindo

  Forest resources development            85.00        85.00               85.00        85.00      Indonesia

POSCO ENGINEERING AND CONSTRUCTION AUSTRALIA (POSCO E&C AUSTRALIA) PTY LTD

  Iron ore sales            100.00        100.00               100.00        100.00      Australia

POSCO-TISCO (JILIN) PROCESSING CENTER Co., Ltd.

  Steel manufacturing     50.00        10.00        60.00        50.00        10.00        60.00      China

Hunchun Posco Hyundai International Logistics Complex Development Co., Ltd

  Logistics            78.15        78.15               72.93        72.93      China

USA-SRDC

  Scrap sales            100.00        100.00               100.00        100.00      USA

Daewoo International Vietnam Co., Ltd.

  Trading business            100.00        100.00               100.00        100.00      Vietnam

PT.Krakatau Posco Chemtech Calcination

  Manufacturing and selling of quicklime            80.00        80.00               80.00        80.00      Indonesia

POSCO AFRICA (PROPRIETARY) LIMITED

  Trading business     100.00               100.00        100.00               100.00      South
Africa

EPC INGENIERIA & SERVICIOS DE COSTA RICA SA

  Construction and engineering service            100.00        100.00               100.00        100.00      Costa Rica

POSCO ICT BRASIL

  IT service and engineering            100.00        100.00               100.00        100.00      Brazil

LA-SRDC

  Scrap manufacturing            68.41        68.41               68.41        68.41      USA

DONG FANG JIN HONG

  Real estate development, rental and management            99.00        99.00               99.00        99.00      China

 

F-18


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      
    2012     2013    
   

Principal Operations

  POSCO     Subsidiaries     Total     POSCO     Subsidiaries     Total     Region

PRODUCTOS OFERTAS SISTEMAS Y COMERCIALIZADORA ORIENTAL S DE RL DE CV

  Steel sales            100.00        100.00               100.00        100.00      Mexico

POSCO(Guangdong) Automotive Steel Co., Ltd.

  Steel manufacturing and sales     83.64        10.00        93.64        83.64        10.00        93.64      China

POSCO MAPC SA DE CV

  Steel manufacturing and sales     80.00        20.00        100.00        80.00        20.00        100.00      Mexico

POSCO AMERICA COMERCIALIZADORA S DE RL DE CV

  Human-resource service            100.00        100.00               100.00        100.00      Mexico

POSCO ENGINEERING (THAILAND) CO., LTD. (*2)

  Chemical plant                                 48.90        48.90      Thailand

POSCO YongXin Rare Earth Metal Co., Ltd.

  Magnet material manufacturing and sales                                 51.67        51.67      China

POSCO-Mory-Maruyasu PIPE

  Common steel welded pipe manufacturing and selling                                 50.00        50.00      Japan

PT KRAKATAU BLUE WATER

  Wastewater treatment facilities operation and maintenance                                 67.00        67.00      Indonesia

KRAKATAU POS-CHEM DONG-SUH CHEMICAL (*2)

  Chemical by-product manufacturing and sales                                 45.00        45.00      Indonesia

Myanmar Daewoo International Corporation

  Trading business                                 100.00        100.00      Myanmar

POSCO-Italy Processing Center

  Stainless steel sheet manufacturing and sales                          80.00        10.00        90.00      Italy

DAEWOO E&P CANADA CORPORATION

  Crude oil and natural gas mining                                 100.00        100.00      Canada

Yingkou Puxiang Trade Co., Ltd.

  Refractory quality test and import and export trade                                 100.00        100.00      China

Myanmar POSCO C&C Company, Limited.

  Steel manufacturing and sales                                 70.00        70.00      Myanmar

POSCO ICT VIETNAM

  IT service and electric control engineering                                 100.00        100.00      Vietnam

Daewoo Global Development. Pte., Ltd

  Real estate development                                 51.00        51.00      Myanmar

Myanmar POSCO Engineering & Construction Company, Limited.

  Construction and engineering service                                 100.00        100.00      Myanmar

POSCO COATED STEEL (THAILAND) CO., LTD.

  Automotive steel sheet manufacturing and sales                          100.00               100.00      Thailand

 

 

(*1) Included as a subsidiary from 2011 as the Company has the power over more than half of the voting rights by virtue of an agreement with Postech, which has a 4.72% ownership interest.

 

(*2) These subsidiaries are included in the consolidated financial statements as the controlling company has control over them in consideration of the board of directors’ composition and others.

The amounts recognized in equity as a result of changes in the Company’s ownership interests in subsidiaries that did not result in a loss of control (2011 : POSCO ENGINEERING CO., LTD, Guangdong Pohang Coated Steel Co., Ltd., POSCO VST Co., Ltd., etc., 2012: POSCO Specialty Steel Co., Ltd., POSCO ENERGY Co., Ltd., POSCO-Thainox Public Company Limited, etc., 2013: POSCO Specialty Steel Co., Ltd., POSCO ICT Co., Ltd., POSCO TMC Co., Ltd. etc.) were 20,694 million , 41,924 million and 31,417 million for the years ended December 31, 2011, 2012 and 2013, respectively.

 

F-19


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Cash flows from increase in non-controlling interest, net for the years ended December 31, 2011, 2012 and 2013 amounted to 155,785 million, 375,850 million and 385,122 million, respectively.

Cash dividends paid to POSCO by subsidiaries for the years ended December 31, 2011, 2012 and 2013 amounted to 45,675 million, 22,581 million and 71,970 million, respectively.

As of December 31, 2013, there are no restrictions on the ability of subsidiaries to transfer funds to the controlling company, such as in the form of cash dividends, repayment of loans or payment of advances.

 

F-20


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(c) Summarized financial information of subsidiaries as of December 31, 2011 2012 and 2013 are as follows:

1) December 31, 2011

 

Company

   Sales      Net income (loss)  
     (in millions of Won)  

[Domestic]

     

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

   6,142,026         109,921   

POSCO Processing & Service

     3,141,999         19,234   

POSCO COATED & COLOR STEEL Co., Ltd.

     956,179         (24,713

POSCO Plant Engineering Co., Ltd.

     597,508         6,758   

POSCO ICT

     983,649         30,578   

POSCO Research Institute

     30,844         216   

POSMATE (formerly Seoung Gwang Co., Ltd.)

     14,652         2,522   

POSCO A&C

     196,794         7,236   

POSCO Specialty Steel Co., Ltd.

     1,662,896         127,573   

POSTECH Venture Capital Co., Ltd.

             1,041   

eNtoB Corporation

     634,830         1,249   

POSCO CHEMTECH

     1,186,623         92,391   

POSCO-Terminal Co., Ltd.

     100,710         22,955   

POSCO M-TECH

     602,155         12,447   

POSCO ENERGY CO., LTD.

     1,863,670         25,152   

Postech 2006 Energy Fund

             (202

PHP Co., Ltd.

     4,456         483   

POSCO TMC Co., Ltd.

     219,580         5,746   

POSCO NIPPON STEEL RHF JOINT VENTURE. CO., Ltd.

     74,013         13,366   

MegaAsset Co., Ltd.

     63,667         5,794   

POSCO Engineering CO., Ltd

     980,340         3,225   

Pohang Feul Cell Co. Ltd.

     2,235         (286

Pohang SPFC Co., Ltd.

     38,117         1,170   

POSWITH Co., Ltd.

     13,745         151   

BASYS INDUSTRY Co., Ltd.

     2,500         369   

POSTECH BD Newundertaking fund

             (1

POSBRO Co., Ltd.

             (54

POSCO AST

     365,682         4,972   

DaiMyung TMS Co., Ltd.

     6,265         (3,695

POSHIMETAL Co., Ltd.

     34,682         (28,857

Poscoene

             508   

POMIC Co., Ltd.

     21,111         317   

POSFINE Co., Ltd.

     2,285         (3,847

POS ECO HOUSING Co., Ltd.

     13,629         265   

Mapo high broad parking Co., Ltd.

             (355

Dakos Co., Ltd.

     225         (58

Steel Processing and Fabricating Center Co., LTD

     4,686         (2,156

POSCALCIUM Company, Ltd.

     106         (1,353

Plant Engineering service Technology Co., Ltd.

     6,259         354   

9Digit Co., Ltd.

     58,341         (308

Postech Early Stage Fund

             (31

Busan E&E Co., Ltd.

             127   

POSCO Family Strategy Funds

             290   

POREKA Co., Ltd.

     20,785         1,158   

Songdo SE Co., Ltd.

     2,761         77   

Posgreen Co., Ltd.

     2,944         (33

Daewoo International Corporation

     18,758,511         160,088   

POSCO LED Co., Ltd.

     14,063         (5,355

Gunsan SPFC Co., Ltd.

     53,797         (236

 

F-21


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Sales      Net income (loss)  
     (in millions of Won)  

POSCO NST Co., Ltd.

   202,334         (803

Pohang Scrap Recycling Distribution Center Co., Ltd.

     1,748         143   

PSC Energy Global Co., Ltd.

             (1,595

Suncheon Eco Trans Co., Ltd

             48   

Shinan Energy Co., Ltd.

             (56

Reco Metal Co., Ltd.

     6,761         (2,658

New Altec Co., Ltd

     92,849         638   

PONUTech Co., Ltd.

             (263

BLUE O&M Co., Ltd.

             (12

[Foreign]

     

POSCO America Corporation

     419,258         8,866   

POSCO AUSTRALIA PTY LTD

     136,144         283,875   

POSCO Canada Ltd.

     304,274         133,660   

POSCAN Elkveiw Coal Ltd.

               

POSCO Asia Co., Ltd.

     2,968,097         6,523   

Dalian POSCO Steel Co., Ltd

     90,990         (8,711

POSCO-CTPC Co., Ltd.

     134,930         1,320   

POSCO-JKPC Co., Ltd.

     87,203         1,405   

INTERNATIONAL BUSINESS CENTER CORPORATION

     25,889         11,655   

POSCO E&C Vietnam Co., Ltd.

     114,350         6,670   

Zhangjiagang Pohang Stainless Steel Co., Ltd.

     2,808,722         4,444   

POSCO (Guangdong) Steel Co., Ltd.

     275,521         (7,849

POSCO (Thailand) Company Ltd.

     231,144         1,227   

Myanmar POSCO Steel Co., Ltd

     30,967         5,885   

POSCO-JOPC Co., Ltd.

     92,296         768   

POSCO Investment Co., Ltd.

     10,792         10,509   

POSCO-MKPC SDN BHD

     177,822         1,763   

Qingdao Pohang Stainless Steel Co., Ltd.

     615,532         (3,110

POSCO (Suzhou) Automotive Processing Center Co., Ltd.

     384,705         11,046   

POSCO BIOVENTURES I, L.P.

             (4,226

PT. POSNESIA Stainless Steel Industry

             (28

POSEC Hawaii, Inc.

             (304

POSCO-China Qingdao Processing Center Co., Ltd.

     117,470         65   

POS-ORE PTY LTD

     250,347         132,737   

POSCO-China Holding Corp.

     173,639         3,617   

POSCO JAPAN Co., Ltd.

     1,686,385         13,518   

POS-CD PTY LTD

     22,575         557   

POS-GC PTY LTD

     10,263         (4,344

POSCO-India Private Limited

             (1,034

POSCO-India Pune Processing Center. Pvt. Ltd.

     211,417         (16,626

POSCO-JNPC Co., Ltd.

     207,654         716   

POSCO-CFPC Co., Ltd.

     529,788         227   

POSCO E&C CHINA Co., Ltd.

     104,055         1,898   

POSCO MPPC S.A. de C.V.

     316,446         (6,587

Zhangjigang Pohang Port Co., Ltd.

     6,244         222   

Qingdao Pos-metal Co., Ltd.

     79,732         13   

POSCO-VIETNAM Co., Ltd.

     962,490         (46,976

POSCO MEXICO S.A. DE C.V.

     396,897         (43,298

POSCO India Delhi Steel Processing Centre Private Limited

     129,434         (9,824

POSCO-Poland Wroclaw Processing Center Sp. z o. o.

     71,871         (1,483

POS-NP PTY LTD

     48,404         9,480   

POSCO-Vietnam Processing Center Co., Ltd.

     159,369         26   

POSCO (Chongqing) Automotive Processing Center Co, Ltd.

     62,795         (1,622

SUZHOU POSCO-CORE TECHNOLOGY CO., LTD.

     96,008         781   

POSCO-JYPC Co., Ltd.

     102,700         781   

POSCO-Malaysia SDN. BHD.

     140,709         (4,114

 

F-22


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Sales      Net income (loss)  
     (in millions of Won)  

POS-Minerals Corporation

             (808

POSCO (Wuhu) Automotive Processing Center Co., Ltd.

   92,554         618   

POSCO Engineering and Construction India Private Limited

     4,966         1,135   

POSCO E&C SMART S DE RL DE CV

     4,421         135   

POSCO Philippine Manila Processing Center, Inc.

     45,680         266   

Dalian POSCO ICT-DONGFANG Engineering Co., Ltd.

     5,104         382   

SANPU TRADING Co., Ltd.

     73         3   

Zhangjiagang BLZ Pohang International Trading

     100,833         116   

POSCO MEXICO HUMAN TECH S.A. de C.V.

     5,378         221   

POSCO MESDC S.A. DE C.V.

     5,638         110   

POSCO Gulf Logistics LLC.

               

POSCO ICT-China

     4,920         114   

DWEMEX, S.A.DE.C.V.

     2         (29

POSCO MPC Servicios S.A. de C.V.

     4,902         90   

EUROTALY S.A.

     24         (898

Pos-Sea Pte Ltd

     62,235         256   

POSCO Europe Steel Distribution Center

     13,354         322   

VECTUS LIMITED

     3,560         (1,530

POSCO VST CO., LTD.

     264,616         (10,669

POSCO Maharashtra Steel Private Limited

     44         2,036   

POSCO India Chennai Steel Processing Centre Pvt. Ltd.

     134,409         (3,232

POSCO TNPC Otomotiv Celik San. Ve Tic. A.S

     38,729         (3,971

POSCO Vietnam Ha Noi Processing Center Co., Ltd.

     55,239         902   

POSCO (Liaoning) Automotive Processing Center Co., Ltd.

     117,395         3,267   

POSCO-Indonesia Jakarta Processing Center

     64,597         216   

POSCO E&C VENEZUELA C.A.

               

Motta Resources Indonesia

     458         (3,854

POSCO TMC INDIA PRIVATE LIMITED

     15,186         (48

POSCO America Alabama Processing Center Co., Ltd.

     85,381         (858

PT PEN INDONESIA

     13,962         (267

POSCO (Yantai) Automotive Processing Center Co., Ltd.

     32,301         172   

POSCO India Steel Distribution Center Private Ltd.

     786         (427

POSCO China Dalian Plate Processing Center Co., Ltd.

     66,113         (165

POSCO-South Asia Company Limited

     8,015         1,039   

POSCO SS-VINA

             (1,122

POSCO NCR Coal Ltd.

               

POSCO WA PTY LTD

             (33,142

POSCO Engineering and Construction — UZ

     2,046         104   

POSCO AUSTRALIA GP PTY LIMITED

             (8

Daewoo International (America) Corp.

     984,378         5,372   

Daewoo International (Deutschland) GmbH.

     482,585         314   

Daewoo International Japan Corp.

     804,864         981   

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

     902,315         481   

Daewoo Italia S.r.l.

     361,821         145   

Daewoo Cement (Shandong) Co., Ltd.

     133,502         20,361   

Daewoo (China) Co., Ltd.

     54,521         726   

PT. RISMAR Daewoo Apparel

     58,182         1,246   

DAEWOO TEXTILE FERGANA LLC

     132,866         (11,994

DAEWOO TEXTILE BUKHARA LLC

     51,312         (11,500

DAEWOO INTERNATIONAL AUSTRALIA HOLDINGS PTY LTD

     1,935         199   

Daewoo Paper Manufacturing Co., Ltd.

     76,632         (5,210

Tianjin Daewoo Paper Manufacturing Co., Ltd.

               

POSCO MAURITIUS LIMITED

             (22

PT. KRAKATAU POSCO

             (2,385

Myanmar Daewoo Limited

     1,373         152   

DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.

     240,448         299   

Daewoo International Guangzhou Corp.

     61,554         (1,265

 

F-23


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Sales      Net income (loss)  
     (in millions of Won)  

Daewoo Energy Central Asia

             

DAEWOO STC VINA LTD.

     9,435         94   

MYANMAR Daewoo International Ltd.

     11,947         759   

DAYTEK ELECTRONICS CORP.

               

Daewoo (M) SDN. BHD.

               

Daewoo CANADA LTD.

               

Daewoo EL SALVADOR S.A. DE C.V.

               

GEZIRA TANNERY CO., LTD.

               

POSCO (Zhangjiagang) STS Processing Center Co., Ltd

     67,175         15   

Daewoo International (M) SDN BHD

     21,190         157   

Daewoo International SHANGHAI CO., LTD.

     91,541         1,286   

PGSF, L.P.

             280   

Xenesys Inc.

     2,494         (3,865

Daewoo International INDIA Private Ltd.

     3,343         69   

TECHREN Solar, LLC

             (506

PT. POSCO E&C INDONESIA

     46,665         2,114   

HUME COAL PTY LTD

             (9

Daewoo HANDELS GmbH

               

POSCO FOUNDATION

             3   

EPC EQUITIES LLP

     438         (2,743

SANTOS CMI CONSTRUCTION TRADING LLP

     2,750         (1,323

SANTOS CMI INC. USA

     11,604         (155

SANTOS CMI ENGENHARIA E CONSTRUCOES LTDA

     14,823         7,484   

SANTOS CMI PERU S.A.

     59,091         4,779   

SANTOS CMI COSTA RICA S.A.

     1,228         (1,794

SANTOS CMI CONSTRUCCIONES S.A.

             (9

GENTECH INTERNATIONAL INC.

     1,800         728   

EPC INVESTMENTS C.V.

             (6

INGENIERÍA Y CONSTRUCCIÓN HOLANDCO S.A.

             (2

ASESORÍA Y SERVICIOS EPC S.A. CHILE

     635         88   

SANTOSCMI S.A.

     34,879         (5,430

SANTOSCMI CONSTRUCCIONES DE CHILE S.A.

     13,009         1,703   

S&K-SANTOSCMI S.A. DE C.V.

     203         (208

COMPANIADEAUTOMATIZACION & CONTROL, GENESYS S.A.

     14,588         923   

VAUTIDAMERICAS S.A.

     1,765         141   

SANTOS CMI CONSTRUCTION ARGENTINA S.A.

             1   

POSCO ENGINEERING & CONSTRUCTION DO BRAZIL LTDA.

     6,200         (465

POSCO Electrical Steel India Private Limited

             346   

Daewoo International Cameroon S.A.

               

POSCO ASSAN TST STEEL INDUSTRY

             1,724   

HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.

             (3,466

POSCO Klappan Coal Ltd.

               

DAESAN (Cambodia) Co., Ltd.

             (946

Brazil Sao Paulo Steel Processing Center

               

POSCO(Dalian) IT Center Development Co., Ltd.

             (1,464

PT.POSCO Resources Indonesia

             (415

PT.POSCO ICT INDONESIA

             (80

PT. POSCO MTECH INDONESIA

     3,329         61   

PT. KRAKATAU POSCO ENERGY

             (134

POSCO RUS LLC

             (273

POSCO Thainox Public Company Limited

     401,257         (22,466

DAEWOO INTERNATIONAL SHANGHAI WAIGAOQIAO CO., LTD.

     22,354         343   

PT. Bio Inti Agrindo

             (1,486

POSCO ENGINEERING AND CONSTRUCTION AUSTRALIA (POSCO E&C AUSTRALIA) PTY LTD

             (237

POSCO-TISCO (JILIN) PROCESSING CENTER Co., Ltd.

             (375

Hunchun Posco Hyundai International Logistics Complex Development Co., Ltd

             (229

USA-SRDC

               

Daewoo International Vietnam Co., Ltd.

               

 

F-24


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) December 31, 2012

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

[Domestic]

             

POSCO ENGINEERING & CONSTRUCTION., LTD.

   7,893,306         5,007,149         2,886,157        7,041,300         346,107   

POSCO Processing & Service

     1,084,473         456,338         628,135        2,770,764         8,087   

POSCO COATED & COLOR STEEL Co., Ltd.

     468,910         294,718         174,192        853,499         (47,444

POSCO Plant Engineering Co., Ltd.

     255,831         162,662         93,169        523,227         2,121   

POSCO ICT

     802,675         527,641         275,034        1,017,662         40,089   

POSCO Research Institute

     34,138         9,239         24,899        46,340         535   

POSMATE

     83,439         33,998         49,441        12,667         685   

POSCO A&C

     87,019         40,382         46,637        160,667         (6,227

POSCO Specialty Steel Co., Ltd.

     1,496,939         484,585         1,012,354        1,405,667         69,091   

POSTECH Venture Capital Co., Ltd.

     107,796         501         107,295        6,475         1,438   

eNtoB Corporation

     103,000         71,712         31,288        607,230         1,839   

POSCO CHEMTECH

     533,402         134,298         399,104        1,292,356         78,554   

POSCO-Terminal Co., Ltd.

     120,483         14,806         105,677        111,275         25,796   

POSCO M-TECH

     340,877         169,150         171,727        618,316         14,737   

POSCO ENERGY CO., LTD.

     3,315,742         2,374,622         941,120        2,805,208         177,796   

Postech 2006 Energy Fund

     26,000         950         25,050        6,141         385   

POSCO TMC Co., Ltd.

     253,987         163,175         90,812        268,574         152   

POSCO NIPPON STEEL RHF JOINT VENTURE.CO., Ltd.

     149,117         104,272         44,845        72,607         13,380   

MegaAsset Co., Ltd.

     112,729         64,252         48,477        14,274         1,402   

POSCO Engineering CO., Ltd

     562,645         383,154         179,491        881,279         1,141   

Pohang SPFC Co., Ltd.

     29,514         22,941         6,573        75,513         816   

POSWITH Co., Ltd.

     5,140         2,366         2,774        14,873         105   

POSCO AST

     453,410         298,192         155,218        372,185         4,564   

POSHIMETAL Co., Ltd.

     341,640         321,197         20,443        155,274         (19,369

Poscoene

     22,787         52         22,735                407   

POSFINE Co., Ltd.

     58,480         46,640         11,840        19,651         (2,304

POSCO Humans

     8,274         1,822         6,452        14,513         108   

Mapo Hibroad Parking co., Ltd.

     1,561         281         1,280                (285

Dakos Co., Ltd.

     670         191         479        245         16   

Steel Processing and Fabricating Center Co., LTD

     85,814         76,909         8,905        39,472         (6,539

POSCALCIUM Company, Ltd.

     7,637         6,528         1,109        155         (1,790

Plant Engineering service Technology Co., Ltd.

     3,620         1,316         2,304        8,332         477   

9Digit Co., Ltd.

     27,458         22,798         4,660        289,912         (431

Postech Early Stage Fund

     9,869                 9,869        163         (100

Busan E&E Co,. Ltd.

     79,054         37,470         41,584        67,419         (745

POSCO Family Strategy Fund

     66,390                 66,390        1,368         362   

POREKA Co., Ltd.

     16,785         12,967         3,818        40,560         1,389   

Daewoo International Corporation

     6,989,140         4,866,242         2,122,898        17,011,373         306,041   

POSCO LED Co., Ltd.

     37,735         23,523         14,212        41,278         (8,205

Gunsan SPFC Co., Ltd.

     61,683         41,606         20,077        70,443         (692

Pohang Scrap Recycling Distribution Center Co., Ltd.

     19,435         3,207         16,228        5,657         1,270   

PSC Energy Global Co., Ltd.

     61,168                 61,168                (3,060

Suncheon Eco Trans Co., Ltd

     49,496         27,118         22,378                (251

Reco Metal Co., Ltd.

     32,959         35,547         (2,588     42,482         (4,736

New Altec Co., Ltd

     126,527         28,488         98,039        95,474         1,376   

PONUTech Co., Ltd.

     133,854         97,105         36,749        53,662         (5,825

BLUE O&M Co., Ltd.

     900         21         879        232         (110

Tamra Offshore Wind Power Co., Ltd

     20,074         2         20,072                (56

 

F-25


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

POS-HiAL

   47,314         32,852         14,462                (1,158

MCM Korea

     50                 50                  

Tancheonene Co., Ltd

     5,606         17         5,589                (165

[Foreign]

             

POSCO America Corporation

     510,392         333,246         177,146        803,368         (1,338

POSCO AUSTRALIA PTY LTD

     1,195,398         477,894         717,504        118,874         23,634   

POSCO Canada Ltd.

     555,972         47,925         508,047        205,885         62,584   

POSCO Asia Co., Ltd.

     586,971         550,913         36,058        2,616,390         2,148   

Dalian POSCO Steel Co., Ltd.

     29,078         47,280         (18,202     18,615         (9,958

POSCO-CTPC Co., Ltd.

     82,206         50,391         31,815        132,510         1,481   

POSCO-JKPC Co., Ltd.

     79,788         61,793         17,995        115,531         3,108   

INTERNATIONAL BUSINESS CENTER CORPORATION

     81,465         46,210         35,255        25,340         10,987   

POSCO E&C Vietnam Co., Ltd.

     127,161         102,831         24,330        187,325         14,331   

Zhangjiagang Pohang Stainless Steel Co., Ltd.

     1,340,336         867,576         472,760        2,786,474         (79,016

POSCO (Guangdong) Steel Co., Ltd.

     141,727         102,418         39,309        221,738         (20,980

POSCO (Thailand) Company Limited

     155,836         110,059         45,777        255,611         5,611   

Myanmar POSCO Steel Co., Ltd

     23,699         7,810         15,889        19,484         2,569   

POSCO-JOPC Co., Ltd.

     78,402         73,817         4,585        114,432         647   

POSCO Investment Co., Ltd.

     718,078         621,268         96,810        13,461         6,000   

POSCO-MKPC SDN BHD

     159,191         111,749         47,442        232,088         107   

Qingdao Pohang Stainless Steel Co., Ltd.

     206,941         117,753         89,188        514,354         (17,445

POSCO (Suzhou) Automotive Processing Center Co., Ltd.

     284,046         195,684         88,362        407,513         8,425   

POSCO BIOVENTURES I, L.P.

     7,571                 7,571                (1,301

PT. POSNESIA Stainless Steel Industry

     14,978         1,926         13,052                (55

POSEC Hawaii, Inc.

     350         2         348                (35

POSCO-China Qingdao Processing Center Co., Ltd.

     47,351         33,119         14,232        111,017         (623

POS-ORE PTY LTD

     59,784         11,043         48,741        163,407         75,389   

POSCO-China Holding Corp.

     438,538         184,127         254,411        138,067         3,055   

POSCO JAPAN Co., Ltd.

     852,406         735,583         116,823        1,659,045         16,218   

POS-CD PTY LTD

     68,681         17,931         50,750        12,869         (9,603

POS-GC PTY LTD

     83,998         49,598         34,400        20,160         (10,905

POSCO-India Private Limited

     131,409         306         131,103                (768

POSCO-India Pune Processing Center. Pvt. Ltd.

     179,112         164,386         14,726        252,296         (6,061

POSCO-JEPC Co., Ltd.

     221,086         200,769         20,317        351,377         4,769   

POSCO-CFPC Co., Ltd.

     218,881         177,426         41,455        515,773         727   

POSCO E&C CHINA Co., Ltd.

     145,448         101,733         43,715        169,956         8,459   

POSCO MPPC S.A. de C.V.

     204,770         178,108         26,662        359,768         (7,137

Zhangjigang Pohang Port Co., Ltd.

     23,889         9,070         14,819        6,542         255   

Qingdao Pos-metal Co., Ltd.

     10,429         9,628         801        59,165         (1,313

POSCO-VIETNAM Co., Ltd.

     572,453         539,426         33,027        805,214         (46,619

POSCO MEXICO S.A. DE C.V.

     772,518         538,907         233,611        430,986         (12,354

POSCO India Delhi Steel Processing Centre Private Limited

     100,153         81,218         18,935        142,038         977   

POSCO-Poland Wroclaw Processing Center Sp. z o. o.

     56,394         37,399         18,995        97,381         5,875   

POS-NP PTY LTD

     62,868         26,259         36,609        28,872         (4,363

POSCO-Vietnam Processing Center Co., Ltd.

     64,551         39,418         25,133        137,641         58   

POSCO (Chongqing) Automotive Processing Center Co., Ltd.

     63,038         54,523         8,515        93,615         (729

SUZHOU POSCO-CORE TECHNOLOGY CO., LTD.

     52,746         29,180         23,566        83,910         (1,055

POSCO-Malaysia SDN. BHD.

     74,431         96,028         (21,597     153,122         1,529   

 

F-26


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

POS-Minerals Corporation

   213,365         108,246         105,119                (496

POSCO (Wuhu) Automotive Processing Center Co., Ltd.

     62,067         39,958         22,109        86,998         (363

POSCO Engineering and Construction India Private Limited

     33,536         26,578         6,958        56,037         2,990   

POSCO E&C SMART S DE RL DE CV

     12,607         10,693         1,914        41,717         1,326   

POSCO Philippine Manila Processing Center, Inc.

     23,737         14,091         9,646        35,897         673   

POSCO Gulf SFC LLC

     41,150         33,676         7,474        24,891         (3,297

Dalian POSCO ICT-DONGFANG Engineering Co., Ltd.

     6,358         1,418         4,940        5,109         270   

SANPU TRADING Co., Ltd.

     1,753         2         1,751        86         21   

Zhangjiagang BLZ Pohang International Trading

     9,150         4,408         4,742        61,529         192   

POSCO MEXICO HUMAN TECH S.A. de C.V.

     693         708         (15     6,777         (148

POSCO MESDC S.A. DE C.V.

     12,860         717         12,143        5,654         287   

POSCO ICT-China

     1,922         1,286         636        6,528         227   

DWEMEX, S.A.DE.C.V.

     211         19         192                29   

POSCO MPC Servicios S.A. de C.V.

     925         697         228        6,077         62   

POSCO-Uruguay S.A

     24,835         226         24,609        3         (1,842

Pos-Sea Pte Ltd

     9,571         7,126         2,445        90,158         556   

POSCO Europe Steel Distribution Center

     7,270         1,460         5,810        13,054         399   

VECTUS LIMITED

     2,859         12,164         (9,305     3,365         (7,325

POSCO VST CO., LTD.

     405,882         353,058         52,824        348,339         (30,977

POSCO Maharashtra Steel Private Limited

     942,982         754,791         188,191        97,948         (41,512

POSCO India Chennai Steel Processing Centre Pvt. Ltd.

     129,030         119,375         9,655        187,797         1,453   

POSCO TNPC Otomotiv Celik San. Ve Tic. A.S

     51,139         40,429         10,710        53,246         1,841   

POSCO Vietnam Ha Noi Processing Center Co., Ltd.

     46,382         40,764         5,618        72,321         (1,232

POSCO (Liaoning) Automotive Processing Center Co., Ltd.

     71,502         48,643         22,859        114,046         1,143   

POSCO-Indonesia Jakarta Processing Center

     79,711         57,569         22,142        76,506         (1,402

POSCO E&C VENEZUELA C.A.

     128                 128                  

Motta Resources Indonesia

     8,148         15,508         (7,360     1,109         (1,603

POSCO TMC INDIA PRIVATE LIMITED

     9,004         6,823         2,181        17,192         (45

POSCO America Alabama Processing Center Co., Ltd.

     49,178         37,475         11,703        109,454         (397

PT PEN INDONESIA

     6,960         6,936         24        15,296         (101

POSCO (Yantai) Automotive Processing Center Co., Ltd.

     35,773         20,063         15,710        57,464         442   

POSCO India Steel Distribution Center Private Ltd.

     4,759         2,698         2,061        57         (72

POSCO China Dalian Plate Processing Center Co., Ltd.

     86,264         55,531         30,733        37,501         (7,020

POSCO-South Asia Company Limited

     13,212         183         13,029        8,354         72   

POSCO SS-VINA

     156,811         4,050         152,761                (2,602

POSCO WA PTY LTD

     235,224         51         235,173                (39,181

POSCO Engineering and Construction — UZ

     8,589         7,968         621        1,076         334   

POSCO AUSTRALIA GP PTY LIMITED

     62,768         4         62,764                (67,392

Daewoo International (America) Corp.

     332,620         288,716         43,904        1,040,183         4,767   

Daewoo International (Deutschland) GmbH.

     104,259         94,087         10,172        324,061         739   

 

F-27


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

Daewoo International Japan Corp.

   236,056         228,631         7,425        749,714         273   

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

     80,294         75,966         4,328        708,613         13   

Daewoo Italia S.r.l.

     103,710         99,911         3,799        262,784         383   

Daewoo (China) Co., Ltd.

     56,225         9,614         46,611        118,971         683   

DAEWOO TEXTILE FERGANA LLC

     86,781         65,730         21,051        127,432         9,214   

DAEWOO TEXTILE BUKHARA LLC

     54,780         40,581         14,199        44,382         2,615   

DAEWOO INTERNATIONAL AUSTRALIA HOLDINGS PTY LTD

     154,829         26,482         128,347        7,539         (3,464

Daewoo Paper Manufacturing Co., Ltd.

     70,572         70,339         233        69,880         (4,132

Tianjin Daewoo Paper Manufacturing Co., Ltd.

     13,739         31,105         (17,366               

POSCO MAURITIUS LIMITED

     23,316         2         23,314                (15

PT. KRAKATAU POSCO

     1,912,134         969,415         942,719                (29,063

Myanmar Daewoo Limited

     5,671         3         5,668        1,305         473   

DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.

     80,432         75,226         5,206        262,230         1,412   

Daewoo International Guangzhou Corp.

     18,292         14,120         4,172        66,808         (4,854

DAEWOO STC VINA LTD.

     1,736         89         1,647        1,856         96   

POSCO (Zhangjiagang) STS Processing Center Co., Ltd

     114,433         102,240         12,193        265,850         519   

Daewoo International (M) SDN BHD

     9,145         6,689         2,456        37,244         213   

Daewoo International SHANGHAI CO., LTD.

     38,374         30,621         7,753        63,039         (2,746

PGSF, L.P.

     5,669         2         5,667                731   

Xenesys Inc.

     10,162         1,404         8,758        4,302         (1,083

Daewoo International INDIA Private Ltd.

     2,279         272         2,007        2,382         223   

TECHREN Solar, LLC

     6,015                 6,015                (2,486

PT. POSCO E&C INDONESIA

     100,543         78,852         21,691        247,331         20,302   

HUME COAL PTY LTD

     36,681         1,194         35,487        48         (210

POSCO FOUNDATION

     187         2         185                (4

EPC EQUITIES LLP

     36,602         36,636         (34             (141

SANTOS CMI CONSTRUCTION TRADING LLP

     39,148         30,527         8,621        15,299         8,963   

SANTOS CMI INC. USA

     43,496         47,350         (3,854     60,152         (5,013

SANTOS CMI ENGENHARIA E CONSTRUCOES LTDA

     9,338         17,629         (8,291     20,029         (17,431

SANTOS CMI PERU S.A.

     19,937         39,932         (19,995     69,415         (26,391

SANTOS CMI COSTA RICA S.A.

     10,720         10,469         251                (99

SANTOS CMI CONSTRUCCIONES S.A.

     18         7         11                (25

GENTECH INTERNATIONAL INC.

     1,972         1,568         404        1,008         227   

EPC INVESTMENTS C.V.

     107         24         83                (8

INGENIERÍA Y CONSTRUCCIÓN HOLANDCO S.A.

     103         4         99                (6

ASESORÍA Y SERVICIOS EPC S.A.

     891         468         423        1,691         250   

SANTOSCMI S.A.

     58,219         44,584         13,635        46,738         1,737   

SANTOSCMI CONSTRUCCIONES DE CHILE S.A.

     9,533         3,608         5,925        1,608         178   

S&K-SANTOSCMI S.A. DE C.V.

     84         149         (65     335         (158

COMPANIADEAUTOMATIZACION & CONTROL, GENESYS S.A.

     8,648         6,018         2,630        16,926         465   

VAUTIDAMERICAS S.A.

     4,866         2,217         2,649        1,445         (451

SANTOS CMI CONSTRUCTION ARGENTINA S.A.

     58         24         34                4   

POSCO ENGINEERING & CONSTRUCTION DO BRAZIL LTDA.

     343,882         322,576         21,306        59,862         11,470   

POSCO Electrical Steel India Private Limited

     132,529         94,046         38,483                (1,343

 

F-28


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

Daewoo International Cameroon S.A.

   2,064         25         2,039                  

POSCO ASSAN TST STEEL INDUSTRY

     377,066         230,778         146,288                1,072   

HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.

     147,685         172,085         (24,400             (21,103

DAESAN (CAMBODIA) Co., Ltd.

     27,979         33,111         (5,132             (18

Brazil Sao Paulo Steel Processing Center

     39,794         23,210         16,584        4,863         (1,634

POSCO (Dalian) IT Center Development Co., Ltd.

     176,026         37,908         138,118                (4,691

PT. POSCO RESOURCES INDONESIA

     2,448         48         2,400                (1,147

PT. POSCO ICT INDONESIA

     3,624         3,185         439        4,335         (324

PT. POSCO MTECH INDONESIA

     11,577         6,620         4,957        9,631         (34

PT. KRAKATAU POSCO ENERGY

     143,452         55,475         87,977                (949

POSCO RUS LLC

     12,384         8,324         4,060        4,260         505   

POSCO Thainox Public Company Limited

     473,048         153,836         319,212        502,041         (5,532

DAEWOO INTERNATIONAL SHANGHAI WAIGAOQIAO CO., LTD.

     11,003         10,241         762        161,675         255   

PT. Bio Inti Agrindo

     35,514         21,447         14,067        404         828   

POSCO ENGINEERING AND CONSTRUCTION AUSTRALIA (POSCO E&C AUSTRALIA) PTY LTD

     35,552         34,986         566        52,143         836   

POSCO-TISCO (JILIN) PROCESSING CENTER Co., Ltd.

     26,258         9,203         17,055        1,497         (514

Hunchun Posco Hyundai International Logistics Complex Development Co., Ltd

     46,923         8         46,915                (829

USA-SRDC

     311         21         290                  

Daewoo International Vietnam Co., Ltd.

     4,453         149         4,304        2,096         14   

PT.Krakatau Posco Chemtech Calcination

     23,217         1,279         21,938                (722

POSCO AFRICA (PROPRIETARY) LIMITED

     3,580         112         3,468                (1,509

EPC INGENIERIA & SERVICIOS DE COSTA RICA SA

     1,497         1,553         (56     1,973         (73

POSCO ICT BRASIL

     1,983         1,471         512                (336

LA-SRDC

     1,274         758         516        5,128         62   

DONG FANG JIN HONG

     267,838         97,208         170,630                (1,233

PRODUCTOS OFERTAS SISTEMAS Y COMERCIALIZADORA ORIENTAL S DE RL DE CV

     177         175         2        168         2   

POSCO AMERICA COMERCIALIZADORA S DE RL DE CV

     309         649         (340     339         (408

POSCO (Guangdong) Automotive Steel Co., Ltd.

     351,910         203,033         148,877        1,061         (9,197

POSCO MAPC SA DE CV

     6,427                 6,427                  

 

F-29


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) December 31, 2013

 

Company

   Assets      Liabilities      Equity (deficit)      Sales      Net income (loss)  
     (in millions of Won)  

[Domestic]

              

POSCO ENGINEERING & CONSTRUCTION., LTD.

   6,853,318         3,885,127         2,968,191         8,028,269         98,714   

POSCO Processing & Service

     1,061,686         367,791         693,895         2,745,727         35,941   

POSCO COATED & COLOR STEEL Co., Ltd.

     449,661         280,097         169,564         821,183         (5,173

POSCO ICT

     733,968         327,728         406,240         1,050,747         33,796   

POSCO Research Institute

     36,841         10,051         26,790         58,519         1,167   

POSMATE

     214,286         56,247         158,039         118,489         8,501   

POSCO A&C

     98,502         56,578         41,924         154,053         (6,076

POSCO Specialty Steel Co., Ltd.

     1,792,904         533,797         1,259,107         1,316,781         31,703   

POSTECH Venture Capital Co., Ltd.

     118,603         11,186         107,417         11,506         3,506   

eNtoB Corporation

     89,371         56,789         32,582         648,761         1,414   

POSCO CHEMTECH

     588,671         139,399         449,272         1,280,591         59,953   

POSCO-Terminal Co., Ltd.

     134,787         9,443         125,344         104,586         22,152   

POSCO M-TECH

     346,577         193,375         153,202         902,541         (10,649

POSCO ENERGY CO., LTD.

     4,022,984         2,433,704         1,589,280         2,901,117         143,976   

POSCO TMC Co., Ltd.

     209,745         117,890         91,855         319,580         447   

POSCO NIPPON STEEL RHF JOINT VENTURE. CO., Ltd.

     139,612         92,134         47,478         56,789         2,601   

MegaAsset Co., Ltd.

     136,387         87,750         48,637         83,809         183   

POSCO Engineering CO., Ltd

     608,624         435,380         173,244         1,013,115         10,286   

POSCO AST

     508,189         354,591         153,598         611,458         (3,006

POSHIMETAL Co., Ltd.

     359,240         350,158         9,082         179,550         (12,109

Poscoene

     22,447         91         22,356                 66   

POSFINE Co., Ltd.

     58,252         44,852         13,400         28,974         1,560   

POSCO Humans

     13,691         4,179         9,512         33,116         286   

Mapo Hibroad Parking co., Ltd.

     1,544         300         1,244                 (36

Steel Processing and Fabricating Center Co., LTD

     169,437         136,488         32,949         194,018         (2,558

Plant Engineering service Technology Co., Ltd.

     6,754         2,970         3,784         10,731         1,385   

Busan E&E Co,. Ltd.

     113,287         73,609         39,678         136,279         (1,820

POSCO Family Strategy Fund

     61,033         7         61,026         1,082         (5,298

POREKA Co., Ltd.

     19,403         15,468         3,935         23,961         69   

Daewoo International Corporation

     7,739,676         5,524,030         2,215,646         16,601,358         132,541   

POSCO LED Co., Ltd.

     57,561         50,419         7,142         60,693         (7,029

Pohang Scrap Recycling Distribution Center Co., Ltd.

     17,072         511         16,561         5,530         734   

PSC Energy Global Co., Ltd.

     96,058                 96,058                 (13,890

Suncheon Eco Trans Co., Ltd

     67,768         46,467         21,301                 (1,065

New Altec Co., Ltd

     131,244         34,473         96,771         81,318         (1,366

PONUTech Co., Ltd.

     117,033         80,881         36,152         56,151         (560

Tamra Offshore Wind Power Co., Ltd

     26,728                 26,728                 (12

POS-HiAL

     59,836         43,460         16,376                 (2,521

IT Engineering

     7,026         3,349         3,677         11,293         133   

[Foreign]

              

POSCO America Corporation

     360,278         307,874         52,404         737,584         (126,699

POSCO AUSTRALIA PTY LTD

     971,471         328,455         643,016         117,481         74,784   

POSCO Canada Ltd.

     589,015         100,337         488,678         143,485         48,611   

POSCO Asia Co., Ltd.

     760,306         721,090         39,216         2,861,848         3,829   

POSCO-CTPC Co., Ltd.

     87,914         51,514         36,400         127,558         4,526   

POSCO-JKPC Co., Ltd.

     66,374         50,347         16,027         107,220         1,717   

INTERNATIONAL BUSINESS CENTER CORPORATION

     75,459         41,476         33,983         24,275         9,894   

 

F-30


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

POSCO E&C Vietnam Co., Ltd.

   263,042         214,573         48,469        363,321         25,364   

Zhangjiagang Pohang Stainless Steel Co., Ltd.

     1,305,878         806,051         499,827        2,935,626         21,467   

POSCO (Guangdong) Steel Co., Ltd.

     128,859         84,435         44,424        211,606         4,715   

POSCO (Thailand) Company Limited

     119,445         76,044         43,401        220,471         1,471   

Myanmar POSCO Steel Co., Ltd

     19,884         3,318         16,566        14,001         932   

POSCO-JOPC Co., Ltd.

     54,026         49,524         4,502        97,003         906   

POSCO Investment Co., Ltd.

     802,503         702,337         100,166        13,962         4,949   

POSCO-MKPC SDN BHD

     136,957         92,539         44,418        211,330         1,058   

Qingdao Pohang Stainless Steel Co., Ltd.

     191,829         100,902         90,927        396,564         1,783   

POSCO (Suzhou) Automotive Processing Center Co., Ltd.

     300,725         187,070         113,655        458,113         22,798   

POSCO BIOVENTURES I, L.P.

     7,255                 7,255                (206

PT. POSNESIA Stainless Steel Industry

     11,568                 11,568                (1,340

POSEC Hawaii, Inc.

     314         7         307                (38

POSCO-China Qingdao Processing Center Co., Ltd.

     54,609         40,042         14,567        108,054         155   

POS-ORE PTY LTD

     43,442         2,642         40,800        130,819         72,845   

POSCO-China Holding Corp.

     360,809         108,315         252,494        145,469         (21,932

POSCO JAPAN Co., Ltd.

     756,571         649,824         106,747        1,379,727         11,868   

POS-CD PTY LTD

     55,347         14,354         40,993        22,178         (2,173

POS-GC PTY LTD

     55,150         45,074         10,076        8,411         (21,444

POSCO-India Private Limited

     115,183         311         114,872                620   

POSCO-India Pune Processing Center. Pvt. Ltd.

     143,286         139,149         4,137        266,832         (9,619

POSCO-JEPC Co., Ltd.

     165,310         147,355         17,955        299,848         1,780   

POSCO-CFPC Co., Ltd.

     180,275         136,369         43,906        619,308         1,962   

POSCO E&C CHINA Co., Ltd.

     307,625         250,899         56,726        238,999         12,733   

POSCO MPPC S.A. de C.V.

     198,465         168,548         29,917        352,952         (3,433

Zhangjigang Pohang Port Co., Ltd.

     22,495         6,736         15,759        6,712         768   

Qingdao Pos-metal Co., Ltd.

     5,947         6,481         (534     50,774         (1,376

POSCO-VIETNAM Co., Ltd.

     541,348         509,293         32,055        714,841         (503

POSCO MEXICO S.A. DE C.V.

     794,853         594,916         199,937        359,422         (32,287

POSCO India Delhi Steel Processing Centre Private Limited

     91,704         83,949         7,755        145,625         (9,685

POSCO-Poland Wroclaw Processing Center Sp. z o. o.

     41,003         20,860         20,143        66,597         978   

POS-NP PTY LTD

     56,343         25,704         30,639        21,429         (364

POSCO-Vietnam Processing Center Co., Ltd.

     84,133         58,435         25,698        132,608         1,299   

POSCO (Chongqing) Automotive Processing Center Co., Ltd.

     67,049         52,512         14,537        115,253         5,634   

SUZHOU POSCO-CORE TECHNOLOGY CO., LTD.

     60,707         36,249         24,458        86,400         324   

POSCO-Malaysia SDN. BHD.

     82,648         104,940         (22,292     124,556         (2,730

POS-Minerals Corporation

     217,664         119,701         97,963                (5,815

POSCO (Wuhu) Automotive Processing Center Co., Ltd.

     69,625         44,536         25,089        113,011         2,758   

POSCO Engineering and Construction India Private Limited

     18,098         11,083         7,015        76,805         1,034   

POSCO E&C SMART S DE RL DE CV

     20,993         17,054         3,939        21,562         2,194   

POSCO Philippine Manila Processing Center, Inc.

     29,045         19,037         10,008        32,582         726   

POSCO Gulf SFC LLC

     53,831         48,441         5,390        23,585         (1,951

Dalian POSCO ICT-DONGFANG Engineering Co., Ltd.

     7,630         5,037         2,593        7,564         318   

SANPU TRADING Co., Ltd.

     1,806         3         1,803        70         24   

 

F-31


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

Zhangjiagang BLZ Pohang International Trading

   10,036         5,050         4,986        52,649         187   

POSCO MEXICO HUMAN TECH S.A. de C.V.

     1,035         908         127        9,267         101   

POSCO MESDC S.A. DE C.V.

     12,574         491         12,083        4,784         203   

POSCO ICT-China

     2,566         1,742         824        6,957         163   

DWEMEX, S.A. DE. C.V.

     183         19         164                (12

POSCO MPC Servicios S.A. de C.V.

     1,152         875         277        6,591         57   

POSCO-Uruguay S.A

     22,805         120         22,685        1         (891

Pos-Sea Pte Ltd

     12,724         9,855         2,869        122,439         675   

POSCO Europe Steel Distribution Center

     7,564         1,205         6,359        13,769         458   

POSCO ENGINEERING (THAILAND) CO., LTD.

     21,082         20,357         725        23,492         741   

VECTUS LIMITED

     954         15,565         (14,611     5,240         (5,155

POSCO VST CO., LTD.

     399,242         371,409         27,833        377,478         (24,136

POSCO Maharashtra Steel Private Limited

     942,836         832,247         110,589        224,385         (111,675

POSCO India Chennai Steel Processing Centre Pvt. Ltd.

     93,623         89,043         4,580        183,304         (4,247

POSCO TNPC Otomotiv Celik San. Ve Tic. A.S

     41,597         34,336         7,261        64,185         (1,923

POSCO Vietnam Ha Noi Processing Center Co., Ltd.

     56,855         50,358         6,497        110,108         995   

POSCO (Liaoning) Automotive Processing Center Co., Ltd.

     73,083         46,710         26,373        113,971         3,297   

POSCO-Indonesia Jakarta Processing Center

     106,838         89,768         17,070        80,534         (5,110

POSCO E&C VENEZUELA C.A.

     126                 126                  

Motta Resources Indonesia

     4,264         18,259         (13,995             (5,522

POSCO TMC INDIA PRIVATE LIMITED

     9,095         7,211         1,884        18,376         (29

POSCO America Alabama Processing Center Co., Ltd.

     46,816         34,958         11,858        107,780         339   

PT PEN INDONESIA

     4,681         3,707         974        20,037         (1,289

POSCO (Yantai) Automotive Processing Center Co., Ltd.

     45,863         27,874         17,989        64,784         2,124   

POSCO India Steel Distribution Center Private Ltd.

     6,063         4,413         1,650        5,526         (144

POSCO China Dalian Plate Processing Center Co., Ltd.

     88,337         67,680         20,657        29,843         (10,876

POSCO-South Asia Company Limited

     13,061         235         12,826        10,214         1,049   

POSCO SS-VINA

     505,785         264,716         241,069                (1,586

POSCO WA PTY LTD

     317,250         38         317,212                (6,338

POSCO Engineering and Construction — UZ

     3,964         3,039         925        2,690         406   

POSCO AUSTRALIA GP PTY LIMITED

     38,786         4         38,782                (18,523

POSCO YongXin Rare Earth Metal Co., Ltd.

     23,925         33,715         (9,790     3,962         (9,194

Daewoo International (America) Corp.

     417,955         372,011         45,944        1,046,283         2,788   

Daewoo International (Deutschland) GmbH.

     148,268         137,035         11,233        308,507         772   

Daewoo International Japan Corp.

     190,524         184,329         6,195        588,810         240   

 

F-32


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales     Net income (loss)  
     (in millions of Won)  

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

   125,927         122,160         3,767        659,805        (516

Daewoo Italia S.r.l.

     59,839         54,973         4,866        277,455        959   

Daewoo (China) Co., Ltd.

     84,004         36,556         47,448        250,006        244   

DAEWOO TEXTILE FERGANA LLC

     85,758         57,733         28,025        117,548        8,237   

DAEWOO TEXTILE BUKHARA LLC

     51,071         33,520         17,551        47,896        3,695   

DAEWOO INTERNATIONAL AUSTRALIA HOLDINGS PTY LTD

     134,238         27,044         107,194        21,629        (1,525

Daewoo Paper Manufacturing Co., Ltd.

     69,020         72,745         (3,725     61,163        (4,052

Tianjin Daewoo Paper Manufacturing Co., Ltd.

     13,916         31,505         (17,589              

POSCO MAURITIUS LIMITED

     24,071         5         24,066               (22

PT. KRAKATAU POSCO

     3,410,502         2,437,868         972,634               (41,921

Myanmar Daewoo Limited

     181         8         173        1,075        564   

DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.

     46,695         40,563         6,132        170,951        1,098   

Daewoo International Guangzhou Corp.

     9,668         9,077         591        54,403        (3,718

POSCO (Zhangjiagang) STS Processing Center Co., Ltd

     63,729         50,653         13,076        350,000        743   

Daewoo International (M) SDN BHD

     28,161         25,865         2,296        87,881        61   

Daewoo International SHANGHAI CO., LTD.

     66,677         58,754         7,923        44,490        73   

PGSF, L.P.

     7,464         2         7,462               1,948   

Xenesys Inc.

     7,996         2,337         5,659        3,877        (1,558

Daewoo International INDIA Private Ltd.

     4,771         3,008         1,763        18,805        43   

TECHREN Solar, LLC

     1,373         528         845               (8,531

PT. POSCO E&C INDONESIA

     54,139         44,327         9,812        217,879        17,145   

HUME COAL PTY LTD

     40,634         259         40,375        110        (282

POSCO FOUNDATION

     161                 161               (1

EPC EQUITIES LLP

     59,500         60,378         (878     (1,592     516   

SANTOS CMI CONSTRUCTION TRADING LLP

     35,562         37,836         (2,274            (11,991

SANTOS CMI INC. USA

     28,780         27,425         1,355        36,385        8,777   

SANTOS CMI ENGENHARIA E CONSTRUCOES LTDA

     12,997         17,017         (4,020     15,907        3,474   

SANTOS CMI PERU S.A.

     6,590         30,761         (24,171     13,187        (16,510

SANTOS CMI CONSTRUCCIONES S.A.

     26         14         12        17        3   

GENTECH INTERNATIONAL INC.

     981         323         658        1,901        293   

EPC INVESTMENTS C.V.

             24         (24            (11

SANTOSCMI S.A.

     39,513         24,918         14,595        87,597        907   

SANTOSCMI CONSTRUCCIONES DE CHILE S.A.

     6,159         270         5,889        1,833        191   

S&K-SANTOSCMI S.A. DE C.V.

     55         169         (114     468        (54

COMPANIADEAUTOMATIZACION & CONTROL, GENESYS S.A.

     10,872         7,530         3,342        19,350        754   

VAUTIDAMERICAS S.A.

     4,559         2,757         1,802        2,020        (839

POSCO ASSAN TST STEEL INDUSTRY

     622,336         527,955         94,381        122,071        (51,312

HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.

     146,186         168,589         (22,403            1,881   

POSCO ENGINEERING & CONSTRUCTION DO BRAZIL LTDA.

     261,738         234,275         27,463        122,020        8,683   

 

F-33


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

POSCO Electrical Steel India Private Limited

   141,462         109,955         31,507        1,769         (12,645

Daewoo International Cameroon S.A.

     3,060         36         3,024                  

DAESAN (CAMBODIA) Co., Ltd.

     27,556         32,635         (5,079             (24

Brazil Sao Paulo Steel Processing Center

     65,191         58,010         7,181        32,155         (7,930

POSCO(Dalian) IT Center Development Co., Ltd.

     235,918         99,127         136,791                (3,174

PT. POSCO RESOURCES INDONESIA

     1,089         60         1,029                (1,024

PT. POSCO ICT INDONESIA

     9,106         8,674         432        24,975         116   

PT. POSCO MTECH INDONESIA

     15,502         12,477         3,025        3,882         (2,207

PT. KRAKATAU POSCO ENERGY

     275,011         189,242         85,769                (945

POSCO RUS LLC

     17,301         14,256         3,045        2,052         (702

POSCO Thainox Public Company Limited

     398,449         114,365         284,084        403,382         (10,166

DAEWOO INTERNATIONAL SHANGHAI WAIGAOQIAO CO., LTD.

     26,123         25,310         813        109,757         43   

PT. Bio Inti Agrindo

     48,986         33,525         15,461        880         399   

POSCO ENGINEERING AND CONSTRUCTION AUSTRALIA (POSCO E&C AUSTRALIA) PTY LTD

     5,285         3,270         2,015        19,369         (3,567

POSCO-TISCO (JILIN) PROCESSING CENTER Co., Ltd.

     72,832         56,324         16,508        71,052         (790

Hunchun Posco Hyundai International Logistics Complex Development Co., Ltd

     58,355         26         58,329                369   

USA-SRDC

     411         5         406                140   

Daewoo International Vietnam Co., Ltd.

     4,031         123         3,908        3,537         (271

PT. Krakatau Posco Chemtech Calcination

     53,317         32,970         20,347        107         (1,694

POSCO AFRICA (PROPRIETARY) LIMITED

     44,885         31         44,854        129         5,592   

EPC INGENIERIA & SERVICIOS DE COSTA RICA SA

     5,101         1,266         3,835        6,519         4,016   

POSCO ICT BRASIL

     3,944         4,371         (427     829         (983

LA-SRDC

     1,373         725         648        6,276         144   

DONG FANG JIN HONG

     365,795         194,786         171,009                (1,856

PRODUCTOS OFERTAS SISTEMAS Y COMERCIALIZADORA ORIENTAL S DE RL DE CV

     127         125         2        531           

POSCO AMERICA COMERCIALIZADORA S DE RL DE CV

     13,000         14,424         (1,424     15,401         (1,160

POSCO (Guangdong) Automotive Steel Co., Ltd.

     402,115         277,747         124,368        141,877         (27,026

POSCO MAPC SA DE CV

     40,278         20,320         19,958        14,492         (1,186

POSCO-Mory-Maruyasu PIPE

     7,879         3,612         4,267        9         (371

PT KRAKATAU BLUE WATER

     592         285         307        337         20   

KRAKATAU POS-CHEM DONG-SUH CHEMICAL

     14,853         6,395         8,458                (768

Myanmar Daewoo International Corporation

     5,709         4         5,705        629         447   

POSCO-Italy Processing Center

     53,683         47,700         5,983        6,541         (1,732

 

F-34


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

   Assets      Liabilities      Equity (deficit)      Sales      Net income (loss)  
     (in millions of Won)  

DAEWOO E&P CANADA CORPORATION

   16,584         8,606         7,978         912         215   

Yingkou Puxiang Trade Co., Ltd.

     421         73         348         473         60   

Myanmar POSCO C&C Company, Limited.

     6,611         279         6,332                   

POSCO ICT VIETNAM

     1,659         982         677         498         194   

Daewoo Global Development. Pte., Ltd

     26,378         202         26,176                 (214

Myanmar POSCO Engineering & Construction Company, Limited.

     1,052                 1,052                 (3

POSCO COATED STEEL (THAILAND) CO., LTD

     5,874                 5,874                   

(d) Details of non-controlling interest as of December 31, 2012 and 2013 are as follows :

1) December 31, 2012

 

Company

  Daewoo
International
Corporation
    PT.
KRAKATAU
POSCO
    POSCO
Specialty
Steel Co., Ltd.
    POSCO
ENGINEERING &
CONSTRUCTION
CO., LTD.
    POSCO
ENERGY
Co., Ltd.
    Others     Total  
    (in millions of Won)  

Current assets

  4,142,307        165,929        420,353        6,239,531        804,453        9,153,256      20,925,829   

Non-current assets

    5,553,655        1,746,193        897,110        966,467        2,363,485        7,957,323        19,484,233   

Current liabilities

    (3,569,545     (175,718     (389,757     (4,227,440     (691,825     (8,706,504     (17,760,789

Non-current liabilities

    (1,739,130     (793,686     (95,357     (944,170     (1,688,581     (2,385,111     (7,646,035

Equity

    4,387,287        942,718        832,349        2,034,388        787,532        6,018,964        15,003,238   

Non-controlling interests

    1,741,207        282,815        43,785        213,094        86,435        1,308,989        3,676,325   

Sales

    16,996,730               1,405,667        7,041,300        2,805,208        25,029,616        53,278,521   

Profit for the period

    (143,667     (29,063     69,078        278,566        174,539        (108,430     241,023   

Profit (loss) attributable to non-controlling interests

    (57,018     (8,719     3,634        29,179        19,156        (13,733     (27,501

Cash flows from operating activities

    254,061        (20,775     8,376        (16,465     50,179        56,375        331,751   

Cash flows from investing activities

    265,091        (287,476     (2,394     (29,694     (62,721     (409,440     (526,634

Cash flows from financing activities (before dividends to non-controlling interest)

    (541,778     273,209        (3,071     20,832        11,235        341,974        102,400   

Dividend to non-controlling interest

    (8,190            (1,597     (686            (5,098     (15,571

Effect of exchange rate fluctuation on cash held

    (74     (2,306            (256            (15,191     (17,827

Net increase in cash and cash equivalents

    (30,891     (37,348     1,314        (26,269     (1,307     (31,380     (125,881

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) December 31, 2013

 

Company

  Daewoo
International
Corporation
    PT.
KRAKATAU
POSCO
    POSCO
Specialty
Steel Co., Ltd.
    POSCO
ENGINEERING &
CONSTRUCTION
CO., LTD.
    POSCO
ENERGY
Co., Ltd.
    Others     Total  
    (in millions of Won)  

Current assets

  4,313,678        427,029        633,583        5,071,247        697,234        9,773,753      20,916,524   

Non-current assets

    6,110,630        3,019,191        879,536        1,062,166        3,115,599        8,538,325        22,725,447   

Current liabilities

    (4,258,245     (611,434     (269,749     (3,515,803     (674,370     (8,990,091     (18,319,692

Non-current liabilities

    (1,835,835     (1,862,078     (264,596     (478,070     (1,760,156     (3,038,981     (9,239,716

Equity

    4,330,228        972,708        978,774        2,139,540        1,378,307        6,283,006        16,082,563   

Non-controlling interests

    1,718,562        291,812        273,143        224,108        151,274        1,451,734        4,110,633   

Sales

    16,838,559               1,316,781        8,036,752        2,901,117        25,405,268        54,498,477   

Profit for the period

    42,312        (41,844     31,749        144,888        146,419        (143,940     179,584   

Profit (loss) attributable to non-controlling interests

    16,793        (12,553     8,860        15,176        16,070        (15,634     28,712   

Cash flows from operating activities

    (67,785     (50,209     18,721        40,815        32,174        23,342        (2,942

Cash flows from investing activities

    (123,609     (405,186     (54,152     (15,888     (94,741     (337,253     (1,030,829

Cash flows from financing activities (before dividends to non-controlling interest)

    156,326        467,617        80,213        (29,059     62,273        375,947        1,113,317   

Dividend to non-controlling interest

    (13,558            (2,217     (2,885            (9,125     (27,785

Effect of exchange rate fluctuation on cash held

    (114     (560            (360            (9,036     (10,070

Net increase in cash and cash equivalents

    (48,740     11,662        42,565        (7,377     (294     43,875        41,691   

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(e) Details of associates and joint ventures

1) Associates

Details of associates as of December 31, 2012 and 2013 are as follows:

 

        Ownership (%)      

Investee

 

Category of Business

    2012         2013       Region

[Domestic]

       

MTAPOLIS Co., Ltd.

  Multiplex development     40.05        40.05      Hwaseong

New Songdo International City Development, LLC

  Real estate rental     29.90        29.90      Seoul

Gale International Korea, LLC

  Real estate rental     29.90        29.90      Seoul

SNNC

  Raw material manufacturing and sales     49.00        49.00      Gwangyang

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd.

  Real estate development     25.10        25.10      Chungju

Taegisan Wind Power Corporation

  Wind power plant construction and management     50.00        50.00      Hoengseong

Garolim Tidal Power Plant Co., Ltd.

  Tidal power plant construction and management     32.13        32.13      Seosan

Posco e&c Songdo International Building

  Non-resident building lease     49.00        49.00      Seoul

Universal Studios Resort Asset Management Corporation

  Real estate services     26.17        26.17      Seoul

Daewoo Public Car Sales (Gwangju) CO., Ltd.

  Leasing services     50.00        50.00      Gwangju

UITrans LRT Co., Ltd.

  Transporting     41.89        38.19      Seoul

Suwon Green Environment Co., Ltd.

  Construction     27.50        27.50      Hwaseong

Pajoo & Viro Co., Ltd.

  Construction     40.00        40.00      Paju

Clean Gimpo Co., Ltd.

  Construction     29.58        29.58      Gimpo

Busan-Gimhae Light Rail Transit Co., Ltd.

  Transporting     25.00        25.00      Gimhae

Incheon-Gimpo Expressway Co., Ltd.

  Construction     29.94        29.94      Anyang

Green Jang Ryang Co. Ltd.

  Sewerage treatment     25.00        25.00      Pohang

Dakos Co., Ltd. (*1)

  Railway equipment manufacturing     81.00        31.00      Seongnam

Pureun Tongyeong Enviro Co., Ltd.

  Sewerage treatment     20.40        20.40      Tongyoung

Pure Gimpo Co., Ltd.

  Construction     28.79        28.79      Seoul

Pohang Techno Valley AMC

  Construction     29.50        29.50      Pohang

POSCO PLANTEC Co., Ltd.
(formerly, SUNGJIN GEOTEC Co., Ltd.)

  Industrial structure manufacturing     33.02        43.97      Ulsan

Postech Early Stage Fund

  Investment in venture companies     10.00        10.00      Pohang

Posgreen Co., Ltd.

  Plastic manufacturing     19.00        19.00      Gwangyang

Clean Iksan Co., Ltd.

  Construction     23.50        23.50      Pohang

Gyeonggi CES Co., Ltd.

  Facility construction     21.83        21.83      Yangju

Innovalley Co., Ltd.

  Real estate development     28.77        28.77      Yongin

Applied Science Corp.

  Machinery manufacturing     27.57        27.11      Paju

AROMA POSTECH RENEWABLE ENERGY Co., Ltd. (*2)

  Other science research     28.57             Seoul

Hyundai Investment Network Private Equity Fund I

  Mine investment     50.00        50.00      Seoul

Pohang Techno Valley PFV Corporation (*3)

  Real estate development     29.90        54.99      Pohang

BLUE OCEAN Private Equity Fund

  Private Equity Financial     27.52        27.52      Seoul

SuNAM Co., Ltd.

  Power supply manufacturing     23.92        19.17      Seoul

KONES, Corp.

  Technical service     41.67        41.67      Gyeongju

DAEHO GLOBAL MANAGEMENT CO., LTD.

  Investment advisory service     35.82        35.82      Pohang

Mokpo Deayang Industrial Corporation

  Real estate development     29.90        27.40      Mokpo

Gunggi Green Energy

  Electricity generation     25.50        19.00      Hwaseong

Pohang Special Welding Co., Ltd.

  Welding material and tools manufacturing and sales     50.00        50.00      Pohang

KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund (*4)

  Investment in new technologies            12.50      Seoul

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      

Investee

 

Category of Business

    2012         2013       Region

EQP POSCO Global NO1 Natural Resources PEF (*4)

  Investment in new technologies            27.23      Seoul

KC Chemicals (*4)

  Machinery manufacturing            19.00      Hwaseong

POSTECH Social Enterprise Fund (*4)

  Investment in new technologies            9.17      Seoul

QSONE Co., Ltd. (*5)

  Real estate rental and facility management            50.00      Seoul

Future Creation M&A Fund (*4)

  M&A Fund            40.00      Seoul

Chuncheon Energy Co., ltd. (*4)

  Electricity generation            29.90      Chooncheon

POSMATE (*6)

  Business facilities maintenance     45.15             Seoul

[Foreign]

       

VSC POSCO Steel Corporation

  Steel manufacturing and sales     50.00        50.00      Vietnam

POSCHROME (PROPRIETARY) LIMITED

  Raw material manufacturing and sales     50.00        50.00      South Africa

POSVINA Co., Ltd. (*10)

  Plating steel sheet manufacturing and sales     50.00             Vietnam

CAML RESOURCES PTY LTD.

  Raw material manufacturing and sales     33.34        33.34      Australia

Nickel Mining Company SAS

  Raw material manufacturing and sales     49.00        49.00      New Caledonia

POSK(Pinghu) Steel Processing Center Co., Ltd.

  Steel processing and sales     20.00        20.00      China

AN KHANH NEW CITY DEVELOPMENT J.V CO., LTD.

  Highway construction and new town development     50.00        50.00      Vietnam

Zhongyue POSCO (Qinhuangdao) Tinplate Industrial Co., Ltd.

  Tinplate manufacturing and sales     34.00        34.00      China

POSCO-SAMSUNG Suzhou Processing Center Co., Ltd.

  Steel processing and sales     30.00        30.00      China

Eureka Moly LLC

  Steel processing and sales     20.00        20.00      USA

POSCO SeAH Steel Wire (Nantong) Co., Ltd.

  Steel processing and sales     25.00        25.00      China

Yingkou Posrec Refractories Co., Ltd.

  Refractory manufacturing     25.00        25.00      China

Sebang Steel

  Scrap sales     49.00        49.00      Japan

NCR LLC

  Coal sales     29.41        29.41      Canada

AMCI (WA) PTY LTD.

  Iron ore sales & mine development     49.00        49.00      Australia

SHANGHAI LANSHENG DAEWOO CORP.

  Trading     49.00        49.00      China

SHANGHAI WAIGAOQIAO FREE TRADE ZONE LANSHENG DAEWOO IN’L TRADING CO., LTD.

  Trading     49.00        49.00      China

Hanjung Power Pty., Ltd.

  Electric power manufacturing and sales     49.00        49.00      Papua New

Guinea

General Medicines Company Ltd.

  Medicine manufacturing and sales     33.00        33.00      Sudan

KOREA LNG LTD.

  Gas production and sales     20.00        20.00      England

KG Power (M) SDN. BHD

  Energy & resource development     20.00        20.00      Malaysia

Daewoo (THAILAND) CO., LTD.

  Trading     49.00        49.00      Thailand

N.I.CO., LTD.

  Trading     50.00        50.00      North Korea

South-East Asia Gas Pipeline Company Ltd.

  Pipeline construction     25.04        25.04      Myanmar

GLOBAL KOMSCO Daewoo LLC

  Mintage     35.00        35.00      Uzbekistan

POSCO-Poggenamp Electrical Steel Pvt. Ltd.

  Steel manufacturing     26.00        26.00      India

Arctos Anthracite Joint Venture

  Coal sales     20.00        20.00      Canada

AES-VCM Mong Duong Power Company Limited

  Electricity generation     30.00        30.00      Vietnam

PT. INDONESIA POS CHEMTECH CHOSUN Ref

  Refractory manufacturing and sales     30.00        30.19      Indonesia

NS-Thainox Auto Co., Ltd.

  Steel manufacturing and sales     49.00        49.00      Vietnam

PT. Tanggamus Electric Power

  Construction and engineering service     20.00        20.00      Indonesia

PT. Wampu Electric Power

  Construction and engineering service     20.00        20.00      Indonesia

Boulder Solar Power, LLC

  Electric power manufacturing     25.00        21.74      USA

LLP POSUK Titanium

  Titanium manufacturing and sales     50.00        36.83      Kazakhstan

LI3 ENERGY INC

  Energy & resource development     26.06        26.06      Peru

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

        Ownership (%)      

Investee

 

Category of Business

    2012         2013       Region

Fifth Combined Heat and Power Plant LLC

  Thermal power generation     30.00        30.00      Mongolia

IMFA ALLOYS FINLEASE LTD.

  Raw material manufacturing and sales     24.00        24.00      India

7623704 Canada Inc. (*4)

  Investments management            10.40      Canada

Baganuur Energy Corporation (*4)

  Refined oil manufacturing            50.00      Mongolia

Hamparan Mulia (*4)

  Resource development            45.00      Indonesia

BGC-POS PTY LTD. (*4)

  Construction            49.00      Australia

POS-SEAHSTEELWIRE(TIANJIN) CO., Ltd. (*4)

  Steel manufacturing and sales            25.00      China

POS-Hyundai Steel Manufacturing India Private Ltd. (*7)

  Steel manufacturing and sales     29.50             India

Liaoning Rongyuan Posco Refractories Co., Ltd. (*2)

  Refractory manufacturing and sales     35.00             China

Daewoo Engineering (THAILAND) Co., Ltd. (*8)

  Development and contract business     48.90             Thailand

POSCO YongXin Rare Earth Metal Co., Ltd. (*8)

  Resource development     31.00             China

Myanmar Korea Timber International Ltd. (*9)

  Plywood manufacturing     45.00             Myanmar

 

 

(*1) Reclassified to associate from subsidiary due to decrease in ownership percentage during the year ended December 31, 2013.

 

(*2) Excluded from associates due to the disposal during the year ended December 31, 2013.

 

(*3) The Company is not able to exercise control over the investee because of the redeemable preferred stock with voting rights held by others, which results in the Company holding less than 50% voting rights considering the potential voting rights from the redeemable preferred stock.

 

(*4) These associates were newly established or acquired in 2013.

 

(*5) This entity split off from POSCO Processing & Service during the year ended December 31, 2013.

 

(*6) Reclassified to subsidiary from associate due to the merger with Seoung Gwang Co., Ltd., a subsidiary of the Company.

 

(*7) Reclassified to associate from subsidiary due to a decrease in ownership percentage during the year ended December 31, 2013.

 

(*8) Reclassified to subsidiary from associate due to an increase in ownership percentage during the year ended December 31, 2013.

 

(*9) Excluded from associates due to the liquidation during the year ended December 31, 2013.

 

(*10) Reclassified to assets held for sale in 2013.

As of December 31, 2013, there are no restrictions on the ability of associates to transfer funds to the Company, such as in the form of cash dividends, repayment of loans or payment of advances.

2) Joint ventures

Details of joint ventures as of December 31, 2012 and 2013 are as follows :

 

          Ownership (%)       

Investee

  

Category of Business

     2012          2013        Region

[Domestic]

           

POSCO ES MATERIALS

   Secondary battery manufacturing      50.00         50.00       Gumi

POSCO MITSUBISHI CARBON TECHNOLOGY

   Steel processing and sales      60.00         60.00       Gwangyang

[Foreign]

           

KOBRASCO

   Facility lease      50.00         50.00       Brazil

USS-POSCO Industries

   Cold rolled coil manufacturing and sales      50.00         50.00       USA

PT. POSMI Steel Indonesia

   Steel processing and sale      36.69         36.69       Indonesia

Henan Tsingpu Ferro Alloy Co., Ltd.

   Raw material manufacturing and sales      49.00         49.00       China

United Spiral Pipe, LLC

   Material manufacturing and sales      35.00         35.00       USA

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

   Steel processing and sales      25.00         25.00       China

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

          Ownership (%)       

Investee

  

Category of Business

     2012          2013        Region

POSCO-SAMSUNG-Slovakia Processing Center

   Steel processing and sales      30.00         30.00       Slovakia

Zhangjiagang Pohang Refractories Co., Ltd.

   Refractory manufacturing      50.00         50.00       China

DMSA, AMSA

   Energy & resource development      4.00         4.00       Madagascar

POSCO-NPS Niobium LLC

   Mine development      50.00         50.00       USA

CSP — Compania Siderurgica do Pecem

   Steel manufacturing and sales      20.00         20.00       Brazil

Korea Siberia Wood CJSC

   Forest resource development      50.00         50.00       Russia

Roy Hill Holdings Pty Ltd.

   Energy & resource development      12.50         12.50       Australia

(f) Newly included subsidiaries

1) Consolidated subsidiaries acquired or newly established during the year ended December 31, 2013 are as follows:

 

Company

 

Date of acquisition

  Ownership (%)  

Reason

POSCO ENGINEERING (THAILAND) CO., LTD. (*1)

  January 2013   48.90   Reclassification from associate

POSMATE Co., Ltd.

  January 2013   66.23   Reclassification from associate

POSCO-Mory-Maruyasu PIPE (*1)

  February 2013   50.00   New establishment

PT KRAKATAU BLUE WATER

  February 2013   67.00   New establishment

KRAKATAU POS-CHEM DONG-SUH CHEMICAL (*1)

  March 2013   45.00   New establishment

MAX STEEL Co., Ltd.

  March 2013   100.00   New acquisitions

Myanmar Daewoo International Corporation

  March 2013   100.00   New establishment

POSCO YongXin Rare Earth Metal Co., Ltd.

  March 2013   51.67   Reclassification from associate

POSCO-Italy Processing Center

  July 2013   90.00   New establishment

NEW POWER TECH Co., Ltd.

  August 2013   100.00   Split off from POSCO Engineering Co., Ltd.

DAEWOO E&P CANADA CORPORATION

  August 2013   100.00   New establishment

IT Engineering (*1)

  August 2013   17.00   New acquisitions

Yingkou Puxiang Trade Co., Ltd.

  September 2013   100.00   New establishment

POSCO ICT VIETNAM

  October 2013   100.00   New establishment

Daewoo Global Development. Pte., Ltd

  October 2013   51.00   New establishment

Myanmar POSCO Engineering & Construction Company, Limited.

  November 2013   100.00   New establishment

Myanmar POSCO C&C Company, Limited.

  December 2013   70.00   New establishment

POSCO COATED STEEL (THAILAND) Co., Ltd.

  December 2013   100.00   New establishment

DAEWOO POWER AND INFRA (PTY) LTD.

  December 2013   100.00   New establishment

 

 

(*1) These subsidiaries are included in the consolidated financial statements as the controlling company has control over them in consideration of the board of directors’ composition and others.

2) Cash outflows (inflows) caused by the acquisitions for the years ended December 31, 2011, 2012 and 2013

 

      2011     2012     2013  
     (in millions of Won)  

Consideration transferred

   551,732        287,085        4,359   

Less: Cash and cash equivalent acquired

     (114,268     (188,205     (10,088
  

 

 

   

 

 

   

 

 

 

Total

   437,464        98,880        (5,729
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(g) Excluded subsidiaries

Subsidiaries that were excluded from consolidation during the year ended December 31, 2013 are as follows:

 

Company

  Date of disposal  

Reason

    (in millions of Won)

Postech 2006 Energy Fund

  January 2013   Reclassification from subsidiary to associate

Postech Early Stage Fund

  January 2013  

Reclassification from subsidiary to associate

Statutory merger by SPFC Co., LTD.

Pohang SPFC Co., Ltd.

  January 2013  

(formerly, Gwangyang SPFC Co., LTD.)

Statutory merger by SPFC Co., LTD.

Gunsan SPFC Co., Ltd.

  January 2013   (formerly, Gwangyang SPFC Co., LTD.)

POSCALCIUM Company, Ltd.

  January 2013   Statutory merger by POSCO CHEMTECH

Reco Metal Co., Ltd.

  January 2013   Statutory merger by POSCO M-TECH

9Digit Co., Ltd.

  January 2013   Statutory merger by POSCO M-TECH

SeungGwang Co., Ltd.

  January 2013   Statutory merger by POSMATE

POSWITH Co., Ltd.

  January 2013  

Statutory merger by POSCO Humans Co., Ltd.

(formerly, POS ECO HOUSING Co., LTD.)

MCM Korea

  March 2013   Exclusion by liquidation

DAEWOO CANADA LTD.

  March 2013   Exclusion by liquidation

DAEWOO HANDELS GmbH

  March 2013   Exclusion by liquidation

Dalian POSCO Steel Co., Ltd.

  March 2013  

Disposal

Statutory merger by POSCO-Vietnam

MAX STEEL Co., LTD.

  April 2013  

Processing Center Co., Ltd.

Statutory merger by Sungjin Geotec Co., Ltd.

POSCO PLANTEC Co., Ltd.

  July 2013  

(currently, POSCO PLANTEC Co., Ltd.

by changing its name)

Dakos Co., Ltd.

  October 2013  

Disposal

Statutory merger by Plant Engineering Service

BLUE O&M Co., Ltd

  December 2013  

Technology Co., Ltd.

Statutory merger by POSCO

NEW POWER TECH CO., LTD

  December 2013   ENGINEERING & CONSTRUCTION CO., LTD.

Tancheonene Co., Ltd

  December 2013   Statutory merger by Poscoene

SANTOS CMI COSTA RICA S.A.

  December 2013   Exclusion by liquidation

INGENIERIA Y CONSTRUCCION HOLANDCO S.A.

  December 2013   Exclusion by liquidation
   

Statutory merger by SANTOSCMI

CONSTRUCCIONES

ASESORIA Y SERVICIOS EPC S.A. CHILE

  December 2013   DE CHILE S.A.

SANTOS CMI CONSTRUCTION ARGENTINA S.A.

  December 2013   Exclusion by liquidation

DAEWOO STC VINA LTD.

  December 2013   Disposal

GEZIRA TANNERY Co., Ltd.

  December 2013   Exclusion by liquidation

 

2. Statement of Compliance

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting Standards Board.

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except for the following material items in the statement of financial position, as described in the accounting policy below.

 

  (a) Derivatives instruments are measured at fair value

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  (b) Financial instruments at fair value through profit or loss (FVTPL) are measured at fair value

 

  (c) Available-for-sale financial assets are measured at fair value

 

  (d) Defined benefit liabilities are measured at the present value of the defined benefit obligation less the fair value of the plan assets

Functional and presentation currency

These consolidated financial statements are presented in Korean won, which is POSCO’s functional currency and the currency of the primary economic environment in which POSCO operates.

Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

 

  (a) Judgments

Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is included in the following notes:

 

   

Note 1 — Subsidiaries, associates and joint venture

 

   

Note 8 — Other financial assets

 

   

Note 12 — Joint operations

 

   

Note 13 — Investment property, net

 

   

Note 14 — Property, plant and equipment, net

 

   

Note 15 — Goodwill and other intangibles

(b) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

 

   

Note 20 — Provisions

 

   

Note 21 — Employee benefits

 

   

Note 29 — Construction contracts

 

   

Note 38 — Commitments and contingencies

 

  (c) Measurement of fair value

The Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. The Company has an

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values, and reports directly to the financial officer.

The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS including the level in the fair value hierarchy in which such valuation techniques should be classified.

When measuring the fair value of an asset or a liability, the Company uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.

 

   

Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

   

Level 2 — inputs other than quoted prices included in Level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

 

   

Level 3 — inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Information about the assumptions made in measuring fair values is included in the following notes:

 

   

Note 23 — Financial instruments

Changes in accounting policies

Except for the changes below, the Company has consistently applied the accounting policies set out in note 3 to all periods presented in these consolidated financial statements.

The Company has adopted the following new standards and amendments to standards with a date of initial application of January 1, 2013.

 

  (a) IAS No. 1, “Presentation of Financial Statements”

 

  (b) IAS No. 19, “Employee Benefits

 

  (c) IFRS No. 7, “Financial Instruments: Disclosures

 

  (d) IFRS No. 10, “Consolidated Financial Statements

 

  (e) IFRS No. 11, “Joint Arrangements

 

  (f) IFRS No. 12, “Disclosure of Interests in Other Entities

 

  (g) IFRS No. 13, “Fair Value Measurement

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

The details of changes in accounting policies are as follows:

 

  (a) Classification of other comprehensive income

As a result of the amendments to IAS No. 1, the Company has modified the presentation of items of other comprehensive income in its statement of comprehensive income to present separately items that would be reclassified to profit or loss from those that would never be reclassified to profit or loss. Comparative information has been re-presented accordingly.

 

  (b) Post-employment defined benefit plan

As a result of the amendments to IAS No. 19, the Company has changed its accounting policy with respect the basis for determining the income or expense related to its post-employment defined benefit plans. Under the amendments to IAS No. 19, the Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Consequently, the net interest on the net defined benefit liability (asset) now comprises: interest cost on the defined benefit obligation, interest income on plan assets and interest on the effect on the asset ceiling. Previously, the Company determined interest income on plan assets based on their long-term rate of expected return.

 

  (c) Offsetting of financial assets and financial liabilities

As a result of the amendments to IFRS No. 7, the Company has expanded its disclosures about the offsetting of financial assets and financial liabilities (Note 23).

 

  (d) Subsidiaries

As a result of IFRS No. 10, the Company has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS No. 10 introduces a new control model that focuses on whether the Company has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns.

In accordance with the transitional provisions of IFRS No. 10, the Company reassessed the control conclusion for its investees at January 1, 2013. As a consequence, the Company changed its control conclusion with the following investees:

 

    

Company

Newly included subsidiaries

   POSCO Engineering (Thailand) Co., Ltd.

Excluded subsidiaries

   Postech 2006 Energy Fund, Postech Early Stage Fund

 

  (e) Joint arrangements

As a result of IFRS No. 11, the Company has changed its accounting policy for its interests in joint arrangements. Under IFRS No. 11, the Company has classified its interests in joint arrangements as either joint operations (if the Company has rights to the assets, and obligations for the liabilities, relating to an arrangement) or joint ventures (if the Company has rights only to the net assets of an arrangement). When making this assessment, the Company considered the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

The Company has re-evaluated its involvement in its only joint arrangement and has reclassified the investment from a jointly controlled entity to a joint venture. Notwithstanding the reclassification, the investment continues to be recognized by applying the equity method and there has been no impact on the recognized assets, liabilities and comprehensive income of the Company.

 

  (f) Disclosure of interests in other entities

As a result of IFRS No. 12, the Company has expanded its disclosures about its interests in subsidiaries (see Note 1) and equity-accounted investees (Note 11).

 

  (g) Fair value measurement

IFRS No. 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements when such measurements are required or permitted by other IFRSs. It unifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It replaces and expands the disclosure requirements about fair value measurements in other IFRSs, including IFRS No. 7. As a result, the Company has included additional disclosures in this regard (Note 23).

In accordance with the transitional provisions of IFRS No. 13, the Company has applied the new fair value measurement guidance prospectively and has not provided any comparative information for new disclosures. Notwithstanding the above, the change had no significant impact on the measurements of the Company’s assets and liabilities.

Impact of changes in accounting policies

As management believes the impact of the amendments to IAS No. 19, IFRS No. 10 and No. 13 on the Company’s prior year’s consolidated financial statement is not significant, the comparative period’s consolidated financial statements are not restated.

Approval of financial statements

The consolidated financial statements were authorized for issue by the Board of Directors on January 29, 2014.

 

3. Summary of Significant Accounting Policies

The significant accounting policies applied by the Company in preparation of its consolidated financial statements are included below. The accounting policies set out below have been applied consistently to all periods presented in these financial statements, except for those as disclosed in note 2.

The comparative amounts in consolidated statements of comprehensive income have been re-presented as a result of a change in the accounting policy regarding the presentation of items of other comprehensive income.

Basis of consolidation

 

  (a) Business combinations

The Company accounts for business combinations using the acquisition method when control is transferred to the Company.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.

If share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards), then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based measure of the replacement awards compared with the market-based measure of the acquiree’s awards and the extent to which the replacement awards relate to pre-combination service.

 

  (b) Non-controlling interests

Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.

Changes in the Company’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

 

  (c) Subsidiaries

Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

 

  (d) Loss of control

When the Company loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

 

  (e) Interests in equity-accounted investees

The Company’s interests in equity-control investees comprise interests in associates and joint ventures. Associates are those entities in which the Company has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Company has joint control, whereby the Company has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interests in associates and joint ventures are accounted for using the equity method. They are recognized initially at cost, which includes transaction costs. Subsequent to initial

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

recognition, the consolidated financial statements include the Company’s share of the profit or loss and other comprehensive income of equity-accounted investees, until the date on which significant influence or joint control ceases.

 

  (f) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Company’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

Foreign currency transactions and translation

 

  1) Foreign currency transactions

Foreign currency transactions are initially recorded using the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. At the end of each reporting period, foreign currency monetary items are translated using the closing rate. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the original transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rate at the date fair value was initially determined.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the period in which they arise. When gains or losses on non-monetary items are recognized in other comprehensive income, exchange components of those gains or losses are recognized in other comprehensive income. Conversely, when gains or losses on non-monetary items are recognized in profit or loss, exchange components of those gains or losses are recognized in profit or loss.

 

  2) Foreign operations

If the presentation currency of the Company is different from a foreign operation’s functional currency, the financial statements of the foreign operation are translated into the presentation currency using the following methods:

The assets and liabilities of foreign operations, whose functional currency is not the currency of a hyperinflationary economy, are translated to presentation currency at exchange rates at the reporting date. The income and expenses of foreign operations are translated to functional currency at exchange rates at the dates of the transactions. Foreign currency differences are recognized in other comprehensive income.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as assets and liabilities of the foreign operation. Thus, they are expressed in the functional currency of the foreign operation and translated at the closing rate.

When a foreign operation is disposed of, the relevant amount in the translation is transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that includes a foreign operation, the relevant proportion of such cumulative

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

amount is reattributed to non-controlling interest. In any other partial disposal of a foreign operation, the relevant proportion is reclassified to profit or loss.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, demand deposits, and short-term investments in highly liquid securities that are readily convertible to known amounts of cash with maturities of three months or less from the acquisition date and which are subject to an insignificant risk of changes in value. Equity investments are excluded from cash and cash equivalents.

Non-derivative financial assets

The Company recognizes and measures non-derivative financial assets by the following four categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. The Company recognizes financial assets in the consolidated statement of financial position when the Company becomes a party to the contractual provisions of the instrument.

Upon initial recognition, non-derivative financial assets are measured at their fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the asset’s acquisition or issuance.

(a) Financial assets at fair value through profit or loss

Financial assets are classified at fair value through profit or loss if they are held for trading or designated as such upon initial recognition. Upon initial recognition, transaction costs are recognized in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

(b) Held-to-maturity financial assets

A non-derivative financial asset with a fixed or determinable payment and fixed maturity, for which the Company has the positive intention and ability to hold to maturity, is classified as held-to-maturity. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest rate method.

(c) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method unless the effect of discounting is immaterial.

(d) Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets or loans and receivables. Subsequent to initial recognition, they are measured

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

at fair value, with changes in fair value, net of any tax effect, recorded in other comprehensive income in equity. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost. When a financial asset is derecognized or impairment losses are recognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Dividends on an available-for-sale equity instrument are recognized in profit or loss when the Company’s right to receive payment is established.

(e) Derecognition of non-derivative financial assets

The Company derecognizes non-derivative financial assets when the contractual rights to the cash flows from the financial asset expire, or the Company transfers the rights to receive the contractual cash flows from the financial asset as well as substantially all the risks and rewards of ownership of the financial asset. Any interest in a transferred financial asset that is created or retained by the Company is recognized as a separate asset or liability.

If the Company retains substantially all the risks and rewards of ownership of the transferred financial assets, the Company continues to recognize the transferred financial assets and recognizes financial liabilities for the consideration received.

(f) Offsetting a financial asset and a financial liability

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position only when the Company currently has a legally enforceable right to offset the recognized amounts, and there is the intention to settle on a net basis or to realize the asset and settle the liability simultaneously.

Inventories

Inventories are measured at the lower of cost and net realizable value. Costs are determined by using the moving-weighted average method. The cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The allocation of fixed production overheads to the costs of finished goods or work in progress are based on the normal capacity of the production facilities.

When inventories are sold, the carrying amount of those inventories is recognized as cost of goods sold in the period in which the related revenue is recognized. Inventories are measured at the lower of cost and net realizable value. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories arising from an increase in net realizable value is recognized as a reduction in the amount of inventories recognized as a cost of goods sold in the period in which the reversal occurs.

Non-current assets held for sale

Non-current assets or disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. In order to be classified as held for sale, the assets or disposal groups must be available for immediate sale in their present condition and their sale must be highly probable. The assets or disposal groups that are classified as non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

The Company recognizes an impairment loss for any initial or subsequent write-down of an asset or disposal group to fair value less costs to sell, and a gain for any subsequent increase in fair value less costs to sell, up to the cumulative impairment loss previously recognized in accordance with IAS No. 36 “Impairment of Assets”.

A non-current asset that is classified as held for sale or part of a disposal group classified as held for sale is not depreciated (or amortized).

Investment property

Property held to earn rentals or for capital appreciation or both is classified as investment property. Investment property is measured initially at its cost. Transaction costs are included in the initial measurement. Subsequently, investment property is carried at depreciated cost less any accumulated impairment losses.

Subsequent costs are recognized in the carrying amount of investment property at cost or, if appropriate, as separate items if it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing are recognized in profit or loss as incurred.

Depreciation methods, useful lives and residual values are reviewed at the end of each reporting date and adjusted, if appropriate. The change is accounted for as a change in an accounting estimate.

Property, plant and equipment

Property, plant and equipment are initially measured at cost and after initial recognition, are carried at cost less accumulated depreciation and any accumulated impairment losses. The cost of property, plant and equipment includes expenditures arising directly from the construction or acquisition of the asset, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and, when the Company has an obligation to remove the asset or restore the site, an estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

The cost of replacing a part of an item is recognized in the carrying amount of the item of property, plant and equipment, if the following recognition criteria are met:

(a) it is probable that future economic benefits associated with the item will flow to the Company; and

(b) the cost can be measured reliably.

The carrying amount of the replaced part is derecognized at the time the replacement part is recognized. The costs of the day-to-day servicing of the item are recognized in profit or loss as incurred.

Items of property, plant and equipment are depreciated from the date they are available for use or, in respect of self-constructed assets, from the date that the asset is completed and ready for use. Other than land, the costs of an asset less its estimated residual value are depreciated. Depreciation of property, plant and equipment is recognized in profit or loss on a straight-line basis, which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset,

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

over the estimated useful lives of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Land is not depreciated.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.

The gain or loss arising from the derecognition of an item of property, plant and equipment is included in profit or loss when the item is derecognized.

The estimated useful lives for the current and comparative periods are as follows:

 

Buildings

   10-60 years

Structures

     4-50 years

Machinery and equipment

     2-25 years

Vehicles

     3-10 years

Tools

     4-10 years

Furniture and fixtures

     3-10 years

Lease assets

     3-18 years

The estimated residual value, useful lives and the depreciation method are reviewed at least at the end of each reporting period and, if expectations differ from previous estimates, the changes are accounted for as changes in accounting estimates.

Borrowing costs

The Company capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized in expense as incurred. A qualifying asset is an asset that requires a substantial period of time to get ready for its intended use or sale. Financial assets and inventories that are manufactured or otherwise produced over a short period of time are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

To the extent that the Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. The Company immediately recognizes other borrowing costs as an expense. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Company shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs that the Company capitalizes during a period shall not exceed the amount of borrowing costs incurred during that period.

Intangible assets

Intangible assets are measured initially at cost and, subsequently, are carried at cost less accumulated amortization and accumulated impairment losses.

Amortization of intangible assets except for goodwill is calculated on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The residual value of intangible assets is zero. However, as there are no foreseeable limits to the periods

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

over which club memberships are expected to be available for use, this intangible asset is determined as having an indefinite useful life and not amortized.

 

Intellectual property rights

   5-10 years

Development costs

   3-10 years

Port facilities usage rights

   5-75 years

Other intangible assets

   2-25 years

Amortization periods and the amortization methods for intangible assets with finite useful lives are reviewed at the end of each reporting period. The useful lives of intangible assets that are not being amortized are reviewed at the end of each reporting period to determine whether events and circumstances continue to support indefinite useful life assessments for those assets. Changes are accounted for as changes in accounting estimates.

Expenditures on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognized in profit or loss as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditures are recognized in profit or loss as incurred.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures, including expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.

Exploration for and evaluation of mineral resources

POSCO is engaged in exploration projects for mineral resources through subsidiaries, associates and joint ventures in the mines or other contractual arrangements. Expenditures related to the development of mineral resources are recognized as exploration or development intangible assets. The nature of these intangible assets are as follows:

 

  (a) Exploration and evaluation assets

Exploration and evaluation assets consist of expenditures for topographical studies, geophysical studies and trenching. These assets are reclassified as development assets when it is proved that the exploration has identified an economically feasible mine.

 

  (b) Development assets

Development assets consist of expenditures for the evaluation of oil fields, facility construction, drilling for viability and others. These development assets are reclassified as industrial rights (mining rights) at inception of the extraction when the technical feasibility and commercial viability of extracting mineral resources are demonstrable. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to property, plant and equipment and depreciation is computed by the unit of production method.

Government grants

Government grants are not recognized unless there is reasonable assurance that the Company will comply with the grant’s conditions and that the grant will be received.

 

  (a) Grants related to assets

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Government grants whose primary condition is that the Company purchase, construct or otherwise acquire long-term assets are deducted from the carrying amount of the assets and recognized in profit or loss on a systematic and rational basis over the life of the depreciable assets.

 

  (b) Grants related to income

Government grants which are intended to compensate the Company for expenses incurred are deducted from the related expenses.

Leases

The Company classifies and accounts for leases as either a finance or operating lease, depending on the terms. Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

 

  (a) Finance leases

At the commencement of the lease term, the Company recognizes as finance assets and finance liabilities the lower amount of the fair value of the leased property and the present value of the minimum lease payments, each determined at the inception of the lease. Any initial direct costs are added to the amount recognized as an asset.

Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.

The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the Company adopts for similar depreciable assets that are owned. If there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is fully depreciated over the shorter of the lease term and its useful life.

 

  (b) Operating leases

Lease obligations under operating leases are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred.

 

  (c) Determining whether an arrangement contains a lease

Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset or assets (the asset) and the arrangement conveys a right to use the asset.

At inception or reassessment of the arrangement, management of the Company separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If management of the Company concludes for a financial lease that it is impracticable to separate the payments reliably, the Company recognizes an asset and a liability at an amount equal to the fair

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

value of the underlying asset that was identified as the subject of the lease. Subsequently, the liability shall be reduced as payments are made and an imputed finance charge on the liability recognized using the purchaser’s incremental borrowing rate of interest.

Impairment for financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. However, losses expected as a result of future events, regardless of likelihood, are not recognized.

Objective evidence that a financial asset or group of assets are impaired includes:

 

  (a) significant financial difficulty of the issuer or obligor;

 

  (b) a breach of contract, such as a default or delinquency in interest or principal payments;

 

  (c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;

 

  (d) it becoming probable that the borrower will enter bankruptcy or other financial reorganization;

 

  (e) the disappearance of an active market for that financial asset because of financial difficulties; or

 

  (f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group.

In addition, for an equity instrument classified as available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

If financial assets have objective evidence that they are impaired, impairment losses are measured and recognized.

 

  (a) Financial assets measured at amortized cost

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of its estimated future cash flows discounted at the asset’s original effective interest rate. If it is not practicable to obtain the instrument’s estimated future cash flows, impairment losses would be measured by using prices from any observable current market transactions. The Company can recognize impairment losses directly or establish a provision to cover impairment losses. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account.

 

  (b) Financial assets carried at cost

If there is objective evidence that an impairment loss has occurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed.

 

  (c) Available-for-sale financial assets

When a decline in the fair value of an available-for-sale financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available-for-sale are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.

Impairment for non-financial assets

The carrying amounts of the Company’s non-financial assets, other than assets arising from construction contracts, employee benefits, inventories, deferred tax assets and non-current assets held for sale, are reviewed at the end of the reporting period to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, irrespective of whether there is any indication of impairment, are tested for impairment annually by comparing their recoverable amount to their carrying amount.

Management estimates the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then management estimates the recoverable amount of cash-generating unit (“CGU”). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or CGU is the greater of its value-in-use and its fair value less costs to sell. The Company determined that individual operating entities are CGUs.

The recoverable amount of an asset or CGU is the greater of its value-in-use and its fair value less costs to sell. The value-in-use is estimated by applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU for which estimated future cash flows have not been adjusted, to the estimated future cash flows expected to be generated by the asset or CGU.

An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss.

Goodwill acquired in a business combination is allocated to each CGU that is expected to benefit from the synergies arising from the goodwill acquired. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying amount of the other assets in the CGU on a pro rata basis. Except for impairment losses in respect of goodwill which are never reversed, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Derivative financial instruments and hedges

Derivatives are initially recognized at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss.

 

  (a) Embedded derivatives

Embedded derivatives are separated from the host contract and accounted for separately only if the following criteria have been met: (a) the economic characteristics and risks of the host contract and the embedded derivatives are not clearly and closely related to a separate instrument with the same terms as the embedded derivative that would meet the definition of a derivative, and (b) the hybrid (combined) instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives from the host contract are recognized immediately in profit or loss. However, convertible rights of convertible bonds are not separated from the host contract and the compound financial instruments of bonds and convertible rights are designated and measured at fair value through profit and loss.

 

  (b) Other derivatives

Changes in the fair value of a derivative that is not designated as a hedging instrument are recognized immediately in profit or loss.

Non-derivative financial liabilities

The Company classifies non-derivative financial liabilities into financial liabilities at fair value through profit or loss or other financial liabilities in accordance with the substance of the contractual arrangement and the definitions of financial liabilities. The Company recognizes financial liabilities in the consolidated statement of financial position when the Company becomes a party to the contractual provisions of the financial liability.

 

  (a) Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading or designated as such upon initial recognition. Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Upon initial recognition, transaction costs that are directly attributable to the acquisition are recognized in profit or loss as incurred.

 

  (b) Other financial liabilities

Non-derivative financial liabilities other than financial liabilities at fair value through profit or loss are classified as other financial liabilities.

Financial guarantee liabilities are initially measured at their fair values and, if not designated as financial liabilities at fair value through profit or loss, they are subsequently measured at the higher of:

 

   

the amount of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period; and

 

   

the amount initially recognized less, cumulative amortization recognized on a straight-line basis over the guarantee period

At the date of initial recognition, other financial liabilities are measured at fair value minus transaction costs that are directly attributable to the acquisition. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

The Company derecognizes a financial liability from the consolidated statement of financial position when it is extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

Construction work in progress

Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognized to date less progress billings and recognized losses. Cost includes all expenditures related directly to specific projects and an allocation of fixed and variable overheads incurred in the Company’s contract activities based on normal operating capacity.

Construction work in progress is presented as part of trade accounts and notes receivable in the consolidated statement of financial position for all contracts in which costs incurred plus recognized profits exceed progress billings. If progress billings exceed costs incurred plus recognized profits, then the difference is presented as amounts due to customers for contract work in the consolidated statement of financial position.

Employee benefits

 

  (a) Short-term employee benefits

Short-term employee benefits are employee benefits that are due to be settled within twelve months after the end of the period in which the employees render the related service. When an employee has rendered service to the Company during an accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service as profit or loss. If the Company has a legal or constructive obligation which can be reliably measured, the Company recognizes the amount of expected payment for profit-sharing and bonuses payable as liabilities.

 

  (b) Other long-term employee benefits

Other long-term employee benefits include employee benefits that are settled beyond 12 months after the end of the period in which the employees render the related service, and are calculated at the present value of the amount of future benefit that employees have earned in return for their service in the current and prior periods, less the fair value of any related assets. The present value is determined by discounting the expected future cash flows using the interest rate of corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. Any actuarial gains and losses are recognized in profit or loss in the period in which they arise.

 

  (c) Retirement benefits: Defined contribution plans

For defined contribution plans, when an employee has rendered service to the Company during a period, the Company recognizes the contribution payable to a defined contribution plan in exchange for that service as an accrued expense, after deducting any contributions already paid. If the contributions already paid exceed the contribution due for service before the end of the reporting period, the Company recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  (d) Retirement benefits: Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The fair value of plan assets is deducted. The calculation is performed annually by an independent actuary using the projected unit credit method.

The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of the Company’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The Company recognizes all actuarial gains and losses arising from actuarial assumption changes and experiential adjustments in other comprehensive income when incurred.

When the fair value of plan assets exceeds the present value of the defined benefit obligation, the Company recognizes an asset, to the extent of the present value of the total of cumulative any economic benefits available in the form of refunds from the plan or reduction in the future contributions to the plan.

Remeasurements of net defined benefit liabilities, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments, net interest expense and other expenses related to defined benefit plans are recognized in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss in curtailment is recognized immediately in profit or loss. The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Where the effect of the time value of money is material, provisions are determined at the present value of the expected future cash flows.

Where some or all of the expenditures required to settle a provision are expected to be reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimates. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

A provision is used only for expenditures for which the provision was originally recognized.

A provision for warranties is recognized when the underlying products are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

Regarding provision for construction warranties, warranty period starts from the completion of construction in accordance with construction contracts. If the Company has an obligation for warranties, provision for warranties which are estimated based on historical warranty data are recorded as cost of construction and provision for warranties during the construction period.

Equity instruments

 

  (a) Share capital

Common stock is classified as equity and the incremental costs arising directly attributable to the issuance of common stock less their tax effects are deducted from equity.

If the Company reacquires its own equity instruments, the amount of those instruments (“treasury shares”) are presented as a contra equity account. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of its own equity instruments. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase to equity, and the resulting surplus or deficit on the transaction is recorded in capital surplus.

 

  (b) Hybrid Bonds

Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of financial liability and an equity instrument. When the Company has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the Company’s hybrid bond has been classified as an equity instrument.

Revenue

Revenue from the sale of goods, services provided and the use of assets is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates, which are not significant for all periods presented.

 

  (a) Sale of goods

Revenue from the sale of goods in the ordinary course of activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. The appropriate timing for transfer of risks and rewards varies depending on the individual terms and conditions of the sales contract. For international sales, this timing depends on the type of international commercial terms of the contract.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  (b) Services rendered

Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

 

  (c) Construction contracts

Construction contracts of the Company primarily consist of contracts for the construction of plants and commercial or residential buildings, and revenue recognition for different types of contracts is as follows:

When the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract. Contract revenue includes the initial amount agreed in the contract plus any variation in contract work, claims and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. The stage of completion of a contract is determined based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

When the outcome of a construction contract cannot be estimated reliably, the revenue is recognized only to the extent of contract costs incurred that it is probable will be recoverable. An expected loss on the construction contract shall be recognized as an expense immediately.

 

  (d) Rental income

Rental income from investment property, net of lease incentives granted, is recognized in profit or loss on a straight-line basis over the term of the lease.

Finance income and finance costs

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest rate method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established.

Finance costs comprise interest expense on borrowings and changes in the fair value of financial assets at fair value through profit or loss. Borrowing costs are recognized in profit or loss using the effective interest rate method.

Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.

 

  (a) Current income tax

Current income tax is the expected income tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the end of the reporting period and any adjustment to tax payable in respect of previous years. The taxable profit is different from the accounting profit for the period since the taxable profit is calculated excluding the temporary differences, which will be taxable or deductible in

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

determining taxable profit of future periods, and non-taxable or non-deductible items from the accounting profit.

 

  (b) Deferred income tax

The measurement of deferred income tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The Company recognizes a deferred income tax liability for all taxable temporary differences associated with investments in subsidiaries, associates, and joint ventures, except to the extent that the Company is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Company recognizes a deferred income tax asset for deductible temporary differences arising from investments in subsidiaries, associates and joint ventures, to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. However, deferred income tax is not recognized for the following temporary differences: taxable temporary differences arising on the initial recognition of goodwill, or the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting profit or loss nor taxable income.

The carrying amount of a deferred income tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred income tax liabilities and deferred income tax assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period to recover or settle the carrying amount of its assets and liabilities.

Deferred income tax assets and liabilities are offset only if there is a legally enforceable right to offset the related current income tax liabilities and assets, and they relate to income taxes levied by the same tax authority and they intend to settle current income tax liabilities and assets on a net basis.

Earnings per share

Management calculates basic earnings per share (“EPS”) data for the Company’s ordinary shares, which is presented at the end of the statement of comprehensive income. Basic EPS is calculated by dividing profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held.

Operating segments

An operating segment is a component of the Company that : a) engages in business activities from which it may earn revenues and incur expenditures, including revenues and expenses that relate

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

to transactions with any of the Company’s other components, b) whose operating results are regularly reviewed by the Company’s chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Management has determined that the CODM of the Company is the CEO.

Segment profit and loss is determined the same way that consolidated net after tax profit for the period is determined under IFRS without any adjustment for corporate allocations. The accounting policies used by each segment are consistent with the accounting policies used in the preparation of the consolidated financial statements. Segment assets and liabilities are measured based on total assets and liabilities in accordance with IFRS without any adjustment for corporate allocations. Also, segment assets and liabilities are based on the separate financial statements of the entities instead of on consolidated basis. In addition, there are varying levels of transactions amongst the reportable segments. These transactions include sales of property, plant and assets, and rendering of construction service and so on. Inter-segment transactions are accounted for on an arm’s length basis.

Segment results that are reported to the CEO include items directly attributable to a segment and do not include allocated items. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

New standards and interpretations not yet adopted

Amendments to IAS No. 32 “Financial Instruments : Presentation

The amendments clarify the application guidance related to offsetting of a financial asset and a financial liability. The amendments are mandatorily effective for annual periods beginning on or after January 1, 2014 with earlier adoption permitted. Management believes the impact of the initial adoption of these amendments on the Company’s consolidated statements of financial position will not be significant.

 

4. Financial risk management

The Company has exposure to the following risks from its use of financial instruments:

 

   

credit risk

 

   

liquidity risk

 

   

market risk

 

   

capital risk

This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  (a) Financial risk management

 

  1) Risk management policy

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities.

The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

 

  2) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. In addition, credit risk arises from finance guarantees.

The Company implements a credit risk management policy under which the Company only transacts business with counterparties that have a certain level of credit rate evaluated based on financial condition, historical experience, and other factors. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The default risk of a nation or an industry in which a customer operates its business does not have a significant influence on credit risk. The Company has established a credit policy under which each new customer is analyzed individually for creditworthiness.

The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for companies of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Debt securities are analyzed individually, and an expected loss shall be directly deducted from debt securities.

Credit risk also arises from transactions with financial institutions, and such transactions include transactions of cash and cash equivalents, various deposits, and financial instruments such as derivative contracts. The Company manages its exposure to this credit risk by only entering into transactions with banks that have high international credit ratings. The Company’s treasury department authorizes, manages, and overseas new transactions with financial institutions with whom the Company has no previous relationship. Furthermore, the Company limits its exposure to credit risk of financial guarantee contracts by strictly evaluating their necessity based on internal decision making processes, such as the approval of the board of directors.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  3) Liquidity risk management

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The Company’s cash flow from business, borrowing or financing is sufficient to meet the cash requirements for the Company’s strategic investments. Management believes that the Company is capable of raising funds by borrowing or financing if the Company is not able to generate cash flow requirements from its operations. The Company has committed borrowing facilities with various banks.

 

  4) Market risk management

Market risk means that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The goal of market risk management is optimization of profit and controlling the exposure to market risk within acceptable limits.

 

   Currency risk

Each segment is influenced by a risk factor of changes in foreign currency exchange rates for the different directions due to the difference in structure of each industry regarding the cash inflows and cash outflows in foreign currency. The steel segment generally has a lack of foreign currency cash outflows, while the engineering and construction segments generally have excessive foreign currency inflows due to the nature of their respective business. Therefore, the result of the business is affected by the changes of foreign exchange rates.

The trading segment is structured such that the cash inflows and outflows of foreign currencies are to be offset; however, the trading segment is exposed to a risk of changes in foreign currency exchange rates when there are differences in currencies on receiving and paying the foreign currency amount and time differences.

The Company’s policy in respect of foreign currency risks is a natural hedge whereby foreign currency income is offset with foreign currency expenditures. The remaining net exposures after the natural hedge have been hedged using derivative contracts such as forward exchange contracts. In addition, the Company’s derivative transactions are limited to hedging actual foreign currency transactions and speculative hedging is not permitted. Based on this policy, the Company entities have performed currency risk management specific to various characteristics of different segments. The entities in the steel industry, which has a lack of foreign currency cash flows, has foreign currency borrowings from banks and hedges foreign currency risks of the foreign currency borrowings by using foreign currency swaps. The entities in the engineering and construction segments, which have excessive foreign currency cash flows, have hedged foreign currency risks by using forward exchange contracts. Entities in the trading industry have hedged foreign currency risks by using forward exchange contracts when the foreign currencies received and paid are different.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  Interest rate risk

The Company mostly borrows at fixed interest rates. The Company’s management monitors interest rate risks regularly.

 

  ƒ Other market price risk

Equity price risk arises from listed equity securities among available-for-sale equity securities. Management of the Company measures regularly the fair value of listed equity securities and the risk of variance in future cash flow caused by market price fluctuations. Significant investments are managed separately and all buy and sell decisions are approved by management of the Company.

 

  (b) Management of capital risk

The fundamental goal of capital management is the maximization of shareholders’ value by means of the stable dividend policy and the retirement of treasury shares. The capital structure of the Company consists of equity and net debt, deducting cash and cash equivalents and current financial instruments from borrowings. The Company applied the same financial risk management strategy that was applied in the previous period.

Net borrowing-to-equity ratio as of December 31, 2012 and 2013 is as follows:

 

      2012     2013  
     (in millions of Won)  

Total borrowings

       24,921,433        26,246,605   

Less: Cash and cash equivalents

     4,680,526        4,208,562   
  

 

 

   

 

 

 

Net borrowings

     20,240,907        22,038,043   

Total equity

     42,429,418        45,822,030   

Net borrowings-to-equity ratio

     47.70     48.09

 

5. Cash and Cash Equivalents

Cash and cash equivalents as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Cash

   8,595         12,575   

Demand deposits and checking accounts

     1,609,934         1,199,768   

Time deposits

     2,945,537         2,959,380   

Other financial cash equivalents

     116,460         36,839   
  

 

 

    

 

 

 
       4,680,526         4,208,562   
  

 

 

    

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

6. Trade Accounts and Notes Receivable

(a) Trade accounts and notes receivable as of December 31, 2012 and 2013 are as follows:

 

      2012     2013  
     (in millions of Won)  

Current

    

Trade accounts and notes receivable

   9,865,436        10,299,826   

Finance lease receivables

     44,918        36,029   

Unbilled due from customers for contract work

     1,493,709        1,574,929   

Less: Allowance for doubtful accounts

     (366,090     (418,183
  

 

 

   

 

 

 
     11,037,973        11,492,601   
  

 

 

   

 

 

 

Non-current

    

Trade accounts and notes receivable

     52,763        50,639   

Finance lease receivables

     102,887        67,251   

Less: Allowance for doubtful accounts

     (13,446     (20,890
  

 

 

   

 

 

 
   142,204        97,000   
  

 

 

   

 

 

 

Trade accounts and notes receivable sold to financial institutions, for which the derecognition conditions were not met, amounted to 80,258 million and 73,956 million as of December 31, 2012 and 2013, respectively, and are included in bank borrowings (Note 17).

(b) Finance lease receivables are as follows:

 

Customer

   Contents    2012      2013  
     (in millions of Won)  

Korea Electric Power Corporation

   Combined thermal
power plant 1~4
   147,634         102,887   

KC CHEMICAL Co., Ltd

   Machinery and
equipment
             393   

Tenant of EXPO Apartment

   Leasehold contract      171           
     

 

 

    

 

 

 
          147,805         103,280   
     

 

 

    

 

 

 

(c) The gross amount and present value of minimum lease payments as of December 31, 2012 and 2013 are as follows:

 

      2012     2013  
     (in millions of Won)  

Less than 1 year

   62,048        48,112   

1 year – 5 years

         120,135        84,270   

Greater than 5 year

     11,772          

Unrealized interest income

     (46,150     (29,102
  

 

 

   

 

 

 

Present value of minimum lease payment

   147,805        103,280   
  

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

7. Other Receivables

Other receivables as of December 31, 2012 and 2013 are as follows:

 

      2012     2013  
     (in millions of Won)  

Current

    

Short-term loans

   271,067        298,289   

Other accounts receivable

     1,298,878        1,322,352   

Accrued income

     71,076        74,968   

Deposits

     107,208        69,502   

Other checking accounts

     302,738        275,892   

Less : Allowance for bad debt accounts

     (53,815     (150,580
  

 

 

   

 

 

 
     1,997,152        1,890,423   
  

 

 

   

 

 

 

Non-current

    

Long-term loans

     574,255        604,478   

Long-term other accounts receivable

     164,289        152,383   

Accrued income

     1,204        1,110   

Deposits

     110,681        111,482   

Less : Allowance for bad debt accounts

     (41,526     (71,998
  

 

 

   

 

 

 
   808,903        797,455   
  

 

 

   

 

 

 

 

8. Other Financial Assets

(a) Other short-term financial assets as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Derivatives assets held for trading

   62,720         44,082   

Short-term available-for-sale securities

     133,656         10,772   

Current portion of held-to-maturity securities (bonds)

     31,237         2,232   

Short-term financial instruments (*1,2,3,4)

     1,621,668         2,913,579   
  

 

 

    

 

 

 
       1,849,281         2,970,665   
  

 

 

    

 

 

 

 

 

(*1) As of December 31, 2012 and 2013, short-term financial instruments amounting to 3,400 million and 4,700 million, respectively, are provided as collateral in relation to long-term borrowings from the National Forestry Cooperative Federation.

 

(*2) As of December 31, 2012 and 2013, 12,699 million and 949 million, respectively, are restricted for the use in a government project.

 

(*3) As of December 31, 2012 and 2013, short-term financial instruments amounting to 7,650 million and 27,195 million, respectively, are provided as collateral for long-term borrowings.

 

(*4) As of December 31, 2012 and 2013, short-term financial instruments amounting to 153,251 million and 261,034 million, respectively, are restricted for use in financial arrangements, pledge and others.

 

F-67


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Other long-term financial assets as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Derivatives assets held for trading

   8,634         34,140   

Long-term available-for-sale securities (equity instruments) (*1,2,3)

     3,711,169         4,068,766   

Long-term available-for-sale securities (bonds)

     26,430         32,456   

Long-term available-for-sale securities (others)

     43,267         54,390   

Held-to-maturity securities (bonds)

     3,251         1,602   

Long-term financial instruments

     68,215         274,376   
  

 

 

    

 

 

 
       3,860,966         4,465,730   
  

 

 

    

 

 

 

 

 

(*1) As of December 31, 2013, 1,795,860 shares equivalent to 16,162,743 American Depository Receipts (“ADRs”) of SK Telecom Co., Ltd. have been pledged as collateral for exchangeable bonds issued.

 

(*2) During the year ended December 31, 2013, there was a significant decline in the fair value of shares of KB Financial Group Inc. and others for a prolonged period, which was considered as objective evidence of impairment. As a result, an impairment loss of 280,237 million was recognized in profit or loss during the year ended December 31, 2013.

 

(*3) As of December 31, 2012 and 2013, 167,100 million and 229,052 million of long-term available-for-sale securities, respectively, have been provided as collateral for construction projects of CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd. and others.

 

9. Inventories

(a) Inventories as of December 31, 2012 and 2013 are as follows:

 

      2012     2013  
     (in millions of Won)  

Finished goods

   1,475,832        1,406,297   

Merchandise

     703,923        711,802   

Semi-finished goods

     1,876,196        1,711,294   

Raw materials

     2,425,367        2,228,110   

Fuel and materials

     893,137        801,992   

Construction inventories

     1,324,873        1,183,390   

Materials-in-transit

     2,007,106        1,848,389   

Others

     93,007        96,389   
  

 

 

   

 

 

 
     10,799,441        9,987,663   
  

 

 

   

 

 

 

Less: Allowance for inventories valuation

     (214,795     (189,282
  

 

 

   

 

 

 
       10,584,646        9,798,381   
  

 

 

   

 

 

 

(b) The changes of allowance for inventories valuation for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011     2012     2013  
     (in millions of Won)  

Beginning

   87,895        215,594        214,795   

Valuation losses of inventories

     140,361        76,484        49,172   

Write-off

     (10,736     (71,459     (73,220

Reversal and others

     (1,926     (5,824     (1,465
  

 

 

   

 

 

   

 

 

 

Ending

       215,594        214,795        189,282   
  

 

 

   

 

 

   

 

 

 

 

F-68


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

10. Non-Current Assets Held for Sale

Details of non-current assets held for sale as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     Subsidiaries      Controlling
company
     Subsidiaries      Total  
     (in millions of Won)  

Property, plant and equipment (*1)

   1,190                 1,190         1,190   

Investments in associates(*2)

             1,304                 1,304   
  

 

 

    

 

 

    

 

 

    

 

 

 
       1,190         1,304         1,190         2,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(*1) POSCO AST determined to dispose of its land and building for employee welfare and classified them as assets held for sale as of December 31, 2012. The amount measured at the lower of those carrying amount and fair value less costs to sell of certain land and building was 1,190 million, the Company recorded impairment loss for the assets held for sale of 70 million.

 

(*2) The Company determined to dispose of the shares of POSVINA Co., Ltd., an associate of the Company, and classified it as assets held for sale as of September 2013. The amount based on the difference between those carrying amount and fair value less costs to sell was 1,304 million. The Company recorded impairment loss for the assets held for sale of 1,814 million.

 

11. Investments in Associates and Joint ventures

(a) Investments in associates and joint ventures as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Investments in associates

     1,530,802         1,830,047   

Investments in joint ventures

     1,508,459         1,978,646   
  

 

 

    

 

 

 
       3,039,261         3,808,693   
  

 

 

    

 

 

 

 

F-69


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Details of investments in associates as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  

Company

   Book value      Number of
shares
     Ownership
(%)
     Acquisition
cost
     Book value  
     (in millions of Won)  

[Domestic]

              

EQP POSCO Global NO 1 Natural Resources PEF

           178,565         27.23         178,566       177,563   

POSCO PLANTEC Co., Ltd.
(formerly, SUNGJIN GEOTEC Co., Ltd.) (*1)

     181,361         27,365,388         43.97         341,087         234,203   

SNNC

     147,539         18,130,000         49.00         90,650         123,969   

BLUE OCEAN Private Equity Fund

     33,839         333         27.52         33,300         29,391   

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd. (*4)

     29,414         2,008,000         25.10         10,040         23,733   

Incheon-Gimpo Expressway Co., Ltd.

     13,680         7,975,319         29.94         39,877         37,759   

UITrans LRT Co., Ltd. (*4)

     16,444         3,929,751         38.19         19,649         19,185   

Garolim Tidal Power Plant Co., Ltd.

     11,544         3,020,220         32.13         15,101         12,941   

Gunggi Green Energy

     7,353         2,880,000         19.00         14,400         4,996   

KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund

             7,012,500         12.50         7,013         6,685   

KONES, Corp.

     6,476         3,250,000         41.67         6,893         5,784   

Busan-Gimhae Light Rail Transit Co., Ltd. (*2,4)

     7,601         9,160,000         25.00         45,800           

QSONE Co., Ltd.

             200,000         50.00         84,395         84,096   

POSMATE (*3)

     46,204                                   

Others (31 companies) (*4)

     39,096                                 39,820   
  

 

 

             

 

 

 
     540,551                  800,125   
  

 

 

             

 

 

 

[Foreign]

              

Eureka Moly LLC

     213,136                 20.00         240,123         217,513   

South-East Asia Gas Pipeline Company Ltd.

     144,831         135,219,000         25.04         150,779         140,202   

Nickel Mining Company SAS

     146,699         3,234,698         49.00         157,585         135,178   

7623704 Canada Inc.

             114,452,000         10.40         124,341         119,516   

AMCI (WA) Pty LTD.

     123,018         49         49.00         209,664         98,467   

KOREA LNG LTD.

     99,976         2,400         20.00         135,205         64,453   

AES-VCM Mong Duong Power Company Limited

     48,636                 30.00         74,161         81,436   

CAML Resources Pty. LTD.

     62,227         3,239         33.34         40,388         43,820   

NCR LLC

     39,303                 29.41         32,348         30,496   

POSCHROME (PROPRIETARY) LIMITED

     21,324         43,350         50.00         19,892         7,911   

Others (31 companies) (*4)

     91,101                                 90,930   
  

 

 

             

 

 

 
     990,251                  1,029,922   
  

 

 

             

 

 

 
       1,530,802                1,830,047   
  

 

 

             

 

 

 

 

 

(*1) It is reclassified from subsidiary to associate due to the merger with Sungjin Geotec Co., Ltd. during the year ended December 31, 2013.

 

(*2) As the Company’s share of losses exceeded its interest in this entity, the carrying amount of that interest was reduced to nil and the recognition of further losses was discontinued. Unrecognized losses in this entity are 10,258 million during the year ended December 31, 2013.

 

(*3) It is reclassified from associate to subsidiary due to the merger with Seoung Gwang Co., Ltd. during the year ended December 31, 2013.

 

(*4) Investments in associates amounting to 64,810 are provided as collateral related to associates’ borrowings.

 

F-70


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(c) Details of investments in joint ventures as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  

Company

   Book value      Number of
shares
     Ownership
(%)
     Acquisition
cost
     Book value  
     (in millions of Won)  

[Domestic]

              

POSCO MITSUBISHI CARBON TECHNOLOGY

   28,060         11,568,000         60.00         115,680       115,708   

POSCO ES MATERIALS

     42,388         1,000,000         50.00         43,000         40,386   
  

 

 

             

 

 

 
     70,448                  156,094   
  

 

 

             

 

 

 

[Foreign]

              

Roy Hill Holdings Pty Ltd.

     527,129         12,723,959         12.50         998,180         825,901   

CSP-Compania Siderurgica do Pecem

     214,761         660,301,330         20.00         393,925         263,419   

POSCO-NPS Niobium LLC

     348,646         325,050,000         50.00         364,609         343,590   

DMSA, AMSA

     124,326                 4.00         193,182         180,355   

KOBRASCO

     113,847         2,010,719,185         50.00         32,950         95,233   

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

     92,888                 25.00         61,961         96,309   

Others (7 companies)

     16,414                  17,745   
  

 

 

             

 

 

 
     1,438,011                  1,822,552   
  

 

 

             

 

 

 
       1,508,459                1,978,646   
  

 

 

             

 

 

 

(d) The movements of investments in associates and joint ventures for the years ended December 31, 2012 and 2013 are as follows:

1) December 31, 2012

 

Company

  Dec. 31, 2011
Book value
    Acquisition     Dividends     Share of
profits (losses)
    Other increase
(decrease) (*1)
    Dec. 31, 2012
Book value
 
    (in millions of Won)  

[Domestic]

           

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

  194,942                      (17,162     3,581        181,361   

SNNC

    154,131               (20,306     15,157        (1,443     147,539   

POSCO MITSUBISHI CARBON TECHNOLOGY

           28,920               (860            28,060   

POSCO ES MATERIALS

           43,000               (560     (52     42,388   

BLUE OCEAN Private Equity Fund

    35,971                      (4,542     2,410        33,839   

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd.

    21,026                      8,534        (146     29,414   

Incheongimpo Highway Co., Ltd

    3,500        9,368               (377     1,189        13,680   

UITrans LRT Co., Ltd.

    3,610        11,294               1,268        272        16,444   

Garolim Tidal Power Plant Co., Ltd.

    11,995                      (451            11,544   

Gunggi Green Energy

           8,925               (1,572            7,353   

KONES, Corp.

    6,764                      (219     (69     6,476   

Busan-Gimhae Light Rail Transit Co., Ltd.

    34,227                      (26,626            7,601   

POSMATE

    22,409        21,025        (536     2,158        1,148        46,204   

Kyobo Life Insurance Co., Ltd.

    1,377,114               (24,600     37,038        (1,389,552       

Cheongna IBT Co., Ltd.

    35,564                      (729     (34,835       

MTAPOLIS Co., Ltd.

    15,674                      (15,674              

MIDAS Information Technology Co., Ltd.

    12,476               (87     1,530        (13,919       

Others

    56,163        3,619        (107     (2,051     (18,528     39,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,985,566        126,151        (45,636     (5,138     (1,449,944     610,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

[Foreign]

           

Roy Hill Holdings Pty Ltd.

           551,979               (16,537     (8,313     527,129   

POSCO-NPS Niobium LLC

    374,868               (18,632     19,199        (26,789     348,646   

 

F-71


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Company

  Dec. 31, 2011
Book value
    Acquisition     Dividends     Share of
profits (losses)
    Other increase
(decrease) (*1)
    Dec. 31, 2012
Book value
 
    (in millions of Won)  

CSP-Compania Siderurgica do Pecem

  124,231        132,849               (2,520     (39,799     214,761   

Eureka Moly LLC

    109,772                             103,364        213,136   

South-East Asia Gas Pipeline Company Ltd.

    136,175        19,248                      (10,592     144,831   

Nickel Mining Company SAS

    168,292                      (12,795     (8,798     146,699   

DMSA, AMSA

    119,556        16,813               (1,176     (10,867     124,326   

AMCI (WA) Pty LTD.

    168,212                      (38,706     (6,488     123,018   

KOREA LNG LTD.

    127,901               (21,534     12,697        (19,088     99,976   

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

    95,577                      2,650        (5,339     92,888   

KOBRASCO

    128,884               (24,644     28,792        (19,185     113,847   

AES-VCM Mong Duong Power Company Limited

    31,201                      (1,246     18,681        48,636   

CAML Resources Pty. LTD.

    55,465                      11,390        (4,628     62,227   

NCR LLC

    24,107                      (452     15,648        39,303   

POSCHROME (PROPRIETARY) LIMITED

    24,674        33               (311     (3,072     21,324   

Others

    157,178        19,136        (5,143     (18,549     (45,107     107,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,846,093        740,058        (69,953     (17,564     (70,372     2,428,262   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      3,831,659        866,209        (115,589     (22,702     (1,520,316     3,039,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Other increase or decrease represents the changes in investments in associates and joint ventures due to disposals and change in capital adjustments arising from translations of financial statements of foreign investees and others.

 

F-72


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) December 31, 2013

 

Company

  December 31,
2012 Book
value
    Acquisition     Dividends     Share of
profits (losses)
    Other increase
(decrease)  (*1)
    December 31,
2013 Book
value
 
    (in millions of Won)  

[Domestic]

 

EQP POSCO Global NO1 Natural Resources PEF

         178,566               (1,017     14        177,563   

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

    181,361        101,210               (49,065     697        234,203   

SNNC

    147,539               (27,685     2,183        1,932        123,969   

POSCO MITSUBISHI CARBON TECHNOLOGY

    28,060        86,760               888               115,708   

POSCO ES MATERIALS

    42,388                      (1,963     (39     40,386   

BLUE OCEAN Private Equity Fund

    33,839                      (2,015     (2,433     29,391   

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd.

    29,414                      (5,535     (146     23,733   

Inc heongimpo Highway Co., Ltd

    13,680        24,521               (441     (1     37,759   

UITrans LRT Co., Ltd.

    16,444        1,967               668        106        19,185   

Garolim Tidal Power Plant Co., Ltd.

    11,544        2,201               (804            12,941   

Gunggi Green Energy

    7,353        5,475               (8,213     381        4,996   

KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund

           7,013               (327     (1     6,685   

KONES, Corp.

    6,476                      (740     48        5,784   

Busan-Gimhae Light Rail Transit Co., Ltd.

    7,601                      (7,601              

QSONE Co., Ltd.

           84,395               (299            84,096   

POSMATE

    46,204                             (46,204       

Others

    39,096        9,124               1,820        (10,220     39,820   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    610,999        501,232        (27,685     (72,461     (55,866     956,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

[Foreign]

 

Roy Hill Holdings Pty Ltd.

    527,129        446,201               (37,781     (109,648     825,901   

POSCO-NPS Niobium LLC

    348,646               (16,188     16,079        (4,947     343,590   

CSP-Compania Siderurgica do Pecem

    214,761        128,185               (34,410     (45,117     263,419   

Eureka Moly LLC

    213,136                             4,377        217,513   

South-East Asia Gas Pipeline Company Ltd.

    144,831                      (2,585     (2,044     140,202   

Nickel Mining Company SAS

    146,699                      (16,617     5,096        135,178   

DMSA, AMSA

    124,326        58,374               31        (2,376     180,355   

7623704 Canada Inc.

           124,341               (1     (4,824     119,516   

AMCI (WA) Pty Ltd.

    123,018                      (6,283     (18,268     98,467   

KOREA LNG LTD.

    99,976               (21,999     21,898        (35,422     64,453   

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

    92,888                      2,400        1,021        96,309   

KOBRASCO

    113,847               (26,482     21,948        (14,080     95,233   

AES-VCM Mong Duong Power Company Limited

    48,636                      (12,841     45,641        81,436   

CAML Resources Pty. LTD.

    62,227               (12,428     17,984        (23,963     43,820   

NCR LLC

    39,303                      (9,609     802        30,496   

POSCHROME (PROPRIETARY) LIMITED

    21,324               (7,196     2,943        (9,160     7,911   

Others

    107,515        7,439        (5,252     (70,504     69,477        108,675   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,428,262        764,540        (89,545     (107,348     (143,435     2,852,474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      3,039,261        1,265,772        (117,230     (179,809     (199,301     3,808,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Other increase or decrease represents the changes in investments in associates and joint ventures due to disposals and change in capital adjustments arising from translations of financial statements of foreign investees and others.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(e) The fair value of investments in associates for which there are published price quotations as of December 31, 2013 is as follows:

 

Company

   Fair value  
     (in millions of Won)  

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

     189,916   

(f) Summarized financial information of associates and joint ventures as of and for years ended December 31, 2012 and 2013 is as follows:

1) December 31, 2012

 

Company

  Assets     Liabilities     Equity     Sales     Net income (loss)  

[Domestic]

         

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

    763,581        632,999        130,582        703,236        (29,219

SNNC

    577,273        261,781        315,492        379,230        16,959   

POSCO MITSUBISHI CARBON TECHNOLOGY

    47,014        247        46,767               (1,433

POSCO ES MATERIALS

    69,287        16,067        53,220               (1,422

BLUE OCEAN Private Equity Fund

    347,298        224,338        122,960        429,210        (16,504

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd.

    333,716        250,540        83,176        229,271        36,971   

Incheongimpo Highway Co., Ltd

    44,714        334        44,380               (1,323

UITrans LRT Co., Ltd.

    50,932        12,822        38,110               (880

Garolim Tidal Power Plant Co.,Ltd.

    37,476        1,546        35,930               (1,404

Gunggi Green Energy

    103,340        68,990        34,350               (467

KONES, Corp.

    6,739        3,627        3,112        8,274        (527

Busan-Gimhae Light Rail Transit Co., Ltd.

    787,011        756,606        30,405        16,811        (106,668

POSMATE

    118,077        14,580        103,497        104,705        9,587   

MTAPOLIS Co., Ltd.

    521,942        512,720        9,222        21,063        (35,244

[Foreign]

         

Roy Hill Holdings Pty Ltd.

    1,404,336        105,340        1,298,996               (146,321

POSCO-NPS Niobium LLC

    697,431        140        697,291               38,412   

CSP-Compania Siderurgica do Pecem

    1,088,105        16,551        1,071,554               (12,622

South-East Asia Gas Pipeline Company Ltd.

    1,341,510        763,116        578,394                 

Nickel Mining Company SAS

    445,344        91,266        354,078        120,224        (33,981

DMSA, AMSA

    7,935,489        5,906,301        2,029,188               (29,407

KOREA LNG LTD.

    545,841        64        545,777        109,992        107,953   

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

    922,932        579,140        343,792        1,506,012        2,296   

KOBRASCO

    231,524        3,831        227,693        121,619        56,282   

CAML Resources Pty. LTD.

    209,717        70,502        139,215        284,134        34,162   

POSCHROME (PROPRIETARY) LIMITED

    53,900        3,582        50,318        89,962        (899

 

F-74


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) December 31, 2013

 

Company

   Assets      Liabilities      Equity (deficit)     Sales      Net income (loss)  
     (in millions of Won)  

[Domestic]

             

EQP POSCO Global NO1 Natural Resources PEF

   652,849         1,034         651,815                (3,684

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

     900,409         765,481         134,928        597,561         (98,435

SNNC

     504,351         235,830         268,521        405,419         8,458   

POSCO MITSUBISHI CARBON TECHNOLOGY

     243,644         51,747         191,897                89   

POSCO ES MATERIALS

     59,807         10,590         49,217        5,759         (3,926

BLUE OCEAN Private Equity Fund

     341,118         234,321         106,797        425,678         (7,321

CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd.

     284,290         222,246         62,044        10,224         (15,924

Incheongimpo Highway Co., Ltd

     157,082         32,691         124,391                (1,473

UITrans LRT Co., Ltd.

     102,828         56,438         46,390                (925

Garolim Tidal Power Plant Co., Ltd.

     43,592         3,350         40,242                (2,502

Gunggi Green Energy

     333,027         263,608         69,419        21,577         (5,526

KoFC POSCO HANWHA KB Shared Growth NO. 2. Private Equity Fund

     55,195         1,712         53,483        1,064         (1,116

KONES, Corp.

     3,748         2,296         1,452        7,442         (1,612

Busan-Gimhae Light Rail Transit Co., Ltd.

     752,011         793,042         (41,031     34,670         (71,110

QSONE Co., Ltd.

     247,592         79,399         168,193        882         (597

[Foreign]

             

Roy Hill Holdings Pty Ltd.

     2,703,533         244,437         2,459,096                (302,248

POSCO-NPS Niobium LLC

     686,978                 686,978                32,158   

CSP-Compania Siderurgica do Pecem

     1,520,989         78,847         1,442,142                (16,915

South-East Asia Gas Pipeline Company Ltd.

     1,755,847         1,195,935         559,912        19,878         (10,323

Nickel Mining Company SAS

     416,878         91,851         325,027        120,324         (39,686

DMSA, AMSA

     8,636,317         5,190,558         3,445,759                (473

7623704 Canada Inc.

     1,161,363         15         1,161,348                (10

KOREA LNG LTD.

     381,437         98         381,339        111,602         109,495   

BX STEEL POSCO Cold Rolled Sheet Co., Ltd.

     776,557         418,958         357,599        1,479,765         5,359   

KOBRASCO

     203,467         13,001         190,466        70,428         42,852   

CAML Resources Pty. LTD.

     185,465         52,782         132,683        238,296         53,950   

POSCHROME (PROPRIETARY) LIMITED

     38,440         3,779         34,661        72,243         6,765   

 

12. Joint Operations

Details of significant joint operations of the Company as of December 31, 2013 are as follows:

 

Joint operations

   Operation      Ownership (% )      Location  

Myanmar A-1/A-3 mine

     Mine development         51.00         Myanmar   

Offshore midstream

     Mine development         51.00         Myanmar   

Gleenhills mine

     Mine development         20.00         Canada   

Actos Anthracite coal project

     Mine development         20.00         Canada   

Mt. Thorley J/V

     Mine development         20.00         Australia   

POSMAC J/V

     Mine development         20.00         Australia   

CD J/V

     Mine development         5.00         Australia   

Intergra Coal J/V

     Mine development         5.95         Australia   

RUM J/V

     Mine development         10.00         Australia   

 

F-75


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

13. Investment Property, Net

(a) Investment property as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     Acquisition
cost
     Accumulated
depreciation
and
impairment
loss
    Book value      Acquisition
cost
     Accumulated
depreciation
and
impairment
loss
    Book value  
     (in millions of Won)  

Land

   252,846         (41,464     211,382         200,468         (38,966     161,502   

Buildings

     490,657         (186,154     304,503         399,998         (160,805     239,193   

Structures

     9,448         (4,142     5,306         6,836         (3,237     3,599   

Others

                            20,935                20,935   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

       752,951         (231,760     521,191         628,237         (203,008     425,229   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2013, the fair value of investment property is 705,707 million, among which the Company evaluated investment property of 7 subsidiaries including International Business Center Corporation as its book value amounted to 84,479 million since it is believed that fair value is approximately same as book value. Also, the Company used the prior year’s fair value for some of the investment property since it is believed to be approximately same.

(b) Changes in the carrying value of investment property for the years ended December 31, 2012 and 2013 were as follows:

1) For the year ended December 31, 2012

 

      Beginning      Acquisitions      Business
combination
     Disposals     Depreciation (*1)     Others (*2)     Ending  
     (in millions of Won)  

Land

   219,477         15,832         1,442         (38,575     (475     13,681        211,382   

Buildings

     301,733         13,857         1,560         (6,730     (15,044     9,127        304,503   

Structures

     6,323                                (322     (695     5,306   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

       527,533         29,689         3,002         (45,305     (15,841     22,113        521,191   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Impairment losses of investment property amounted to 1,053 million are included.

 

(*2) Includes reclassification resulting from changing purpose of use, adjustment of foreign currency translation difference and others.

2) For the year ended December 31, 2013

 

      Beginning      Acquisitions      Business
combination
     Disposals     Depreciation     Others (*1)     Ending  
     (in millions of Won)  

Land

   211,382                 12,625         (4,410            (58,095     161,502   

Buildings

     304,503         10         8,432         (3,129     (12,008     (58,615     239,193   

Structures

     5,306                                (314     (1,393     3,599   

Others

             20,935                                      20,935   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

       521,191         20,945         21,057         (7,539     (12,322     (118,103     425,229   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Includes reclassification resulting from changing purpose of use, adjustment of foreign currency translation difference and others.

 

F-76


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

14. Property, Plant and Equipment, Net

(a) Property, plant and equipment as of December 31, 2012 and 2013 are as follows:

 

    2012     2013  
    Acquisition
cost
    Accumulated
depreciation
and
impairment
loss
    Government
grants
    Book
value
    Acquisition
cost
    Accumulated
depreciation
and
impairment
loss
    Government
grants
    Book
value
 
    (in millions of Won)  

Land

  2,658,401        (11,979            2,646,422        2,719,989        (11,979            2,708,010   

Buildings

    7,120,322        (2,951,420     (100     4,168,802        8,112,980        (3,223,992     (153     4,888,835   

Structures

    3,997,124        (1,676,669     (274     2,320,181        4,649,271        (1,864,574     (110     2,784,587   

Machinery and equipment

    36,217,492        (19,684,338     (950     16,532,204        40,685,986        (21,242,212     (938     19,442,836   

Vehicles

    279,650        (219,489     (7     60,154        284,113        (233,080            51,033   

Tools

    331,870        (261,972     (47     69,851        346,018        (283,120     (45     62,853   

Furniture and fixtures

    526,396        (342,706     (310     183,380        568,313        (394,958     (203     173,152   

Finance lease assets

    105,241        (48,017            57,224        151,219        (50,695            100,524   

Construction-in-progress

    6,238,161                      6,238,161        5,553,322               (5,033     5,548,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      57,474,657        (25,196,590     (1,688     32,276,379        63,071,211        (27,304,610     (6,482     35,760,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(b) Changes in the carrying value of property, plant and equipment for the years ended December 31, 2012 and 2013 were as follows:

1) For the year ended December 31, 2012

 

     Beginning     Acquisitions     Business
combination
    Disposals     Depreciation (*1)     Others (*2)     Ending  
    (in millions of Won)  

Land

  2,549,178        51,978        2,377        (26,793            69,682        2,646,422   

Buildings

    4,019,829        210,756        12,210        (29,756     (298,978     254,741        4,168,802   

Structures

    2,260,437        25,170               (24,308     (199,970     258,852        2,320,181   

Machinery and equipment

    16,179,384        698,693        5,804        (209,357     (1,774,051     1,631,731        16,532,204   

Vehicles

    66,743        15,620        141        (1,244     (20,705     (401     60,154   

Tools

    80,877        17,404        411        (1,081     (36,026     8,266        69,851   

Furniture and fixtures

    169,689        53,040        76        (3,369     (65,074     29,018        183,380   

Finance lease assets

    38,542        535               (236     (9,154     27,537        57,224   

Construction-in-progress

    3,088,505        6,314,731                             (3,165,075     6,238,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    28,453,184        7,387,927        21,019        (296,144     (2,403,958     (885,649     32,276,379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Impairment losses of property, plant and equipment amounted to 12,977 million are included.

 

(*2) Includes reclassification for changing purpose of use, adjustments of foreign currency translation differences and others.

 

F-77


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) For the year ended December 31, 2013

 

     Beginning     Acquisitions     Business
combination
    Disposals     Depreciation (*1)     Others (*2)     Ending  
    (in millions of Won)  

Land

  2,646,422        23,404        23,108        (24,548            39,624        2,708,010   

Buildings

    4,168,802        72,168        7,352        (48,278     (308,084     996,875        4,888,835   

Structures

    2,320,181        29,338        18,568        (7,633     (189,740     613,873        2,784,587   

Machinery and equipment

    16,532,204        740,682        9,634        (88,565     (1,867,408     4,116,289        19,442,836   

Vehicles

    60,154        10,326        700        (2,356     (19,402     1,611        51,033   

Tools

    69,851        20,638        304        (1,811     (33,494     7,365        62,853   

Furniture and fixtures

    183,380        31,578        1,087        (4,837     (72,062     34,006        173,152   

Finance lease assets

    57,224        670               (712     (12,766     56,108        100,524   

Construction-in-progress

    6,238,161        5,931,141               (10,369            (6,610,644     5,548,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    32,276,379        6,859,945        60,753        (189,109     (2,502,956     (744,893     35,760,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Impairment losses of property, plant and equipment amounted to 9,742 million are included.

 

(*2) Includes reclassification for changing purpose of use, adjustment of foreign currency translation differences and others.

(c) Borrowing costs capitalized and the capitalized interest rate for the years ended December 31, 2012 and 2013 were as follows:

 

     2012     2013  
     (in millions of Won)  

Weighted average expenditure

     3,131,866        6,442,564   

Borrowing costs capitalized

     101,794        290,117   

Capitalization rate

     3.25     4.50

(d) Property, plant and equipment and investment property pledged as collateral as of December 31, 2012 and 2013 are as follows:

 

    

Collateral right holder

   2012      2013  
          (in millions of Won)  

Land (*1)

   Korean Development Bank and others    545,654         767,004   

Buildings and structures (*1)

   Korean Development Bank and others      327,757         1,112,855   

Machinery and equipment

   Korean Development Bank and others      1,285,452         3,343,747   

Tools

   Korean Development Bank              7,300   

Construction-in-progress

   The Export-Import Bank of Korea      1,486,745         382,339   
     

 

 

    

 

 

 
        3,645,608         5,613,245   
     

 

 

    

 

 

 

 

 

(*1) Investment property is included.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

15. Goodwill and Other Intangible Assets, Net

(a) Goodwill and other intangible assets as of December 31, 2012 and 2013 are as follows:

 

    2012     2013  
    Acquisition
cost
    Accumulated
amortization
and
impairment
loss
    Government
grants
    Book
value
    Acquisition
cost
    Accumulated
amortization
and
impairment
loss
    Government
grants
    Book
value
 
    (in millions of Won)  

Goodwill

  1,735,879        (22,188            1,713,691        1,741,562        (125,624            1,615,938   

Intellectual property rights

    317,748        (41,448     (1,154     275,146        1,551,898        (76,026     (1,013     1,474,859   

Premium in rental

    151,116        (13,383            137,733        148,295        (17,028            131,267   

Development expense

    127,856        (65,367     (1,558     60,931        158,228        (95,780     (1,346     61,102   

Port facilities usage rights

    410,023        (326,901            83,122        504,331        (337,220            167,111   

Exploration and evaluation assets

    509,581        (29,853            479,728        389,601        (29,853            359,748   

Mining development assets

    1,643,306                      1,643,306        968,191                      968,191   

Customer relationships

    862,217        (111,485            750,732        856,308        (163,428            692,880   

Other intangible assets

    921,277        (403,302     (3     517,972        843,705        (384,960     (1     458,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  6,679,003        (1,013,927     (2,715     5,662,361        7,162,119        (1,229,919     (2,360     5,929,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(b) The changes in carrying value of goodwill and other intangible assets for the years ended December 31, 2012 and 2013 were as follows:

1) For the year ended December 31, 2012

 

          Increase     Decrease              
    Beginning     Acquisitions     Business
combination
    Disposals     Amortization     Impairment
loss
    Others (*3)     Ending  
    (in millions of Won)  

Goodwill (*1)

  1,656,817               77,298                      (7,230     (13,194     1,713,691   

Intellectual property rights

    274,907        26,677        1        (1,375     (24,829            (235     275,146   

Premium in rental (*2)

    139,144        13,498        622        (10,038     (544     (12,336     7,387        137,733   

Development expense

    45,583        10,266               (148     (23,011            28,241        60,931   

Port facilities usage rights

    94,746                             (11,624                   83,122   

Exploration and evaluation assets

    473,192        7,349                             (1,671     858        479,728   

Mining development assets

    1,414,315        228,991                                           1,643,306   

Client relationships

    807,068                             (53,517            (2,819     750,732   

Other intangible assets

    339,156        201,269        26,748        (652     (44,466     (9     (4,074     517,972   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  5,244,928        488,050        104,669        (12,213     (157,991     (21,246     16,164        5,662,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Acquisition amounts include goodwill amounting to 77,298 million related to the acquisition of PONUTech Co., Ltd.

 

(*2) Premium in rental includes memberships with indefinite useful lives.

 

(*3) Includes translation adjustment and reclassification.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) For the year ended December 31, 2013

 

          Increase     Decrease              
    Beginning     Acquisitions     Business
combination
    Disposals     Amortization     Impairment
loss
    Others (*3)     Ending  
    (in millions of Won)  

Goodwill (*1)

  1,713,691               2,668                      (103,436     3,015        1,615,938   

Intellectual property rights

    275,146        54,182               (291     (35,532     (10,313     1,191,667        1,474,859   

Premium in rental (*2)

    137,733        4,089        1,605        (4,382     (211     (4,457     (3,110     131,267   

Development expense

    60,931        13,717        2,032               (23,166     (5,675     13,263        61,102   

Port facilities usage rights

    83,122                             (10,318            94,307        167,111   

Exploration and evaluation assets

    479,728        4,669                                    (124,649     359,748   

Mining development assets

    1,643,306        289,016                                    (964,131     968,191   

Customer relationships

    750,732                             (51,944            (5,908     692,880   

Other intangible assets

    517,972        211,627        684        (1,102     (58,843     (1,435     (210,159     458,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      5,662,361        577,300        6,989        (5,775     (180,014     (125,316     (5,705     5,929,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Acquisition amounts include goodwill amounting to 2,668 million related to the acquisition of POSCO YongXin Rare Earth Metal Co., Ltd.

 

(*2) Premium in rental includes memberships with indefinite useful lives.

 

(*3) Includes translation adjustment and reclassification.

(c) For the purpose of impairment testing, goodwill is allocated to individually operating entities determined to be CGUs. The goodwill amounts as of December 31, 2012 and 2013 are as follows:

 

Reporting segments

   Total number of CGUs                     
   2012      2013     

CGUs

   2012      2013  
     (in millions of Won)                     

Steel

     10         10       POSCO Thainox Public Company Limited (*3)    109,779         18,624   
         POSCO VST CO., LTD.      36,955         36,955   
         Others      14,096         14,084   

Trading

     3         3       Daewoo International Corporation (*1)      1,163,922         1,163,922   
         Others      11,906         9,711   

E&C

     4         4       POSCO Engineering Co., Ltd. (*2)      194,637         194,637   
         EPC EQUITIES LLP (*4)      47,913         44,412   
         Others      11,291         11,119   

Others

     10         10       PONUTech Co., Ltd      77,298         77,298   
         POSCO ENERGY Co., LTD.      26,471         26,471   
         Others (*4)      19,423         18,705   
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     27         27              1,713,691         1,615,938   
  

 

 

    

 

 

       

 

 

    

 

 

 

 

 

(*1) Recoverable amounts of Daewoo International Corporation were 3,849,700 million as of December 31, 2013 based on its value-in-use. As of December 31, 2013, value-in-use is estimated by applying 8.3% discount rate and 3.0% terminal growth rate with 5 years, the period for the estimated future cash flows, based on management’s business plan. The key assumption for the estimated future cash flow projections for the next 5 years is the revenue growth rate. The average annual growth rate of 3.7% is used based on the average growth rate of revenue in the past 5 years (2009 through 2013) and the Company’s business plan for the next 5 years. No impairment loss of goodwill was recognized during the year ended December 31, 2013 as the recoverable amount exceeded the carrying value of the CGU.

 

     The estimated recoverable amount of CGU exceeded the carrying value by 65,816 million. Value-in-use of the CGU was affected by the assumption such as discount rate and terminal growth used in discount cash flow model. When the discount rate increases by 0.25%, value-in-use will be decreased by 5.49% and when the terminal growth rate decreases by 0.25%, value-in-use will be decreased by 3.39%.

 

     Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would cause a change in impairment loss of goodwill.

 

(*2)

Recoverable amounts of POSCO Engineering Company were 635,980 million as of December 31, 2013 determined based on value-in-use. As of December 31, 2013, value-in-use is estimated by applying 12.3% discount rate and 1%

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  terminal growth rate with 5 years. The estimated future cash flows for the next 5 years are based on management’s approved business plan. The most significant assumption on the cash flow projections for the next 5 years is the cash flows from construction projects based on the business plan. No impairment loss of goodwill was recognized during the year ended December 31, 2013 as the recoverable amount exceeded the carrying value of the CGU.

 

     The estimated recoverable amounts of CGU exceeded the carrying value by 288,906 million. Value-in-use of the CGU was affected by the assumption such as discount rate and terminal growth used in discount cash flow model. When the discount rate increases by 0.25%, value-in-use will be decreased by 2.69% and when the terminal growth rate decreases by 0.25%, value-in-use will be decreased by 1.84%. The change has no effect on the impairment loss of the goodwill.

 

     Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the CGU.

 

(*3) Recoverable amounts of POSCO-Thainox Public Company Limited were 340,248 million as of December 31, 2013, determined based on fair value less cost to sell, which was calculated based on quoted market price plus control premium.

 

     The Company recognized goodwill impairment loss of 97,245 million as the carrying value of the CGU was higher than its recoverable amount as of December 31, 2013 and market price decreased due to the market condition of stainless steel industry during the current period.

 

(*4) The Company recognized goodwill impairment loss of 6,191 million as the carrying values of the EPC EQUITIES LLP and other subsidiaries were higher than recoverable amounts as of December 31, 2013.

 

16. Other Assets

Other current assets and other long-term assets as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Other current assets

     

Advance payment

   1,205,969         1,138,976   

Prepaid expenses

     189,647         130,272   

Others

     2,564         1,420   
  

 

 

    

 

 

 
       1,398,180         1,270,668   
  

 

 

    

 

 

 

Other long-term assets

     

Long-term advance payment

   2,119         3,090   

Long-term prepaid expenses

     178,934         204,449   

Others

     212,733         157,659   
  

 

 

    

 

 

 
   393,786         365,198   
  

 

 

    

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

17. Borrowings

(a) Short-term borrowings and current portion of long-term borrowings as of December 31, 2012 and 2013 are as follows:

 

   

Bank

 

Issuance date

 

Maturity date

  Interest
rate (%)
    2012     2013  
    (in millions of Won)  

Short-term borrowings

           

Bank overdrafts

  Bank of America and others   January, 2013~
December, 2013
 

January, 2014~
December, 2014

    0.1~1.0      123,685        100,211   

Short-term borrowings (*1)

  Shinhan Bank and others   January, 2013~
December, 2013
 

January, 2014~
December, 2014

    0.3~12.8        7,586,993        7,256,486   
         

 

 

   

 

 

 
            7,710,678        7,356,697   
         

 

 

   

 

 

 

Current portion of long-term liabilities

           

Current portion of long-term borrowings (*1)

 

Korean Development Bank

  June, 2003~
December, 2013
 

January, 2014~
December, 2014

    0.5~9.0        898,564        856,188   

Less : Present value discount

                   (59

Current portion of foreign loan

  NATIXIS   June, 1984~
March, 1986
 

March, 2014~
December, 2014

    2.0        901        927   

Current portion of debentures (*1)

 

Korean Development Bank

  January, 2009~
November, 2011
 

January, 2014~
December, 2014

    1.5~9.0        1,899,430        2,502,246   

Less: Current portion of discount on debentures issued

            (2,644     (2,353

Add: Premium on debentures redemption

            2,419          
         

 

 

   

 

 

 
            2,798,670        3,356,949   
         

 

 

   

 

 

 
              10,509,348        10,713,646   
         

 

 

   

 

 

 

 

(*1) Property, plant and equipment, trade accounts, short-term financial assets, available-for-sale financial assets and inventories amounting to 5,437,689 million, 43,872 million (three hundred fourteen sheets of note receivable), 27,195 million, 675,812 million and 87,029 million, respectively, are provided as collateral related to short-term borrowings, long-term borrowings and debentures.

(b) Long-term borrowings, excluding current portion as of December 31, 2012 and December 31, 2013 are as follows:

 

   

Bank

 

Issuance date

 

Maturity date

  Interest
rate (%)
    2012     2013  
    (in millions of Won)  

Long-term borrowings (*1)

 

Korean Development Bank

  January, 1983~
December, 2013
  February, 2015~
December, 2099
    0.5~11.2      5,161,711        7,017,532   

Less : Present value discount

            (44,293     (43,897

Foreign loan (*2)

  NATIXIS   March, 1986   March, 2017     2.0        2,009        1,140   

Bonds (*1,3)

  Korean Development Bank  

August, 2006~
December, 2013

 

February, 2015~
December, 2021

      0.0~6.3        9,339,966        8,590,965   

Less: Discount on debentures issued

            (62,943     (45,372

Add: Premium on debentures redemption

            15,635        12,591   
         

 

 

   

 

 

 
              14,412,085        15,532,959   
         

 

 

   

 

 

 

 

(*1)

Property, plant and equipment, trade accounts, short-term financial assets, available-for-sale financial assets and inventories amounting to 5,437,689 million, 43,872 million (three hundred fourteen sheets of note receivable),

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

  27,195 million, 675,812 million and 87,029 million, respectively, are provided as collateral related to short-term borrowings, long-term borrowings and debentures.

 

(*2) Korea Development Bank has provided guarantees related to the foreign loan.

 

(*3) POSCO issued exchangeable bonds with SK Telecom Co., Ltd. ADRs through Zeus (Cayman) Ltd. August 2011. The Company accounted for these exchangeable bonds as long-term borrowings. The Company also provides guarantees for Zeus (Cayman) Ltd.

 

18. Other Payables

Other payables as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Current

     

Accounts payable (*)

   737,802         914,288   

Accrued expenses

     868,015         873,613   

Dividend payable

     7,487         11,709   

Finance lease liabilities

     16,044         14,218   

Withholding

     205,556         315,026   
  

 

 

    

 

 

 
   1,834,904         2,128,854   
  

 

 

    

 

 

 

Non-current

     

Accounts payable

   117,462         116,160   

Accrued expenses

     24,950         25,358   

Finance lease liabilities

     32,961         39,257   

Long-term withholding

     68,549         25,859   
  

 

 

    

 

 

 
           243,922         206,634   
  

 

 

    

 

 

 

 

 

(*) During the year ended December 31, 2012, a fine of 117,629 million was imposed on POSCO and POSCO Coated & Color Steel Co., Ltd. for price fixing galvanized steel sheets as a result of Korea Fair Trade Commission’s investigation. The Company made a payment for the fine in the first half of 2013.

 

19. Other Financial Liabilities

Other financial liabilities as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Current

     

Derivatives liabilities

   84,922         128,370   

Financial guarantee liabilities

     7,819         7,534   
  

 

 

    

 

 

 
   92,741         135,904   
  

 

 

    

 

 

 

Non-current

     

Derivatives liabilities

   100,220         229,096   

Financial guarantee liabilities

     17,493         30,925   
  

 

 

    

 

 

 
           117,713         260,021   
  

 

 

    

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

20. Provisions

(a) Provisions as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     Current      Non-current      Current      Non-current  
     (in millions of Won)  

Provision for bonus payments

   42,904                 52,377           

Provision for construction warranties

     23,489         27,227         35,027         20,669   

Provision for legal contingencies and claims (*1)

             30,920                 30,330   

Others (*2)

     11,438         41,951         19,925         95,273   
  

 

 

    

 

 

    

 

 

    

 

 

 
       77,831         100,098         107,329         146,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) As of December 31, 2012 and 2013, the amount includes a provision of 23,784 million and 23,300 million, respectively, for potential claims in connection with the spin-off of the trading division of Daewoo International Corporation in 2000 (Note 38). In addition, a provision of 7,136 million and 7,030 million are included as of December 31, 2012 and 2013, respectively, for a payment guarantee related to borrowings incurred in the disposition of Daewoo Cement (Shandong) Co., Ltd. during the year ended December 31, 2012.

 

(*2) As of December 31, 2013, the amount includes a provision of 74,888 million for expected outflows of resources in connection with the subrogation and financial joint guarantee for the construction projects of POSCO ENGINEERING & CONSTRUCTION Co., LTD.

(b) The following are the key assumptions concerning the future and other key sources of estimation uncertainties at the end of the reporting period.

 

    

Key assumptions for the estimation

Provision for bonus payments

   Estimations based on financial performance

Provision for construction warranties

   Estimations based on historical warranty data

Provision for legal contingencies and claims

   Estimations based on the degree of probability of an unfavorable outcome and the ability to make a sufficient reliable estimate of the amount of loss

(c) Changes in provisions for the years ended December 31, 2012 and 2013 were as follows:

1) For the year ended December 31, 2012

 

     Beginning      Increase      Utilization     Reversal     Others (*1)     Ending  
     (in millions of Won)  

Provision for bonus payments

   47,682         343,062         (347,262     (523     (55     42,904   

Provision for construction warranties

     50,623         24,694         (16,054     (4,472     (4,075     50,716   

Provision for legal contingencies and claims

     38,847         8,540                (16,163     (304     30,920   

Others

     41,623         14,209         (3,450     (1,680     2,687        53,389   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
       178,775         390,505         (366,766     (22,838     (1,747     177,929   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Includes adjustments of foreign currency translation differences and others.

2) For the year ended December 31, 2013

 

     Beginning      Increase      Utilization     Reversal     Others (*1)     Ending  
     (in millions of Won)  

Provision for bonus payments

   42,904         48,362         (36,126     (2,058     (705     52,377   

Provision for construction warranties

     50,716         27,008         (15,356     (3,887     (2,785     55,696   

Provision for legal contingencies and claims

     30,920         5,090         (4,353     (1,327            30,330   

Others

     53,389         86,077         (23,576     (1,597     905        115,198   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
       177,929         166,537         (79,411     (8,869     (2,585     253,601   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(*1) Includes adjustments of foreign currency translation differences and others.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

21. Employee Benefits

(a) Defined contribution plans

The Company operates a defined contribution plan for participating employees. Though the Company pays fixed contributions into a separate fund, employee benefits relating to employee service in the future is based on the contributions to the funds and the investment earnings on it. Plan assets are managed by a trustee within a fund separate from the Company’s assets.

The expenses related to post-employment benefit plans under defined contribution plans for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Expense related to post-employment benefit under defined contribution plans

       8,874         16,520         19,126   

(b) Defined benefit plans

The Company also operates a defined benefit pension plan for employees. The employees who chose defined benefit pension plan will receive defined payment upon termination of their employment if they fulfill the condition to qualify as recipients. Before the termination of employment, the Company recognizes the pension liability related to defined benefit plans at the end of the reporting period, and measures it at the present value of the defined benefit obligation less the fair value of the plan assets. The Company uses the projected unit credit method in the actuarial valuation of plan assets and the defined benefit obligation.

1) The amounts recognized in relation to net defined benefit liabilities in the statements of financial position as of December 31, 2012 and 2013 are as follows:

 

     2012     2013  
     (in millions of Won)  

Present value of funded obligations

     1,394,675        1,515,426   

Fair value of plan assets

     (1,064,711     (1,247,483

Present value of non-funded obligations

     15,724        5,217   
  

 

 

   

 

 

 

Net defined benefit liabilities

   345,688        273,160   
  

 

 

   

 

 

 

2) Changes in present value of defined benefit obligations for the years ended December 31, 2012 and 2013 were as follows:

 

      2012     2013  
     (in millions of Won)  

Defined benefit obligation at the beginning of period

   1,173,238        1,410,399   

Current service costs

     212,450        238,386   

Interest costs

     51,351        47,039   

Remeasurements:

     83,050        (12,615

— Gain from change in demographic assumptions

     (7,842     (5,624

— Loss from change in financial assumptions

     85,483        7,667   

— Others

     5,409        (14,658

Business combinations

     1,684        11,379   

Benefits paid

     (116,846     (129,038

Others

     5,472        (44,907
  

 

 

   

 

 

 

Defined benefit obligation at the end of period

       1,410,399        1,520,643   
  

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) Changes in fair value of plan assets for the years ended December 31, 2012 and 2013 were as follows:

 

      2012     2013  
     (in millions of Won)  

Fair value of plan assets at the beginning of period

   832,771        1,064,711   

Interest on plan assets

     37,669        37,677   

Remeasurement of plan assets

     2,157        (1,482

Contributions to plan assets (*1)

     267,420        254,771   

Business combinations

     906        9,372   

Others

     (489     (34,942

Benefits paid

     (75,723     (82,624
  

 

 

   

 

 

 

Fair value of plan assets at the end of period

       1,064,711        1,247,483   
  

 

 

   

 

 

 

 

 

(*1) The Company expects to make a contribution of 254,771 million to the defined benefit plan assets in 2014.

4) The fair value of plan assets as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Equity instruments

   12,002         35,364   

Debt instruments

     107,303         98,686   

Deposits

     743,884         958,509   

Others

     201,522         154,924   
  

 

 

    

 

 

 
       1,064,711         1,247,483   
  

 

 

    

 

 

 

5) The amounts recognized in consolidated statements of comprehensive income for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Current service costs

       207,871         212,450         238,386   

Net interest costs (*1)

     29,127         13,682         9,362   
  

 

 

    

 

 

    

 

 

 
   236,998         226,132         247,748   
  

 

 

    

 

 

    

 

 

 

 

 

(*1) The actual return on plan assets amounted to 41,318 million, 39,826 million and 36,195 million for the years ended December 31, 2011, 2012 and 2013, respectively.

The above expenses by function were as follows :

 

     2011      2012      2013  
     (in millions of Won)  

Cost of sales

       169,548         164,763         180,090   

Selling and administrative expenses

     59,978         60,457         66,327   

Others

     7,472         912         1,331   
  

 

 

    

 

 

    

 

 

 
   236,998         226,132         247,748   
  

 

 

    

 

 

    

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

6) Accumulated actuarial gains (losses), net of tax recognized in other comprehensive income for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011     2012     2013  
     (in millions of Won)  

Beginning

       (152,125     (182,702     (245,229

Current actuarial gains (losses)

     (30,577     (62,527     6,224   
  

 

 

   

 

 

   

 

 

 

Ending

   (182,702     (245,229     (239,005
  

 

 

   

 

 

   

 

 

 

7) The principal actuarial assumptions as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (%)  

Discount rate (*1)

     3.29~4.46         3.47~4.91   

Expected future increase in salaries (*2)

     1.04~6.72         1.07~5.75   

 

 

(*1) Discount rate is the yield at the end of the reporting period on high quality corporate bonds that have maturity dates approximating the terms of benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid.

 

(*2) The expected future increase in salaries is based on the average salary increase rate for past three- years.

All assumptions are reviewed at the end of the reporting period. Additionally, the total estimated defined benefit obligation includes actuarial assumptions associated with the long-term characteristics of the defined benefit plan.

8) Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:

 

     1% Increase     1% Decrease  
     Amount     Percentage (%)     Amount     Percentage (%)  
     (in millions of Won)  

Discount rate

       (102,996     (6.8   114,323        7.5   

Expected future increases in salaries

     112,291        7.4            (101,720     (6.7

9) As of December 31, 2013 the maturity of the expected benefit payments are as follows:

 

     Within
1 year
     1 year-
5 years
     5 years-
10 years
     10 years-
20 years
     Later than
20 years
     Total  
     (in millions of Won)  

Benefits paid

       69,334         239,632         532,724         992,760         254,495           2,088,945   

The maturity analysis of the defined benefit obligation were nominal amounts of defined benefit obligations using expected remaining working lives of employees.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

22. Other Liabilities

Other liabilities as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Other current liabilities

     

Due to customers for contract work

   529,104         898,605   

Advances received

     1,289,805             1,176,621   

Unearned revenue

     46,963         29,217   

Withholdings

     162,073         192,497   

Deferred revenue

     235         202   

Others (*1)

     283,474         268,032   
  

 

 

    

 

 

 
       2,311,654         2,565,174   
  

 

 

    

 

 

 

Other long-term liabilities

     

Advances received

   312,668         201,432   

Unearned revenue

     841         1,465   

Others (*1)

     64,305         57,954   
  

 

 

    

 

 

 
   377,814         260,851   
  

 

 

    

 

 

 

 

(*1) Includes other current liabilities amounting to 274,490 million, 261,855 million and other long-term liabilities amounting to 14,939 million and 8,935 million as of December 31, 2012 and 2013, respectively, due to proportionate consolidation of joint ventures which are owned by POSCO’s subsidiaries.

 

23. Financial Instruments

(a) Classification of financial instruments

1) Financial assets as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Financial assets at fair value through profit or loss

     

Derivatives assets held for trading

   71,354         78,222   

Available-for-sale financial assets

     3,914,522         4,166,384   

Held-to-maturity investments

     34,488         3,834   

Loans and receivables

     19,787,951         21,206,326   
  

 

 

    

 

 

 
       23,808,315         25,454,766   
  

 

 

    

 

 

 

2) Financial liabilities as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Financial liabilities at fair value through profit or loss

     

Derivatives liabilities held for trading

   185,142         357,466   

Financial liabilities evaluated as amortized cost

     

Trade accounts payable

     4,391,788         4,231,881   

Borrowings

     24,921,433         26,246,605   

Financial guarantee liabilities

     25,312         38,459   

Others

     1,802,174         2,253,989   
  

 

 

    

 

 

 
     31,140,707         32,770,934   
  

 

 

    

 

 

 
       31,325,849         33,128,400   
  

 

 

    

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) Finance income and costs by category of financial instrument for the years ended December 31, 2011, 2012 and 2013 were as follows:

 December 31, 2011

 

     Finance income and costs        
    Interest
income
(cost)
    Dividend
income
    Gain and
loss on
foreign
currency
transactions
    Gain and loss
on foreign
currency
translations
    Gain and
loss on
disposal
    Others     Total     Other
comprehensive
loss
 
    (in millions of Won)  

Financial assets at fair value through profit or loss

  3                             544,913        70,656        615,572          

Available-for-sale financial assets

    768        143,880                      453,540        (152,804     445,384        (1,231,758

Held-to-maturity investments

    1,749                                    (311     1,438          

Loans and receivables

        213,714               (26,239     46,971        (41,171     (95     193,180          

Financial liabilities at fair value through profit or loss

                                (506,664     (150,963     (657,627       

Financial liabilities at amortized cost

    (788,348            (140,052     (317,867            (27,956     (1,274,223       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (572,114     143,880        (166,291     (270,896     450,618        (261,473     (676,276     (1,231,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

 

     Financial income and costs        
    Interest
income
(cost)
    Dividend
income
    Gain and
loss on
foreign
currency
transactions
    Gain and
loss on
foreign
currency
translations
    Gain and
loss on
disposal
    Others     Total     Other
comprehensive
loss
 
    (in millions of Won)  

Financial assets at fair value through profit or loss

  130                             407,505        77,907        485,542          

Available-for-sale financial assets

    1,046        124,475                      75,809        (224,171     (22,841     (81,471

Held-to-maturity investments

    1,664                             (224     79        1,519          

Loans and receivables

        275,967               (252,265     (162,156     (33,786     (406     (172,646       

Financial liabilities at fair value through profit or loss

                                (308,350     (143,754     (452,104       

Financial liabilities at amortized cost

    (871,457            348,481        855,805               (72,874     259,955          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (592,650     124,475        96,216        693,649        140,954        (363,219     99,425        (81,471
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

ƒ December 31, 2013

 

     Financial income and costs        
    Interest
income
(cost)
    Dividend
income
    Gain and
loss on
foreign
currency
transactions
    Gain and
loss on
foreign
currency
translations
    Gain and
loss on
disposal
    Others     Total     Other
comprehensive
income
 
    (in millions of Won)  

Financial assets at fair value through profit or loss

  549                             348,126        67,951        416,626          

Available-for-sale financial assets

    4,010        59,181                      101,842        (280,237     (115,204     412,346   

Held-to-maturity investments

    480                                    84        564          

Loans and receivables

        255,359               20,232        (69,773     (20,009     (145     185,664          

Financial liabilities at fair value through profit or loss

                                (264,739     (287,864     (552,603       

Financial liabilities at amortized cost

    (657,681            49,906        236,016               (11,703     (383,462       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (397,283     59,181        70,138        166,243        165,220        (511,914     (448,415     412,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(b) Credit risk

1) Credit risk exposure

The carrying amount of financial assets represents the Company’s maximum exposure to credit risk. The maximum exposure to credit risk as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Cash and cash equivalents

   4,680,526         4,208,562   

Financial assets at fair value through profit or loss

     71,354         78,222   

Available-for-sale financial assets

     203,353         97,618   

Held-to-maturity investments

     34,488         3,834   

Loans and other receivables

     3,927,248         5,408,163   

Trade accounts and notes receivable, net

     11,037,973         11,492,601   

Long-term trade accounts and notes receivable, net

     142,204         97,000   
  

 

 

    

 

 

 
       20,097,146         21,386,000   
  

 

 

    

 

 

 

The Company provided financial guarantees for the repayment of loans of associates and third parties. As of December 31, 2012 and 2013, the maximum exposure to credit risk related to the financial guarantee amounted to 4,607,773 million, 4,520,052 million, respectively.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) Impairment losses on financial assets

 Allowance for doubtful accounts as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     (in millions of Won)  

Trade accounts and notes receivable

   379,536         439,073   

Other accounts receivable

     47,565         81,470   

Long-term loans

     42,721         127,990   

Other assets

     5,055         13,118   
  

 

 

    

 

 

 
       474,877         661,651   
  

 

 

    

 

 

 

Impairment losses on financial assets for the years ended December 31, 2012 and 2013 were as follows:

 

      2012     2013  
     (in millions of Won)  

Bad debt expenses on trade receivables

   79,258        90,119   

Impairment of available-for-sale financial assets

     224,171        280,237   

Other bad debt expenses (*1)

     44,115        111,065   

Less: Recovery of impairment of held-to-maturity financial assets

     (79     (84
  

 

 

   

 

 

 
       347,465        481,337   
  

 

 

   

 

 

 

 

(*1) Other bad debt expenses are mainly related to other receivables and loans.

ƒ The aging schedule and the impaired losses of trade accounts and notes receivable as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     Trade accounts and
notes receivable
     Impairment      Trade accounts and
notes receivable
     Impairment  
     (in millions of Won)  

Not due

   9,106,925         52,063         8,465,892         48,147   

Over due less than 1 month

     1,313,554         4,387         1,849,829         12,675   

1 month – 3 months

     278,029         3,264         239,498         3,124   

3 months – 12 months

     413,251         41,291         503,171         10,681   

Over 12 months

     447,954         278,531         970,284         364,446   
  

 

 

    

 

 

    

 

 

    

 

 

 
       11,559,713         379,536         12,028,674         439,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

The aging schedule and the impaired losses of loans and other receivables as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     Loans and other
receivables
     Impairment      Loans and other
receivables
     Impairment  
     (in millions of Won)  

Not due

   3,688,845         3,059         5,186,745         11,176   

Over due less than 1 month

     12,491         359         28,501         19,138   

1 month – 3 months

     22,410         316         13,293         30   

3 months – 12 months

     120,224         2,833         92,022         820   

Over 12 months

     178,618         88,774         310,180         191,414   
  

 

 

    

 

 

    

 

 

    

 

 

 
       4,022,588         95,341         5,630,741         222,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Changes in the allowance for doubtful accounts for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011     2012     2013  
     (in millions of Won)  

Beginning

       357,063        406,721        474,877   

Bad debt expenses

     92,197        79,258        90,119   

(Reversal of) Other bad debt expenses

     (46,720     44,115        111,065   

Write-off

     (16,225     (40,138     (10,368

Others

     20,406        (15,079     (4,042
  

 

 

   

 

 

   

 

 

 

Ending

       406,721        474,877        661,651   
  

 

 

   

 

 

   

 

 

 

(c) Liquidity risk

1) Contractual maturities for non-derivative financial liabilities, including estimated interest, are as follows:

 

      Book value      Contractual
cash flow
     Within
1 year
     1 year -
5 years
     Later
than
5 years
 
     (in millions of Won)  

Trade accounts payable

   4,231,881         4,231,881         4,231,322         559           

Financial guarantee liabilities (*1)

     38,459         4,520,052         4,520,052                   

Other financial liabilities

     2,253,989         2,253,989         2,047,355         206,634           

Borrowings (*2)

     26,246,605         29,293,081         11,946,021         11,723,706         5,623,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       32,770,934         40,299,003         22,744,750         11,930,899         5,623,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(*1) For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

 

(*2) Includes cash flows of embedded derivatives instruments in relation to exchangeable bonds (exchange right).

2) The maturity analysis of derivative financial liabilities is as follows:

 

      Within 1 year      1 year- 
5 years
     Later than
5 years
     Total  
     (in millions of Won)  

Currency forward

   20,166         24,882                 45,048   

Currency futures

     35,605                         35,605   

Currency swaps

     72,267         23,459         5,291         101,017   

Interest swaps

     332                         332   
  

 

 

    

 

 

    

 

 

    

 

 

 
       128,370         48,341         5,291         182,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

(d) Currency risk

1) The Company has exposure to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The exposure to currency risk as of December 31, 2012 and 2013 are as follows:

 

      2012      2013  
     Assets      Liabilities      Assets      Liabilities  
     (in millions of Won)  

USD

       3,933,448         9,120,893         3,929,623         8,953,287   

EUR

     317,381         330,481         365,021         408,542   

JPY

     239,569         2,017,179         482,691         1,727,946   

Others

     264,299         65,679         372,715         212,287   

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) As of December 31, 2012 and 2013, provided that functional currency against foreign currencies other than functional currency hypothetically weakens or strengthens by 10%, the changes in gain or loss during the years ended December 31, 2012 and 2013 were as follows:

 

      2012      2013  
     10% increase     10% decrease      10% increase     10% decrease  
     (in millions of Won)  

USD

   (518,745     518,745         (502,366     502,366   

EUR

     (1,310     1,310         (4,352     4,352   

JPY

     (177,761     177,761         (124,526     124,526   

(e) Interest rate risk

1) The carrying amount of interest-bearing financial instruments as of December 31, 2012 and 2013 are as follows:

 

     2012     2013  
     (in millions of Won)  

Fixed rate

    

Financial assets

   7,325,825        8,195,153   

Financial liabilities

     (15,301,208     (15,633,891
  

 

 

   

 

 

 
   (7,975,383     (7,438,738
  

 

 

   

 

 

 

Variable rate

    

Financial liabilities

   (9,620,225     (10,612,712
  

 

 

   

 

 

 

2) Sensitivity analysis on the fair value of financial instruments with variable interest rate

As of December 31, 2012 and 2013, provided that other factors remain the same and the interest rate of borrowings with floating rates increases or decreases by 1%, the changes in gain or loss for the years ended December 31, 2012 and 2013 were as follows:

 

      2012      2013  
     1% increase     1% decrease      1% increase     1% decrease  
     (in millions of Won)  

Variable rate financial instruments

   (96,202     96,202         (106,127     106,127   

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(f) Fair value

1) Fair value and book value

The carrying amount and the fair value of financial instruments as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     Book Value      Fair Value      Book Value      Fair Value  
     (in millions of Won)  

Assets measured at fair value

           

Available-for-sale financial assets (*1)

   3,349,606         3,349,606         3,560,515         3,560,515   

Derivatives assets held for trading (*2)

     71,354         71,354         78,222         78,222   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,420,960         3,420,960         3,638,737         3,638,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets measured amortized cost (*3)

           

Cash and cash equivalents

     4,680,526         4,680,526         4,208,562         4,208,562   

Trade accounts and notes receivable, net

     11,180,177         11,180,177         11,589,601         11,589,601   

Loans and other receivables, net

     3,927,248         3,927,248         5,408,163         5,408,163   

Held-to-maturity investments

     34,488         34,488         3,834         3,834   
  

 

 

    

 

 

    

 

 

    

 

 

 
     19,822,439         19,822,439         21,210,160         21,210,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities measured at fair value

           

Derivatives liabilities held for trading (*2)

     185,142         185,142         357,466         357,466   

Liabilities measured amortized cost (*3)

           

Trade accounts and notes payable

     4,391,787         4,391,787         4,231,881         4,231,881   

Borrowings

     24,921,433         25,382,344         26,246,605         26,550,721   

Financial guarantee liabilities

     25,312         25,312         38,459         38,459   

Others

     1,802,175         1,802,175         2,253,989         2,253,989   
  

 

 

    

 

 

    

 

 

    

 

 

 
       31,140,707         31,601,618         32,770,934         33,075,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*1) The fair value of available-for-sale financial assets publicly traded is measured at the closing bid price quoted at the end of the reporting period. Meanwhile, the fair value of unquoted available-for-sale financial assets is calculated using the valuation results from an external pricing service in which weighted average cost of capital of evaluated companies is used as a discount rate. Available-for-sale financial assets which are not measured at fair value are excluded.

 

(*2) The fair value of derivatives is measured using valuation models such as Black-Scholes model and others in which the market yields on government bonds are used as a discount rate.

 

(*3) The fair value of financial assets and liabilities measured at amortized cost is determined at the present value of estimated future cash flows discounted at the current market interest rate. The fair value is calculated for the disclosures in the notes. On the other hand, the Company has not performed fair value measurement for the financial assets and liabilities measured at amortized cost except borrowings since the fair value is close to their carrying amounts.

2) Interest rates used for determining fair value

Interest rates used to discount estimated cash flows as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  

Interest rate of borrowings (%)

     1.47~7.22         0.76~5.18   

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) The fair value hierarchy

 

  ¨ The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in measurements.

 

Level 1:    quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:    inputs other than quoted prices that are observable for the asset or liability either directly or indirectly.
Level 3:    inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs).

 

  ¨ The fair values of financial instruments by fair value hierarchy as of December 31, 2012 and 2013 are as follows:

a. December 31, 2012

 

     Level 1      Level 2      Level 3      Total  
     (in millions of Won)  

Financial Assets

           

Available-for-sale financial assets

   2,590,933                 758,673         3,349,606   

Derivatives assets held for trading

             71,354                 71,354   
  

 

 

    

 

 

    

 

 

    

 

 

 
       2,590,933         71,354         758,673         3,420,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Derivatives liabilities held for trading

           185,142                 185,142   
  

 

 

    

 

 

    

 

 

    

 

 

 

b. December 31, 2013

 

     Level 1      Level 2      Level 3      Total  
     (in millions of Won)  

Financial Assets

           

Available-for-sale financial assets

       2,816,484                 744,031         3,560,515   

Derivatives assets held for trading

             78,222                 78,222   
  

 

 

    

 

 

    

 

 

    

 

 

 
   2,816,484         78,222         744,031         3,638,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Derivatives liabilities held for trading

           357,466                 357,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  ¨ Changes in fair value of financial instruments measured by Level 3 for the years ended December 31, 2012 and 2013 were as follows:

 

     2012     2013  
     (in millions of Won)  

Beginning

   939,241        758,673   

Valuation

     (182,927     (15,423

Acquisition and others (*1)

     30,729        19,766   

Disposal and others (*2)

     (28,370     (18,985
  

 

 

   

 

 

 

Ending

       758,673        744,031   
  

 

 

   

 

 

 

 

 

(*1) Included 15,326 million and 16,518 million transferred to Level 3 for the years ended December 31, 2012 and 2013, respectively.

 

(*2) Included 17,500 million and 12,176 million excluded from Level 3 for the years ended December 31, 2012 and 2013, respectively.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(g) Offsetting financial assets and financial liabilities

As of December 31, 2012 and 2013, financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements are as follows:

1) December 31, 2012

 

     Gross amounts
of recognized
financial
instruments
     Gross
amounts of
recognized
financial
instruments
set off in the
statement of
financial
     Net
amounts
of financial
instruments
presented in
the statement
of financial
position
     Related amounts not set off
in the statement of financial
position
    Net
amount
 
            Financial
instruments
    Cash collateral
received or
pledged
   
     (in millions of Won)  

Financial assets

               

Trade accounts and notes receivable

   80,258                 80,258         (80,258              

Derivatives (*1)

     56,341                 56,341         (56,341              
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     136,599                 136,599         (136,599              
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Financial liabilities

               

Short-term borrowings

     80,258                 80,258         (80,258              

Derivatives (*1)

     59,274                 59,274         (56,341     (2,933       
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

       139,532                 139,532         (136,599     (2,933       
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(*1) Some of derivative contract are made under International Swaps and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counter party on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. In certain circumstances (i.e. when a default occurs), all standing transactions under the agreement are terminated, the termination value is assessed and only a single amount is payable in settlement of all transactions.

2) December 31, 2013

 

     Gross amounts
of recognized
financial
instruments
     Gross
amounts of
recognized
financial
instruments
set off in the
statement of
financial
     Net
amounts
of financial
instruments
presented in
the statement
of financial
position
     Related amounts not set off
in the statement of financial
position
    Net
amount
 
            Financial
instruments
    Cash collateral
received or
pledged
   
     (in millions of Won)  

Financial assets

               

Trade accounts and notes receivable

   73,956                 73,956         (73,956              

Derivatives (*1)

     64,408                 64,408         (64,408              
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     138,364                 138,364         (138,364              
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Financial liabilities

               

Short-term borrowings

     73,956                 73,956         (73,956              

Derivatives (*1)

     108,405                 108,405         (64,408     (3,410     40,587   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

       182,361                 182,361         (138,364     (3,410     40,587   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(*1) Some of derivative contract are made under International Swaps and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counter party on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. In certain circumstances (i.e. when a default occurs), all standing transactions under the agreement are terminated, the termination value is assessed and only a single amount is payable in settlement of all transactions.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

24. Share Capital and Contributed Surplus

(a) Share capital as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (share, in Won)  

Authorized shares

     200,000,000         200,000,000   

Par value

   5,000         5,000   

Issued shares (*1)

     87,186,835         87,186,835   

Shared capital (*2)

       482,403,125,000         482,403,125,000   

 

 

(*1) As of December 31, 2013, total shares of ADRs of 53,749,064 are equivalent to 13,437,266 of common stock.

 

(*2) As of December 31, 2013, the difference between the ending balance of common stock and the par value of issued common stock is 46,469 million due to retirement of 9,293,790 treasury stocks.

(b) The changes in issued common stock for the years ended December 31, 2012 and 2013 were as follows:

 

     2012      2013  
     Issued
shares
     Treasury
shares
    Number of
outstanding
shares
     Issued
shares
     Treasury
shares
    Number of
outstanding
shares
 
     (share)  

Beginning

     87,186,835         (9,942,391     77,244,444         87,186,835         (9,942,391     77,244,444   

Disposal of treasury shares

                                    2,539,180        2,539,180   

Ending

     87,186,835         (9,942,391     77,244,444         87,186,835         (7,403,211     79,783,624   

(c) Capital surplus as of December 31, 2012 and 2013 are as follows:

 

      2012     2013  
     (in millions of Won)  

Share premium

   463,825        463,825   

Gain on disposal of treasury shares

     763,867        769,215   

Other capital deficit

     (122,878     (154,774
  

 

 

   

 

 

 
       1,104,814        1,078,266   
  

 

 

   

 

 

 

 

25. Hybrid Bonds

(a) Hybrid bonds classified as equity as of December 31, 2013 are as follows:

 

     Date of
issue
     Date of maturity      Rate of interest (%)      2013  
     (in millions of Won)  

Hybrid bond 1-1 (*1)

     2013-06-13         2043-06-13         4.30       800,000   

Hybrid bond 1-2 (*1)

     2013-06-13         2043-06-13         4.60         200,000   

Issuance cost

              (3,081
           

 

 

 
                996,919   
           

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(*1) Details of hybrid bonds as of December 31, 2013 are as follows:

 

    

Hybrid bond 1-1

  

Hybrid bond 1-2

     (in millions of Won)

Issue price

   800,000    200,000

Maturity date

  

30 years (The Company has a right to extend the maturity date)

 

Issue date~2018-06-12 : 4.3%

 

reset every 5 years as follows;

  

30 years (The Company has a right to extend the maturity date)

 

Issue date~2023-06-12 : 4.6%

 

reset every 10 years as follows;

Interest rate

  

· After 5 years : return on government bond (5 years) + 1.3%

· After 10 years : additionally +0.25% according to Step-up clauses

· After 25 years : additionally +0.75%

  

· After 10 years : return on government bond (10 years) + 1.4%

· After 10 years : additionally +0.25% according to Step-up clauses

· After 30 years : additionally +0.75%

Interest payments

  

Quarterly

  

Quarterly

condition

  

(Optional deferral of interest payment is available to the Company)

 

The Company can call the hybrid bond at year 5 and interest payment date afterwards

  

(Optional deferral of interest payment is available to the Company)

 

The Company can call the hybrid bond at year 10 and interest payment date afterwards

Others

     

The Company holds the right to extend the maturity dates of the hybrid bonds and to defer interest payments for the hybrid bonds. If interest payments for the hybrid bonds are deferred, the Company cannot declare or pay dividends attributable to common stock. Since the Company has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the hybrid bonds have been classified as equity instruments. The hybrid bond holders’ preference in the event of liquidation is higher than the common stock holders, but lower than other creditors. The interest accumulated but not paid on the hybrid bonds as of December 31, 2013 amounts to 2,301 million.

(b) POSCO ENERGY Co., Ltd., a subsidiary of the Company, issued hybrid bonds during the year ended December 31, 2013, which are classified as non-controlling interests in the consolidated financial statements. Hybrid bonds as of December 31, 2013 are as follows:

 

     Date of issue      Date of maturity      Interest rate (%)      2013  
     (in millions of Won)  

Hybrid bond 1-1 (*1)

     2013-08-29         2043-08-29         4.66           165,000   

Hybrid bond 1-2 (*1)

     2013-08-29         2043-08-29         4.72         165,000   

Hybrid bond 1-3 (*1)

     2013-08-29         2043-08-29         4.72         30,000   

Hybrid bond 1-4 (*1)

     2013-08-29         2043-08-29         5.21         140,000   

Issuance cost

              (1,532
           

 

 

 
            498,468   
           

 

 

 

 

 

(*1) Details of hybrid bonds of POSCO ENERGY Co., Ltd .as of December 31, 2013 are as follows:

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

    

Hybrid bond 1-1

  

Hybrid bond 1-2 and 1-3

  

Hybrid bond 1-4

     (in millions of Won)

Issue price

   165,000    195,000    140,000

Maturity date

  

30 years (The Company has a right to extend the maturity date)

 

Issue date~2018-08-29 : 4.66% reset every 5 years as follows;

· After 5 years : return on

  

30 years (The Company has a right to extend the maturity date)

 

Issue date~2018-08-29 : 4.72% reset every 5 years as follows;

· After 5 years : return on

  

30 years (The Company has a right to extend the maturity date)

 

Issue date~2018-08-29 : 5.21% reset every 5 years as follows;

· After 5 years : return on

Interest rate

  

government bond (5 years) + 1.39%

· After 10 years : additionally +0.25% according to Step-up clauses

· After 30 years : additionally +0.75%

 

Quarterly

  

government bond (5 years) + 1.45%

· After 10 years : additionally +0.25% according to Step-up clauses

· After 30 years : additionally +0.75%

 

Quarterly

  

government bond (5 years) + 1.55%

· After 10 years : additionally +0.25% according to Step-up clauses

· After 30 years : additionally +0.75%

 

Quarterly

Interest payments condition

   (Optional deferral of interest payment is available to the Company)    (Optional deferral of interest payment is available to the Company)    (Optional deferral of interest payment is available to the Company)

Others

   The Company can call the hybrid bond at year 5 and interest payment date afterwards    The Company can call the hybrid bond at year 5 and interest payment date afterwards    The Company can call the hybrid bond at year 5 and interest payment date afterwards

The Company holds the right to extend the maturity dates of the hybrid bonds and to defer interest payments for the hybrid bonds. If interest payments for the hybrid bonds are deferred, the Company cannot declare or pay dividends attributable to common stock. Since the Company has an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the hybrid bonds have been classified as equity instruments (Non-controlling interests). The hybrid bond holders’ preference in the event of liquidation is higher than the common stock holders, but lower than other creditors. The interest accumulated but not paid on the hybrid bonds as of December 31, 2013 amounts to 2,000 million.

 

26. Reserves

(a) Reserves as of December 31, 2012 and 2013 are as follows:

 

     2012     2013  
     (in millions of Won)  

Accumulated comprehensive loss of investments in associates and joint ventures

   (129,159     (295,946

Changes in the unrealized fair value of available-for-sale investments

     67,956        480,409   

Currency translation differences

     (8,591     (189,085

Others

     (18,356     (18,454
  

 

 

   

 

 

 
   (88,150     (23,076
  

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Changes in fair value of available-for-sale investments for the years ended December 31, 2012 and 2013 were as follows:

 

     2012     2013  
     (in millions of Won)  

Beginning balance

   154,617        67,956   

Changes in the unrealized fair value of available-for-sale investments

     (189,664     312,196   

Reclassification to profit or loss upon disposal

     (54,089     (73,848

Impairment of available-for-sale investments

     150,869        170,892   

Others

     6,223        3,213   
  

 

 

   

 

 

 

Ending balance

   67,956        480,409   
  

 

 

   

 

 

 

 

27. Treasury Shares

Based on the Board of Director’s resolution, the Company holds treasury shares for the business purposes including price stabilization. The changes in treasury shares for the years ended December 31, 2012 and 2013 were as follows:

 

     2012      2013  
     Number of shares      Amount      Number of shares     Amount  
     (shares, in millions of Won)  

Beginning

     9,942,391       2,391,406         9,942,391        2,391,406   

Disposal of treasury shares

                     (2,539,180     (812,282
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending

     9,942,391           2,391,406         7,403,211        1,579,124   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

28. Revenue

Details of revenue for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Goods sales

   61,001,789         55,123,774         50,921,090   

Service sales

     2,440,639         3,488,562         3,614,227   

Construction sales

     5,297,892         4,660,811         6,886,007   

Rental income

     39,862         32,056         24,735   

Others

     158,543         298,948         418,591   
  

 

 

    

 

 

    

 

 

 
       68,938,725         63,604,151         61,864,650   
  

 

 

    

 

 

    

 

 

 

 

29. Construction Contracts

(a) Construction contracts in progress as of December 31, 2012 and 2013 were as follows:

 

     2012     2013  
     (in million of Won)  

Aggregate amount of costs incurred

   8,343,117        10,380,202   

Add: Recognized profits

     659,555        950,010   

Less: Recognized losses

     (213,055     (467,023

Cumulative construction revenue

     8,789,617        10,863,189   

Less: Progress billing

     (7,691,482     (10,145,691

Foreign currency gains and losses

     (2,589     (1,379

Others

     (130,941     (39,795
  

 

 

   

 

 

 
   964,605        676,324   
  

 

 

   

 

 

 

 

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Table of Contents

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Unbilled amount due from customers and due to customers for contract work as of December 31, 2012 and 2013 are as follows:

 

     2012     2013  
     (in million of Won)  

Unbilled due from customers for contract work

   1,493,709        1,574,929   

Due to customers for contract work

     (529,104     (898,605
  

 

 

   

 

 

 
   964,605        676,324   
  

 

 

   

 

 

 

(c) When the outcome of a construction contract can be estimated reliably, contract revenue is recognized in profit or loss in proportion to the stage of completion of the contract.

The Company estimates the stage of completion of the contract based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.

The estimated total contract costs are based on the nature and characteristics of an individual contract, historical costs of similar projects, and current circumstances. Only those contract costs that reflect work performed are included in costs incurred to date.

The following are the key assumptions for the estimated contract cost.

 

  

  

Key assumptions for the estimation

Material    Estimations based on recent purchasing contracts, market price and quoted price
Labor Cost    Estimations based on standard monthly and daily labor cost
Outsourcing cost    Estimations based on the historical costs of similar projects, market price and quoted price

The management continually reviews all estimates involved in such construction contracts and adjusts them as necessary.

 

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Table of Contents

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

30. Selling and Administrative Expenses

(a) Administrative expenses

Administrative expenses for years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Wages and salaries

   606,819         694,682         754,819   

Expenses related to post-employment benefits

     60,271         61,261         67,482   

Other employee benefits

     164,508         170,734         165,751   

Travel

     56,635         52,817         53,003   

Depreciation

     172,807         218,747         228,496   

Communication

     13,061         15,088         14,601   

Electric power

     7,529         11,305         13,389   

Taxes and public dues

     50,617         59,664         55,177   

Rental

     65,559         93,268         110,191   

Repairs

     14,919         11,769         5,708   

Entertainment

     17,905         18,239         17,295   

Advertising

     70,939         55,777         105,663   

Research & development

     212,472         192,321         192,805   

Service fees

     286,635         264,439         240,034   

Supplies

     14,357         10,166         15,031   

Vehicles maintenance

     21,491         22,442         12,109   

Industry association fee

     10,200         11,487         11,924   

Training

     24,375         17,772         12,056   

Conference

     21,739         17,745         17,004   

Warranty expense

     12,606         13,148         19,075   

Bad debt allowance

     92,197         79,258         90,119   

Others

     37,412         37,334         30,073   
  

 

 

    

 

 

    

 

 

 
   2,035,053         2,129,463         2,231,805   
  

 

 

    

 

 

    

 

 

 

(b) Selling expenses

Selling expenses for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011      2012      2013  
     (in millions of Won)  

Freight

   1,406,268         1,472,817         1,432,935   

Operating expenses for distribution center

     8,115         9,327         9,838   

Sales commissions

     85,410         74,308         73,922   

Sales advertising

     1,204         4,575         3,228   

Sales promotion

     16,179         17,525         27,129   

Sample

     7,321         7,489         4,751   

Sales insurance premium

     19,915         32,065         27,031   

Contract cost

     62,986         52,176         37,323   

Others

     4,730         8,406         15,963   
  

 

 

    

 

 

    

 

 

 
       1,612,128         1,678,688         1,632,120   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

31. Research and Development Expenditures Recognized as Expenses

Research and development expenditures recognized as expenses for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011      2012      2013  
     (in millions of Won)  

Selling and administrative expenses

   212,472         192,321         192,805   

Cost of sales

     380,177         385,128         369,842   
  

 

 

    

 

 

    

 

 

 
       592,649         577,449         562,647   
  

 

 

    

 

 

    

 

 

 

 

32. Other Operating Income and Expenses

Details of other operating income and expenses for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011     2012     2013  
     (in millions of Won)  

Other operating income

      

Gain on disposals of property, plant and equipment

   13,812        42,290        14,177   

Retail revenues

     6,510        1,898        1,588   

Gain on disposals of intangible assets

     953        906        801   

Gain on disposals of investments in associates

     2,247        39,441        7,668   

Gain on disposals of assets held for sale

            193,333        101,611   

Grant income

     1,228        3,198        2,287   

Reversal of other bad debt allowance

     57,875                 

Reversal of other provisions

     35,629        16,037          

Outsourcing income

     42,136        29,136        25,428   

Gain on disposals of wastes

     11,348        38,597        16,541   

Gain from claim compensation

     68,853        31,613        14,525   

Penalty income from early termination of contracts

     38,570        15,054        16,477   

Others

     27,780        36,617        27,970   
  

 

 

   

 

 

   

 

 

 
       306,941        448,120        229,073   
  

 

 

   

 

 

   

 

 

 

Other operating expenses

      

Loss on disposals of property, plant and equipment

   (60,550     (65,486     (121,133

Loss on disposals of investment property

     (8,826     (3,197     (522

Loss on disposals of assets held for sale

            (9,510     (26,498

Idle tangible assets expenses

     (16,881     (31,297     (17,624

Impairment loss on other long-term assets

     (34,544     (36,453     (9,000

Impairment loss on assets held for sale

            (258,451     (1,814

Impairment loss of property, plant and equipment

     (26,171     (12,977     (9,742

Impairment loss of investment property

     (23,397     (1,053     (22,943

Other bad debt expenses

     (11,155     (44,115     (111,065

Donations

     (66,558     (73,963     (60,940

Impairment loss on intangible assets

     (14,959     (21,776     (125,316

Penalty and default losses

     (39,551     (149,437     (19,340

Loss on disposals of wastes

     (30,585     (45,480     (15,231

Loss on disposals of investments in associates

            (15,119     (19,404

Other provision expenses

                   (65,896

Others

     (33,356     (41,151     (24,338
  

 

 

   

 

 

   

 

 

 
   (366,533     (809,465     (650,806
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

33. Finance Income and Costs

Details of finance income and costs for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011     2012     2013  
     (in millions of Won)  

Finance income

      

Interest income

   216,234        278,807        260,398   

Dividend income

     143,880        124,475        59,181   

Gain on foreign currency transactions

     1,454,103        935,457        997,591   

Gain on foreign currency translations

     259,014        936,740        511,143   

Gain on transactions of derivatives

     549,439        407,791        370,343   

Gain on valuations of derivatives

     111,637        94,492        72,297   

Gain on disposals of available-for-sale investments

     454,543        112,095        105,563   

Others

     1,569        7,206        4,322   
  

 

 

   

 

 

   

 

 

 
   3,190,419        2,897,063        2,380,838   
  

 

 

   

 

 

   

 

 

 

Finance costs

      

Interest expenses

   (788,348     (871,457     (657,681

Loss on foreign currency transactions

     (1,620,394     (839,241     (927,453

Loss on foreign currency translations

     (529,910     (243,091     (344,900

Loss on transactions of derivatives

     (512,882     (309,067     (286,574

Loss on valuations of derivatives

     (188,742     (159,604     (291,465

Impairment loss on available-for-sale investments

     (152,804     (224,171     (280,237

Loss on disposals of available-for-sale investments

     (1,003     (36,286     (3,721

Loss on financial guarantee

     (1,000     (38,442     (5,880

Others

     (71,612     (76,279     (31,342
  

 

 

   

 

 

   

 

 

 
   (3,866,695     (2,797,638     (2,829,253
  

 

 

   

 

 

   

 

 

 

 

34. Expenses by Nature

Expenses that are recorded by nature as cost of sales, selling, general and administrative expenses and other operating expenses in the statements of comprehensive income for the years ended December 31, 2011, 2012 and 2013 were as follows (excluding finance costs and income tax expense):

 

      2011      2012      2013  
     (in millions of Won)  

Changes in inventories

   17,546,701         14,161,271         12,163,136   

Cost of merchandises sold

     26,650,240         25,997,220         25,909,164   

Employee benefits expenses (*2)

     2,639,966         2,889,829         3,174,316   

Outsourced processing cost

     8,331,110         8,896,642         9,462,946   

Depreciation expenses (*1)

     2,133,010         2,405,769         2,505,536   

Amortization expenses

     133,289         157,991         180,014   

Electricity and water expenses

     715,265         837,507         1,109,765   

Service fees

     630,223         670,919         702,953   

Research & development expenses

     592,649         577,449         562,647   

Freight and custody expenses

     1,406,268         1,472,817         1,432,935   

Commission paid

     85,410         74,308         73,922   

Loss on disposal of property, plant, and equipment

     60,550         65,486         121,133   

Donations

     66,558         73,963         60,940   

Other expenses

     2,846,325         2,479,337         2,059,915   
  

 

 

    

 

 

    

 

 

 
       63,837,564         60,760,508         59,519,322   
  

 

 

    

 

 

    

 

 

 

 

 

(*1) Includes depreciation expense of investment property.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(*2) The details of employee benefits expenses for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011      2012      2013  
     (in millions of Won)  

Wages and salaries

       2,394,094         2,647,177         2,907,442   

Severance benefit

     245,872         242,652         266,874   
  

 

 

    

 

 

    

 

 

 
   2,639,966         2,889,829         3,174,316   
  

 

 

    

 

 

    

 

 

 

 

35. Income Taxes

(a) Income tax expense for the years ended December 31, 2011, 2012 and 2013 was as follows:

 

      2011     2012      2013  
     (in millions of Won)  

Current income taxes

       1,069,240        795,601         615,771   

Deferred income tax due to temporary differences

     (318,722     154,324         108,034   

Less: Items recorded directly in equity

     317,591        32,954         (132,808
  

 

 

   

 

 

    

 

 

 

Income tax expense

   1,068,109        982,879         590,997   
  

 

 

   

 

 

    

 

 

 

(b) The following table reconciles the expected amount of income tax expense based on POSCO’s statutory rates (24.2%) to the actual amount of taxes recorded by the Company for the years ended December 31, 2011, 2012 and 2013:

 

      2011     2012     2013  
     (in millions of Won)  

Net income before income tax expense

       4,782,395        3,368,486        1,946,177   

Income tax expense computed at statutory rate

     1,157,340        815,174        470,975   

Adjustments:

     (89,231     167,705        120,022   

Tax effects due to permanent differences

     (13,798     48,220        7,703   

Tax credit

     (193,633     (188,713     (169,166

Tax rate change effect

     17,661                 

Over (under) provision from prior years

     (15,739     1,776        (1,178

Investments in subsidiaries and associates

     97,246        281,437        251,014   

Others

     19,032        24,985        31,649   
  

 

 

   

 

 

   

 

 

 

Income tax expense

   1,068,109        982,879        590,997   
  

 

 

   

 

 

   

 

 

 

Effective tax rate (%)

     22.33        29.18        30.37   

(c) The income taxes credited (charged) directly to other comprehensive income during the period ended December 31, 2012 and 2013 were as follows:

 

      2012      2013  
     (in millions of Won)  

Net changes in the unrealized fair value of available-for-sale securities

   22,585         (139,679

Gains on sale of treasury stock

             (1,707

Others

     10,369         8,578   
  

 

 

    

 

 

 
       32,954         (132,808
  

 

 

    

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(d) The movements in deferred tax assets (liabilities) for the years ended December 31, 2012 and 2013 were as follows:

 

    2012     2013  
    Beginning     Inc (Dec)     Ending     Beginning     Inc (Dec)     Ending  
    (in millions of Won)  

Deferred income tax due to temporary differences

           

Reserve for special repairs

  (29,659     646        (29,013     (29,013     551        (28,462

Allowance for doubtful accounts

    104,621        7,807        112,428        112,428        37,175        149,603   

Reserve for technology developments

    (366,232     (9,698     (375,930     (375,930     (4,735     (380,665

Depreciation

    (58,288     11,714        (46,574     (46,574     13,232        (33,342

Share of profit or loss of equity-accounted investees

    (224,136     127,762        (96,374     (96,374     7,069        (89,305

Reserve for inventory valuation

    (1,514     (2,568     (4,082     (4,082     2,560        (1,522

Revaluation of assets

    (570,403     (229,529     (799,932     (799,932     (211,661     (1,011,593

Prepaid expenses

    21,437        9,803        31,240        31,240        (2,855     28,385   

Impairment loss on property, plant and equipment

    25,492        3,263        28,755        28,755        (3,237     25,518   

Loss on foreign currency translation

    95,787        (159,132     (63,345     (63,345     (125,857     (189,202

Defined benefit obligations

    55,053        15,571        70,624        70,624        29,732        100,356   

Plan assets

    (43,091     (3,330     (46,421     (46,421     (12,245     (58,666

Provision for construction losses

    2,852        (625     2,227        2,227        2,046        4,273   

Provision for construction warranty

    15,902        (1,061     14,841        14,841        1,833        16,674   

Appropriated retained earnings for technological development

    (165     (286     (451     (451            (451

Accrued income

    (1,949     (1,248     (3,197     (3,197     282        (2,915

Others

    376,107        (66,085     310,022        310,022        170,015        480,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (598,186     (296,996     (895,182     (895,182     (96,095     (991,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes recognized directly to equity

           

Loss (gain) on valuation of available-for-sale investments

    1,421        22,585        24,006        24,006        (139,679     (115,673

Others

    35,769        10,369        46,138        46,138        8,578        54,716   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    37,190        32,954        70,144        70,144        (131,101     (60,957
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax from tax credit

           

Tax credit carryforward and others

    256,877        82,231        339,108        339,108        98,534        437,642   

Deferred tax effect due to unrealized gain (losses) and others

    (8,375     27,470        19,095        19,095        23,666        42,761   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (312,494)        (154,341     (466,835     (466,835     (104,996     (571,831
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(e) Deferred tax assets and liabilities for the years ended December 31, 2012 and 2013 are as follows:

 

     2012     2013  
     Assets      Liabilities     Net     Assets      Liabilities     Net  
     (in millions of Won)  

Deferred income tax due to temporary differences

              

Reserve for special repairs

           (29,013     (29,013             (28,462     (28,462

Allowance for doubtful accounts

     112,480         (52     112,428        149,695         (92     149,603   

Reserve for technology developments

             (375,930     (375,930             (380,665     (380,665

Depreciation

     15,192         (61,766     (46,574     23,265         (56,607     (33,342

Share of profit or loss of equity-accounted investees

             (96,374     (96,374             (89,305     (89,305

Reserve for inventory valuation

     1,751         (5,833     (4,082     4,392         (5,914     (1,522

Revaluation of assets

             (799,932     (799,932             (1,011,593     (1,011,593

Prepaid expenses

     31,240                31,240        28,385                28,385   

Impairment loss on property, plant and equipment

     28,755                28,755        25,518                25,518   

Loss on foreign currency translation

     202,973         (266,318     (63,345     243,772         (432,974     (189,202

Defined benefit obligations

     86,200         (15,576     70,624        110,891         (10,535     100,356   

Plan assets

             (46,421     (46,421     22         (58,688     (58,666

Provision for construction losses

     2,227                2,227        4,273                4,273   

Provision for construction warranty

     14,841                14,841        16,674                16,674   

Appropriated retained earnings for technological development

             (451     (451             (451     (451

Accrued income

     25         (3,222     (3,197     5         (2,920     (2,915

Others

     421,595         (111,573     310,022        506,291         (26,254     480,037   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     917,279         (1,812,461     (895,182     1,113,183         (2,104,460     (991,277
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred income taxes recognized directly to equity

              

Loss (gain) on valuation of available-for-sale investments

     281,599         (257,593     24,006        128,938         (244,611     (115,673

Others

     66,975         (20,837     46,138        70,441         (15,725     54,716   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     348,574         (278,430     70,144        199,379         (260,336     (60,957
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Deferred tax from tax credit

              

Tax credit carryforward and others

     378,926         (39,818     339,108        481,256         (43,614     437,642   

Deferred tax effect due to unrealized gain (losses) and others

     522,871         (503,776     19,095        530,823         (488,062     42,761   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     2,167,650         (2,634,485     (466,835     2,324,641         (2,896,472     (571,831
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(f) As of December 31, 2013, the Company did not recognize income tax effects associated with deductible temporary differences of 3,030,715 million (deferred tax assets 733,433 million) mainly relating to loss of subsidiaries and affiliates because realization is not considered probable. As of December 31, 2013, the Company did not recognize income tax effects associated with taxable temporary differences of 3,258,235 million (deferred tax liabilities 788,493 million) mainly relating to increase in retained earnings of subsidiaries since it is probable that the temporary difference will not reverse in the foreseeable future.

 

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Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

36. Earnings per Share

(a) Basic and diluted earnings per share for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

      2011      2012      2013  
     (Won, except per share information)  

Profit attribute to controlling interest

       3,648,136,025,973         2,462,080,504,484         1,376,396,068,069   

Interests of hybrid bonds

                     (18,313,914,551

Weighted-average number of common shares outstanding (*1)

     77,251,818         77,244,444         78,009,654   

Basic and diluted earnings per share

     47,224         31,874         17,409   

 

 

(*1) The weighted-average number of common shares used to calculate basic and diluted earnings per share are as follows:

 

      2011     2012     2013  
     (share)  

Total number of common shares issued

       87,186,835        87,186,835        87,186,835   

Weighted-average number of treasury shares

     (9,935,017     (9,942,391     (9,177,181
  

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares outstanding

   77,251,818        77,244,444        78,009,654   
  

 

 

   

 

 

   

 

 

 

As of December 31, 2011, 2012 and 2013, the Company has no potential dilutive common shares. Accordingly, diluted earnings per share is identical to basic earnings per share.

 

F-108


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

37. Related Party Transactions

(a) Significant transactions with related parties for the years ended December 31, 2011, 2012 and 2013 were as follows:

1) For the year ended December 31, 2011

 

    Sales and others (*1)     Purchase and others (*2)  
    Sales     Others     Total     Purchase of
material
    Purchase of
fixed
assets
    Outsourced
processing

cost
    Others     Total  
    (in millions of Won)  

Subsidiaries

               

POSCO ENGINEERING & CONSTRUCTION Co., LTD.

  25,344        1,192      26,536      1,709        1,632,879        184        52,893      1,687,665   

POSCO Processing & Service

    1,181,060        28        1,181,088        1,405,725                      520        1,406,245   

POSCO COATED & COLOR STEEL Co., Ltd.

    593,634        22        593,656                      1,800        90        1,890   

POSCO PLANTEC Co., Ltd.

    7,674        888        8,562        3,334        277,598        19,734        1,685        302,351   

POSCO ICT

    1,415        122        1,537        81        312,260        27,619        167,923        507,883   

eNtoB Corporation

           8        8        254,107        6,347        228        18,354        279,036   

POSCO CHEMTECH

    405,892        17,751        423,643        486,627        4,362        263,958        568        755,515   

POSCO M-TECH

    19,254        101        19,355        101,660        5,726        104,433        13        211,832   

POSCO ENERGY CO., LTD.

    69,864        1,404        71,268        1                      267        268   

POSCO TMC Co., Ltd.

    168,304        10        168,314                      654        230        884   

POSCO AST

    319,251        7        319,258        7,836               50,345        294        58,475   

POSHIMETAL Co., Ltd.

    8,739        54        8,793        34,649                      86        34,735   

Daewoo International Corporation

    3,896,825        32        3,896,857        3,625               101        1,873        5,599   

POSCO NST Co., Ltd.

    186,807        2        186,809        1,305               2,890        539        4,734   

POSCO America Corporation

    353,904               353,904                             1        1   

POSCO Canada Ltd.

                         289,047                             289,047   

POSCO Asia Co., Ltd.

    2,029,378        403        2,029,781        175,876        2,145               374        178,395   

POSCO (Thailand) Company Limited

    96,278        10        96,288                             63        63   

Qingdao Pohang Stainless Steel Co., Ltd.

    49,860        2        49,862                                      

POSCO(Suzhou) Automotive Processing Center Co., Ltd.

    99,773        5        99,778                                      

POSCO JAPAN Co., Ltd.

    1,628,069               1,628,069        30,027        2,558        20        2,255        34,860   

POSCO-India Pune Processing Center. Pvt. Ltd.

    148,342        1        148,343                                      

POSCO MEXICO S.A. DE C.V.

    347,694        221        347,915                             176        176   

POSCO Maharashtra Steel Private Limited

    510        1,830        2,340                                      

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

                         149,029                             149,029   

Others

    567,215        4,126        571,341        132,625        110,370        11,721        115,090        369,806   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,205,086        28,219      12,233,305      3,077,263        2,354,245        483,687        363,294      6,278,489   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates and joint ventures

               

POSMATE

    1,002        36        1,038        952        1,133        16,657        34,615        53,357   

SNNC

    1,609        3,178        4,787        447,130                             447,130   

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

    44,451               44,451                                      

Dongbang Special Steel Co., Ltd.

    84,748               84,748                                      

USS-POSCO Industries

    342,290        304        342,594                             29        29   

POSCHROME (PROPRIETARY) LIMITED

                         72,502                             72,502   

PT. POSMI Steel Indonesia

    12,205               12,205                                      

POSK(Pinghu) Steel Processing Center Co., Ltd.

    7,825               7,825                             32        32   

POSCO-SAMSUNG-Slovakia Processing Center

    22,493               22,493                                      

POSCO-SAMSUNG Suzhou Processing Center Co., Ltd.

    23,974               23,974                                      

Others

    16,491        7        16,498                      5,483        572        6,055   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  557,088        3,525      560,613      520,584        1,133        22,140        35,248      579,105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

.

    12,762,174        31,744        12,793,918        3,597,847        2,355,378        505,827        398,542        6,857,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Sales and others mainly consist of sales of steel products to subsidiaries, associates and joint ventures. These are priced on an arm’s length basis.

 

F-109


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(*2) Purchases and others mainly consist of subsidiaries’ purchases of construction services and purchases of raw materials to manufacture steel products. These are priced on an arm’s length basis.

2) For the year ended December 31, 2012

 

    Sales and others (*1)     Purchase and others (*2)  
    Sales     Others     Total     Purchase of
material
    Purchase of
fixed assets
    Outsourced
processing
cost
    Others     Total  
    (in millions of Won)  

Subsidiaries

               

POSCO ENGINEERING & CONSTRUCTION Co., LTD.

  27,401        709      28,110      46        1,408,787        7        42,246      1,451,086   

POSCO Processing & Service

    897,017        34        897,051        1,392,988                      2,903        1,395,891   

POSCO COATED & COLOR STEEL Co., Ltd.

    489,507        38        489,545                      5,574        922        6,496   

POSCO PLANTEC Co., Ltd.

    3,253        63        3,316        3,331        233,788        23,372        17,455        277,946   

POSCO ICT

    1,330        217        1,547        1,151        285,093        31,050        151,621        468,915   

eNtoB Corporation

           11        11        211,449        3,490        225        20,978        236,142   

POSCO CHEMTECH

    492,720        19,197        511,917        507,215        10,153        279,507        1,275        798,150   

POSCO M-TECH

    27,770        136        27,906        130,363        9,018        176,263        2,904        318,548   

POSCO ENERGY CO., LTD.

    87,387        820        88,207               482               1,772        2,254   

POSCO TMC Co., Ltd.

    230,215        20        230,235        25               995        12        1,032   

POSCO AST

    278,446        17        278,463        8,114               50,320        213        58,647   

POSHIMETAL Co., Ltd.

    23,882        130        24,012        149,809        180               5        149,994   

Daewoo International Corporation

    4,271,317        133        4,271,450        10,562               389        4,780        15,731   

POSCO NST Co., Ltd.

    212,534        2        212,536        1,229               2,147        242        3,618   

POSCO America Corporation

    726,450               726,450                             733        733   

POSCO Canada Ltd.

                         205,129                             205,129   

POSCO Asia Co., Ltd.

    1,928,881        627        1,929,508        105,392        592               1,329        107,313   

POSCO (Thailand) Company Limited

    119,031        247        119,278                             182        182   

Qingdao Pohang Stainless Steel Co., Ltd.

    62,347        2        62,349                                      

POSCO(Suzhou) Automotive

    128,974               128,974                                      

Processing Center Co., Ltd.

               

POSCO JAPAN Co., Ltd.

    1,439,580               1,439,580        20,472        2,857               5,381        28,710   

POSCO-India Pune Processing Center. Pvt. Ltd.

    164,450        33        164,483                             15        15   

POSCO MEXICO S.A. DE C.V.

    337,921        724        338,645                             492        492   

POSCO Maharashtra Steel Private Limited

    154,055        1,587        155,642                                      

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

                         73,471                             73,471   

Others

    569,076        2,787        571,863        81,411        56,570        17,673        132,115        287,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,673,544        27,534      12,701,078      2,902,157        2,011,010        587,522        387,575      5,888,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates and joint ventures

               

POSMATE

    951        21,093        22,044        1,058        21        14,947        30,032        46,058   

SNNC

    2,162        349        2,511        379,050                             379,050   

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.)

    27,697               27,697                                      

Dongbang Special Steel Co., Ltd.

    89,094               89,094                                      

POSCHROME (PROPRIETARY) LIMITED

           58        58        68,079                             68,079   

PT. POSMI Steel Indonesia

    9,696               9,696                                      

POSK(Pinghu) Steel Processing Center Co., Ltd.

    3,889               3,889                                      

POSCO-SAMSUNG-Slovakia Processing Center

    16,309               16,309                                      

POSCO-SAMSUNG Suzhou Processing Center Co., Ltd.

    26,280               26,280                                      

Others

    7,774        117        7,891        5,303               6,579        2,530        14,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  183,852        21,617      205,469      453,490        21        21,526        32,562      507,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  12,857,396        49,151      12,906,547      3,355,647        2,011,031        609,048        420,137      6,395,863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Sales and others mainly consist of sales of steel products to subsidiaries, associates and joint ventures. These are priced on an arm’s length basis.

 

(*2) Purchases and others mainly consist of subsidiaries’ purchases of construction services and purchases of raw materials to manufacture steel products. These are priced on an arm’s length basis.

 

F-110


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) For the year ended December 31, 2013

 

    Sales and others (*1)     Purchase and others (*2)  
    Sales     Others     Total     Purchase of
material
    Purchase of
fixed assets
    Outsourced
processing
cost
    Others     Total  
    (in millions of Won)  

Subsidiaries (*3)

               

POSCO ENGINEERING & CONSTRUCTION Co., LTD.

  16,439        3,421      19,860      3,042        2,235,798        5,855        9,242      2,253,937   

POSCO Processing & Service

    987,424        8        987,432        1,215,510                      805        1,216,315   

POSCO COATED & COLOR STEEL Co., Ltd.

    472,353        25        472,378                      10,648        98        10,746   

POSCO PLANTEC Co., Ltd.

    2,324        19        2,343        1,499        67,081        13,733        2,492        84,805   

POSCO ICT

    1,210        195        1,405        679        279,660        31,231        157,126        468,696   

POSMATE

    1,419        85        1,504        805        1,041        15,732        32,894        50,472   

eNtoB Corporation

           10        10        234,352        13,241        149        20,079        267,821   

POSCO CHEMTECH

    512,139        25,868        538,007        491,562        21,832        287,584        1,223        802,201   

POSCO M-TECH

    11,122        94        11,216        158,709        2,336        220,986        141        382,172   

POSCO ENERGY CO., LTD.

    104,209        915        105,124               5,178               7        5,185   

POSCO TMC Co., Ltd.

    188,915        15        188,930                      1,051        1,298        2,349   

POSCO AST

    500,193        10        500,203        6,985               56,520        2,029        65,534   

POSHIMETAL Co., Ltd.

    18,922        137        19,059        166,042                      5        166,047   

Daewoo International Corporation

    3,522,678        65        3,522,743        16,297                      2,843        19,140   

POSCO America Corporation

    596,681        1        596,682                             339        339   

POSCO Canada Ltd.

                         144,329                             144,329   

POSCO Asia Co., Ltd.

    2,068,965        221        2,069,186        64,434        182               1,673        66,289   

POSCO (Thailand) Company Limited

    56,210        56        56,266                             85        85   

Qingdao Pohang Stainless Steel Co., Ltd.

    58,502               58,502                             14        14   

POSCO(Suzhou) Automotive Processing Center Co., Ltd.

    129,345        1        129,346                                      

POSCO JAPAN Co., Ltd.

    1,270,325               1,270,325        19,978        2               2,972        22,952   

POSCO-India Pune Processing Center. Pvt. Ltd.

    119,503        7        119,510                                      

POSCO MEXICO S.A. DE C.V.

    256,014        693        256,707                             621        621   

POSCO Maharashtra Steel Private Limited

    176,425        3,157        179,582                             236        236   

DAEWOO INTERNATIONAL SINGAPORE PTE. LTD.

                         108,179                             108,179   

Others

    558,923        7,569        566,492        92,527        38,843        18,782        77,101        227,253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  11,630,240        42,572      11,672,812      2,724,929        2,665,194        662,271        313,323      6,365,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates and joint ventures (*3)

               

SNNC

    1,532        458        1,990        402,639                             402,639   

POSCO PLANTEC Co., Ltd. (formerly, SUNGJIN GEOTEC Co., Ltd.) (*4)

    15,028        48        15,076        1,735        65,802        9,781        6,883        84,201   

POSCHROME (PROPRIETARY) LIMITED

                         66,762                             66,762   

PT. POSMI Steel Indonesia

    6,538               6,538                                      

POSK(Pinghu) Steel Processing Center Co., Ltd.

    3,786               3,786                                      

POSCO-SAMSUNG-Slovakia Processing Center

    19,906               19,906                                      

POSCO-SAMSUNG Suzhou Processing Center Co., Ltd.

    6,429               6,429                                      

Others

    546        165        711        3,937                      176        4,113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  53,765        671      54,436      475,073        65,802        9,781        7,059      557,715   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    11,684,005        43,243        11,727,248        3,200,002        2,730,996        672,052        320,382        6,923,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(*1) Sales and others mainly consist of sales of steel products to subsidiaries, associates and joint ventures. These are priced on an arm’s length basis.

 

(*2) Purchases and others mainly consist of subsidiaries’ purchases of construction services and purchases of raw materials to manufacture steel products. These are priced on an arm’s length basis.

 

(*3) As of December 31, 2013, the Company provided guarantees to related parties (Note 38).

 

(*4) Sungjin Geotec Co., Ltd. merged with POSCO Plant Engineering Co., Ltd. and changed its name to POSCO PLANTEC Co., Ltd.

 

F-111


Table of Contents

POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) The related account balances of significant transactions with related companies as of December 31, 2012 and 2013 are as follows:

1) December 31, 2012

 

    Receivables     Payables  
    Trade accounts and
notes receivable
    Others     Total     Trade accounts and
notes payable
    Accounts
payable
    Others     Total  
    (in millions of Won)  

Subsidiaries

             

POSCO ENGINEERING & CONSTRUCTION Co., LTD.

  5,084        2,893      7,977             403,630             403,630   

POSCO Processing & Service

    64,206        358        64,564        28,723        3,949               32,672   

POSCO COATED & COLOR STEEL Co., Ltd.

    108,465        40        108,505        114               2,504        2,618   

POSCO PLANTEC Co., Ltd.

    59        208        267        3,066        29,231               32,297   

POSCO ICT

           287        287        248        84,432        6,617        91,297   

eNtoB Corporation

           3        3        7,246        9,323        12        16,581   

POSCO CHEMTECH

    43,086        3,988        47,074        52,485        13,300        18,753        84,538   

POSCO M-TECH

    1,230        63        1,293        8,226        10,900        17,866        36,992   

POSCO ENERGY CO., LTD.

    9,177        2,934        12,111               2,292               2,292   

POSCO TMC Co., Ltd.

    64,832        30        64,862        1               144        145   

POSCO AST

    64,542        1,033        65,575        90        2,919        4,791        7,800   

POSHIMETAL Co., Ltd.

    1,233        221        1,454               15,191               15,191   

Daewoo International Corporation

    357,446        1,378        358,824        685               45        730   

POSCO America Corporation

    63,545               63,545                               

POSCO Canada Ltd.

                         12,973                      12,973   

POSCO Asia Co., Ltd.

    102,666        183        102,849        2,244                      2,244   

POSCO (Thailand) Company Limited

    17,965        21        17,986                               

Qingdao Pohang Stainless Steel Co., Ltd.

    8,710               8,710                               

POSCO JAPAN Co., Ltd.

    35,400               35,400        673                      673   

POSCO MEXICO S.A. DE C.V.

    131,372        297        131,669                               

POSCO Maharashtra Steel Private Limited

    55,249        2,628        57,877                               

Others

    49,679        5,500        55,179        5,920        22,509        3,359        31,788   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,183,946        22,065      1,206,011      122,694        597,676        54,091      774,461   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates and joint ventures

             

POSMATE

           78        78        168        2,175        3,972        6,315   

SNNC

    194        35        229        37,145                      37,145   

POSCO PLANTEC Co., Ltd.
(formerly, SUNGJIN GEOTEC Co., Ltd.)

    4,849               4,849                               

POSCHROME (PROPRIETARY) LIMITED

                         2,273                      2,273   

Others

           453        453        804                      804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  5,043        566      5,609      40,390        2,175        3,972      46,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,188,989        22,631        1,211,620        163,084        599,851        58,063        820,998   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

2) December 31, 2013

 

    Receivables     Payables  
    Trade accounts and
notes receivable
    Others     Total     Trade accounts and
notes payable
    Accounts
payable
    Others     Total  
    (in millions of Won)  

Subsidiaries

             

POSCO ENGINEERING & CONSTRUCTION Co., LTD.

  40        110,955      110,995             105,603             105,603   

POSCO Processing & Service

    103,400        73        103,473        17,914        683               18,597   

POSCO COATED & COLOR STEEL Co., Ltd.

    69,260        65        69,325               59        1,434        1,493   

POSCO ICT

    75        123        198               51,247               51,247   

POSMATE

    489        1,533        2,022        141        3,274        1,058        4,473   

eNtoB Corporation

                         8,057        10,311               18,368   

POSCO CHEMTECH

    46,943        4,313        51,256        35,829        6,983        8,663        51,475   

POSCO M-TECH

    18        28        46        12,020        21,326        10,799        44,145   

POSCO ENERGY CO., LTD.

    14,733        2,894        17,627               421               421   

POSCO TMC Co., Ltd.

    20,510        26        20,536               16        50        66   

POSCO AST

    85,501        53        85,554               3,004        5,238        8,242   

POSHIMETAL Co., Ltd.

    1,721        12        1,733               12,624               12,624   

Daewoo International Corporation

    148,383        878        149,261        9,319                      9,319   

POSCO America Corporation

    57,554               57,554                               

POSCO Canada Ltd.

                         12,323                      12,323   

POSCO Asia Co., Ltd.

    134,602        142        134,744        2,063                      2,063   

POSCO (Thailand) Company Limited

    6,052        7        6,059                               

Qingdao Pohang Stainless
Steel Co., Ltd.

    3,329               3,329                               

POSCO JAPAN Co., Ltd.

    73,992               73,992        862        108        1        971   

POSCO-India Pune Processing Center. Pvt. Ltd.

    8,117               8,117                               

POSCO MEXICO S.A. DE C.V.

    100,016        76        100,092                               

POSCO Maharashtra Steel Private Limited

    55,392        3,218        58,610                               

Others

    54,357        8,887        63,244        6,523        15,421        1,647        23,591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  984,484        133,283      1,117,767      105,051        231,080        28,890      365,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Associates and joint ventures

             

SNNC

    140        40        180        16,669                      16,669   

POSCO PLANTEC Co., Ltd.
(formerly, SUNGJIN GEOTEC Co., Ltd.)

    879        46        925        353                      353   

POSCHROME (PROPRIETARY) LIMITED

           67        67                               

LLP POSUK Titanium

           4,066        4,066                               

Others

           17        17        319        2               321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  1,019        4,236      5,255      17,341        2             17,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      985,503        137,519          1,123,022          122,392        231,082        28,890          382,364   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(c) For the years ended December 31, 2011, 2012 and 2013, details of compensation to key management officers were as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Short-term benefits

   93,231         109,614         121,054   

Retirement benefits

     23,407         25,049         20,713   

Long-term benefits

     26,971         22,462         23,480   
  

 

 

    

 

 

    

 

 

 
       143,609         157,125         165,247   
  

 

 

    

 

 

    

 

 

 

Key management officers include directors (including non-standing directors), executive officials and fellow officials who have significant influence and responsibilities in the Company’s business and

 

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As of December 31, 2011, 2012 and 2013

 

 

 

operations. In addition to the compensation described above, the Company provided stock appreciation rights to its executive officers and recorded reversal of stock compensation expenses amounted to 4,223 million and stock compensation expenses amounted to 436 million for years ended December 31, 2011 and 2012, respectively (2013 : nil).

 

38. Commitments and Contingencies

(a) Contingent liabilities

Contingent liabilities may develop in a way not initially expected. Therefore, management continuously assesses contingent liabilities to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognized in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).

Management makes estimates and assumptions that affect disclosures of commitments and contingencies. All estimates and assumptions are based on the evaluation of current circumstances and appraisals with the supports of internal specialists or external consultants.

Management regularly analyzes current information about these matters and provides provisions for probable contingent losses including the estimate of legal expense to resolve the matters. Internal and external lawyers are used for these assessments. In making the decision regarding the need for a provision, management considers whether the Company has an obligation as a result of a past event, whether it is probable that an outflow or cash or other resources embodying economic benefits will be required to settle the obligation and the ability to make a reliable estimate of the amount of the obligation.

(b) Details of guarantees

 

Guarantors

  

Guarantee beneficiary

  

Financial institution

  

Foreign Currency

     Won Equivalent  
     (in millions of Won)  

[The Company]

              

POSCO

   POSCO (Guangdong) Automotive Steel Co., Ltd.    SMBC and others    USD      157,600,000         166,315   
   POSCO Investment Co., Ltd.    BOC    CNY      350,000,000         60,932   
      BOA and others    USD      280,000,000         295,484   
   POSCO Maharashtra Steel Private Limited    Export-Import Bank of Korea and others    USD      566,069,000         597,373   
   POSCO VST CO., LTD.    ANZ and others    USD      65,000,000         68,595   
   POSCO MEXICO S.A. DE C.V.    HSBC and others    USD      244,725,000         258,258   
   POSCO-VIETNAM Co., Ltd.    Export-Import Bank of Korea    USD      196,000,000         206,839   
   Zeus II (Cayman) Ltd.    Creditor    JPY      25,779,278,600         258,994   
   Zhangjiagang Pohang Stainless Steel Co., Ltd.    MIZUHO and others    USD      160,000,000         168,848   
   POSCO ASSAN TST STEEL INDUSTRY    SMBC and others    USD      188,392,500         198,811   
   POSCO Electrical Steel India Private Limited    ING and others    USD      83,784,000         88,417   
   PT. KRAKATAU POSCO    Export-Import Bank of Korea and others    USD      1,350,300,000         1,424,972   

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Guarantors

  

Guarantee beneficiary

  

Financial institution

  

Foreign Currency

     Won Equivalent  
     (in millions of Won)  

Daewoo International Corporation

   Daewoo Paper Manufacturing Co., Ltd.    HSBC    USD      12,500,000         13,191   
   DAEWOO TEXTILE BUKHARA LLC    Export-Import Bank of Korea    USD      20,000,000         21,106   
   DAEWOO INTERNATIONAL MEXICO S.A. DE C.V.    NOVA SCOTIA    USD      30,000,000         31,659   
   POSCO ASSAN TST STEEL INDUSTRY    ING and others    USD      20,932,500         22,090   
   Brazil Sao Paulo Steel Processing Center    SMBC    USD      20,000,000         21,106   
   Daewoo International (Deutschland) GmbH.    Shinhan Bank    EUR      15,000,000         21,844   
   PT. Bio Inti Agrindo    Export-Import Bank of Korea    USD      30,000,000         31,659   

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

   HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.    Woori Bank and others    USD      135,000,000         142,466   
   INTERNATIONAL BUSINESS CENTER CORPORATION    Export-Import Bank of Korea    USD      20,000,000         21,106   
   POSCO E&C Vietnam Co., Ltd.    Export-Import Bank of Korea    USD      16,500,000         17,412   
   SANTOSCMI S.A.    CITI Equador and others    USD      36,000,000         37,991   

POSCO Processing & Service

   POSCO Canada Ltd.    Hana Bank    USD      12,484,500         13,175   
   POSCO Gulf SFC LLC    KEB bank    USD      20,000,000         21,106   

POSCO ICT

   PT. POSCO ICT INDONESIA    POSCO Investment Co., Ltd.    USD      3,000,000         3,166   
   VECTUS LIMITED    KEB bank    GBP      3,500,000         6,092   
      POSCO Investment Co., Ltd.    USD      4,000,000         4,221   

POSCO ENERGY CO., LTD.

   PT. KRAKATAU POSCO ENERGY    Export-Import Bank of Korea and others    USD      193,900,000         204,623   
   TECHREN Solar, LLC    Woori Bank    USD      3,000,000         3,166   

POSCO Engineering CO., Ltd

   PT PEN INDONESIA   

KEB bank

KEB Bank and others

   USD IDR     
 
6,818,876
82,727,107,048
  
  
    
 
7,196
7,148
  
  
   POSCO ENGINEERING (THAILAND) CO., LTD.   

Citi Bank

Woori Bank and others

   USD THB     
 
15,300,000
6,342,881,200
  
  
    
 
16,146
203,860
  
  

POSCO-Japan Co., Ltd.

   POSCO-JEPC Co., Ltd.    Mizuho Bank and others    JPY      1,944,160,748         19,532   
   POSCO-JKPC Co., Ltd.    Higo bank and others    JPY      1,050,400,000         10,553   
   POSCO-JOPC Co., Ltd.    Kiyo bank and others    JPY      112,500,000         1,130   
   Xenesys Inc.    Aozora Bank    JPY      250,000,000         2,512   

DAEWOO TEXTILE FERGANA LLC

   DAEWOO TEXTILE BUKHARA LLC    NBU    USD      3,037,183         3,205   

POSCO E&C CHINA Co., Ltd.

   HONG KONG POSCO E&C (CHINA) INVESTMENT Co., Ltd.    Woori Bank (Beijing branch)    USD      33,000,000         34,825   

POSCO-China Holding Corp.

   POSCO YongXin Rare Earth Metal Co., Ltd.    KEB Bank and others    CNY      71,820,000         12,503   

POSCO CHEMTECH

   PT.Krakatau Posco Chemtech Calcination and others    KEB Bank and others    USD      55,130,000         58,179   

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Guarantors

 

Guarantee beneficiary

 

Financial institution

 

Foreign Currency

    Won Equivalent  
    (in millions of Won)  

POSCO Specialty Steel Co., Ltd.

  POSCO SS-VINA   Export-Import Bank of Korea   USD     354,409,800        374,009   

SANTOSCMI S.A.

  COMPANIADEAUTOMATIZACION & CONTROL, GENESYS S.A.   Banco de Guayaquil and others   USD     1,550,000        1,636   

[Associates and joint ventures]

         

POSCO

 

United Spiral Pipe, LLC

 

Shinhan Bank

 

USD

    24,500,000        25,855   
  LLP POSUK Titanium   Shinhan Bank   USD     18,000,000        18,995   

Daewoo International Corporation

  DMSA/AMSA   Export-Import Bank of Korea and others   USD     165,133,333        174,265   
  GLOBAL KOMSCO Daewoo LLC  

Export-Import Bank of Korea and others

  USD     8,050,000        8,495   

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

  Taegisan Wind Power Corporation   KDB Bank   KRW     7,500        7,500   
  Posco e&c Songdo International Building   Hana Bank and others   KRW     356,600        356,600   
  CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd and others   NH Bank and others   KRW     318,226        318,226   

POSCO Engineering CO., Ltd

  PT. Wampu Electric Power   Woori Bank   USD     344,848        364   

POSCO Processing & Service

  Sebang Steel   Shinhan Bank   JPY     245,000,000        2,461   

POSCO ICT

  UITrans LRT Co., Ltd.   Construction Guarantee Cooperative   KRW     64,638        64,638   
  Incheon-Gimpo Expressway Co., Ltd.   KDB Bank and others   KRW     175,000        175,000   
  CHUNGJU ENTERPRISE CITY DEVELOPMENT Co., Ltd   NH Bank   KRW     2,530        2,530   

Daewoo (China) Co., Ltd.

  SHANGHAI LANSHENG DAEWOO CORP.   Bank of Communications   CNY     100,000,000        17,409   

POSCO CHEMTECH

  PT.INDONESIA POS CHEMTECH CHOSUN Ref   KEB Bank   USD     6,000,000        6,332   

[Others]

         

Daewoo International Corporation

  Ambatovy Project Investments Limited   Export-Import Bank of Korea   USD     65,454,545        69,074   
  Sherritt International Corporation   Export-Import Bank of Korea   USD     21,818,181        23,025   

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

  The union of City environment improvement for Kukje building and others   NH Bank and others   KRW     853,150        853,150   
  THE GALE INVESTMENTS COMPANY, L.L.C.   Woori Bank   USD     50,000,000        52,765   

POSCO ICT

  BTL business and others   Kyobo Life Insurance Co., Ltd. and others   KRW     2,065,471        2,065,471   
  SMS Energy and others   Hana Bank and others   KRW     169,156        169,156   

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

Guarantors

  

Guarantee beneficiary

  

Financial institution

  

Foreign Currency

     Won Equivalent  
     (in millions of Won)  

POSCO M-TECH

   PYUNGSAN SI Co., Ltd    Seoul Guarantee Insurance Co., Ltd.    KRW      67         67   

POSCO AUSTRALIA PTY LTD

   Department of Trade and Investment (NSW Government)    Woori Bank    AUD      8,023,765         7,542   

POSCO Engineering CO., Ltd

   Kwanma Solar Co., Ltd. and others    Hana Bank and others    KRW      57,124         57,124   
   PT MPM and others    Export-Import Bank of Korea and others    USD      7,652,000         8,075   
   Hyundai ENG Co., Ltd.    Engineering Financial Cooperative    KRW      35,933         35,933   
        

 

  

 

 

    

 

 

 
        

USD

     4,705,386,266         4,965,596   
        

AUD

     8,023,765         7,542   
        

CNY

     521,820,000         90,844   
        

EUR

     15,000,000         21,844   
        

GBP

     3,500,000         6,092   
        

IDR

     82,727,107,048         7,148   
        

JPY

     29,381,339,348         295,182   
        

KRW

     4,105,395         4,105,395   
        

THB

     6,342,881,200         203,860   
        

 

  

 

 

    

 

 

 

(c) POSCO ENGINEERING & CONSTRCTION Co., Ltd. has provided the completion guarantees for Samsung C&T Corporation amounting to 1,142,459 million while Samsung C&T Corporation has provided the construction guarantees or payment guarantees on customers’ borrowings on behalf of POSCO ENGINEERING & CONSTRCTION Co., Ltd. amounting to 801,676 million as of December 31, 2013. POSCO ENGINEERING & CONSTRCTION Co., Ltd. provides payment guarantees on borrowings of customers such as Asset Backed Commercial Paper amounted to 650,800 million and Project Financing loan amounted to 38,800 million as of December 31, 2013.

(d) Other commitments

Details of other commitments of the Company as of December 31, 2013, are as follows:

 

POSCO

  

POSCO entered into long-term contracts to purchase iron ore, coal, nickel and others. The contracts of iron ore and coal generally have terms of more than three years and the contracts of nickel have terms of more than one year. These contracts provide for periodic price adjustments based on the market price. As of December 31, 2013, 193 million tons of iron ore and 14 million tons of coal remained to be purchased under such long-term contracts.

 

POSCO entered into an agreement with Tangguh Liquefied Natural Gas (LNG) Consortium in Indonesia to purchase 550 thousand tons of LNG annually for 20 years commencing in August 2005. The purchase price is subject to change, based on changes of the monthly standard oil price (JCC) and with a price ceiling.

 

As of December 31, 2013, POSCO entered into commitments with Korea National Oil Corporation for long-term foreign currency borrowings, which are limited up to the amount of USD 6.86 million, USD 6.58 million and USD 4.12 million. The borrowings are related to the exploration of gas hydrates in Aral Sea, Uzbekistan, the exploration of gas hydrates in Namangan-Chust and the exploration of gas hydrates in Western Fergana-Chenavard, respectively. The repayment of the borrowings depends on the success of the projects. POSCO is not liable for the repayment of full or part of the money borrowed if the respective projects fail. POSCO has agreed to pay a certain portion of its profits under certain conditions, as defined by the borrowing agreements.

 

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

   POSCO has provided a supplemental funding agreement, as the largest shareholder, as requested from the creditors, including Norddeutsche Landesbank, for seamless funding to POSCO ENERGY Co., Ltd. under construction of new power plant.

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

  

 

As of December 31, 2013, POSCO ENGINEERING & CONSTRUCTION CO., LTD. has comprehensive loan agreements of up to 247,000 million and USD 408 million with Woori Bank and 53,000 million with Korea Exchange Bank. Also, POSCO ENGINEERING & CONSTRUCTION CO., LTD. has bank overdraft agreements of up to 20,000 million with WooriBank which is included in the limit of comprehensive loan agreements and 3,000 million with Korea Exchange Bank.

 

POSCO ICT

  

As of December 31, 2013, in relation to contract enforcement, POSCO ICT was provided with 58,954 million and 49,383 million guaranties from Korea Software Financial Cooperative and Seoul Guarantee Insurance, respectively.

 

As of December 31, 2013, POSCO ICT provided 324 million of guaranties to Seoul Guarantee Insurance to ensure performance guarantee agreement which Busan Navy Residence and others had.

 

POSCO Specialty Steel Co., Ltd.

  

As of December 31, 2013, POSCO Specialty Steel Co., Ltd. has agreements for a loan and import letter of credit with Korea Exchange Bank and others.

 

(e) Litigation in progress

As of December 31, 2013, POSCO and certain subsidiaries are defendants in legal actions arising from the normal course of business.

1) Civil lawsuits with Nippon Steel & Sumitomo Metal Corporation

During the year ended December 31, 2012, Nippon Steel & Sumitomo Metal Corporation filed a civil lawsuit in the Tokyo District Court of Japan against POSCO and POSCO Japan Co., Ltd., a subsidiary of POSCO, to prohibit production and sales of grain oriented electrical steel sheets using improperly acquired trade secrets and seeking compensation from the Company of JPY 98.6 billion (990.6 billion). Through trials up to December 31, 2013, the Company submitted its responses that the Japan court did not have jurisdiction on this lawsuit as it should be judged by Korean law and the Company developed grain oriented electrical steel sheets using the Company’s own technologies. As of December 31, 2013, the Japan court has not made any judgments on this matter. Since the Company does not believe that it has any present obligation, the Company has not recorded any provision for this lawsuit as of December 31, 2013.

In addition, Nippon Steel & Sumitomo Metal Corporation filed a civil lawsuit in the New Jersey federal court, United States, against POSCO and POSCO America Co., Ltd., a subsidiary of POSCO, claiming infringement of intellectual property rights related to the production of grain oriented electrical steel sheets. Since the Company does not believe that it has any present obligation, the Company has not recorded any provision for this lawsuit as of December 31, 2013. An estimate of possible loss cannot be reliably determined because the lawsuit is still in the discovery stage and no claim amount has been specified.

2) Lawsuits related to liability of Daewoo Co., Ltd. which was spun off into Daewoo International Corporation and Daewoo Engineering & Construction Co., Ltd.

 

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Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

In May 2002, Industrial Development Bank of India Limited, the creditor of Daewoo Motors India Ltd. for which Daewoo Co., Ltd. provided a guarantee, filed lawsuits against Daewoo Motors India Ltd., Daewoo Co., Ltd., Daewoo Engineering & Construction Co., Ltd, and Daewoo International Corporation (a subsidiary of POSCO) seeking for the disposition of assets and judgment of debt of Daewoo Motors India Ltd. amounting to 76 billion in India Delhi Mumbai Court. A provision of 18 billion for these lawsuits was made as of December 31, 2013. The actual amount and timing of the outflows is uncertain the outcome depends on court proceedings but the provisions is classified as a non-current liability as of December 31, 2013 (See Note 20).

3) Other lawsuits and claims

 

Company

  Legal
actions
    claim amount     Korean won
equivalent
    Description
    (In millions of Won, in thousand of foreign currencies)

POSCO

    37      KRW     68,963        68,963      Lawsuit on claim for damages

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

    84      KRW     110,619        110,619      Lawsuit on claim for payment

POSCO Processing & Service

    2      KRW     705        705      Lawsuit on claim for payment

POSCO COATED & COLOR STEEL Co., Ltd.

    2      KRW     3,595        3,595      Lawsuit on claim for payment

POSCO ICT

    14      KRW     7,333        7,333      Lawsuit on claim for payment

POSCO America Corporation

    1      USD                 Lawsuit on Anti-Trust

POSCO M-TECH

    1      KRW     19        19      Lawsuit on claim for payment

POSCO E&C CHINA Co., Ltd.

    1      CNY     37,000        6,441      Lawsuit on claim for payment

POSCO-Malaysia SDN. BHD.

    1      MYR     5,782        1,852      Lawsuit on claim for payment

POSCO Engineering CO., Ltd

    7      KRW     2,789        2,789      Lawsuit on claim for payment
on construction by
Samyanginnochem

Daewoo International (America) Corp.

    3      USD     13,042        13,763      Lawsuit on claim for product
liability and illegal act on
products

Brazil Sao Paulo Steel Processing Center

    3      BRL     978        437      Lawsuit on claim for payment

Daewoo International Corporation

    2      CNY     42,201        7,347      Lawsuit on claim for
indemnification damages
    2      EUR     8,270        12,043      Lawsuit on claim for damages
    3      KRW     1,175        1,175      Lawsuit on claim for payment
    7      USD     45,787        48,319      Lawsuit on claim for damages

For all other lawsuits and claims, management does not believe that the Company has any present obligations and therefore, the Company has not recognized any provisions as of December 31, 2013 for these matters.

(f) Other contingencies

 

Company

  

Description

POSCO

   POSCO has provided two blank promissory notes and one blank check to Korea Resources Corporation and six blank promissory notes and three blank checks to Korea National Oil Corporation as collateral for out-standing loans.

POSCO ENGINEERING & CONSTRUCTION CO., LTD.

   As of December 31, 2013, POSCO ENGINEERING & CONSTRUCTION CO., LTD. has provided twenty-six blank checks and ten blank promissory notes as collateral for agreements and outstanding loans.

Daewoo International Corporation

   As of December 31, 2013, Daewoo International Corporation has provided forty-five blank promissory notes and thirteen blank checks to Korea National Oil Corporation as collateral for the guarantee on performance for contracts and others.

POSCO ICT

   As of December 31, 2013, POSCO ICT has provided eight blank promissory notes and fourteen blank checks to financial institutions as collateral for the guarantee on performance for contracts and others.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

39. Cash Flows from Operating Activities

Adjustments for operating cash flows for the years ended December 31, 2011, 2012 and 2013 were as follows:

 

     2011     2012     2013  
     (in millions of Won)  

Trade accounts and notes receivable

       (2,402,346     87,830        (612,379

Other financial assets

     (187,607     (392,090     (98,420

Inventories

     (2,538,178     1,450,431        582,287   

Other current assets

     (310,397     (198,157     181,755   

Other long-term assets

     47,929        (141,037     (23,412

Trade accounts payable

     265,993        225,086        47,323   

Other financial liabilities

     260,306        357,502        194,419   

Other current liabilities

     384,943        583,159        13,522   

Provisions

     (36,511     17,108        (42,052

Payment severance benefits

     (574,759     (116,846     (129,038

Plan assets

     252,671        (191,696     (172,147

Other non-current liabilities

     (12,791     252,068        (58,290
  

 

 

   

 

 

   

 

 

 
   (4,850,747     1,933,358        (116,432
  

 

 

   

 

 

   

 

 

 

 

40. Non-Cash Transactions

Significant non-cash transactions for the years ended December 31, 2012 and 2013 were as follows:

 

     2012      2013  
     (in millions of Won)  

Construction-in-progress transferred to other accounts

       3,273,475         6,610,644   

Acquisition of short-term financial statements through issuance of treasury stocks

             804,496   

Other non-current asset transferred to investments in associates and joint ventures

     257,878           

Conversion of bonds to shares

     315,530           

 

41. Operating Segment and Geographic Information

(a) Our operating businesses are organized based on the nature of markets and customers. We have four reportable operating segments — steel, engineering and construction, trading and other. The steel segment includes production of steel products and revenue of such products. The engineering and construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The trading segment consists of exporting and importing a wide range of steel products and raw materials that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. Other segment includes power generation, liquefied natural gas production, network and system integration and logistics activities.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(b) Information about reportable segments as of and for the years ended December 31, 2011, 2012 and 2013 was as follows:

1) As of and for the year ended December 31, 2011

 

     Steel     Trading     Engineering
and
Construction
    Other     Total  
    (in millions of Won)  

External revenues

      39,151,930        21,097,356        5,476,209        3,213,230          68,938,725   

Internal revenues

    17,138,610        7,525,555        2,996,933        2,446,417        30,107,515   

Total revenues

    56,290,540        28,622,911        8,473,142        5,659,647        99,046,240   

Interest income

    154,671        43,842        22,744        22,025        243,282   

Interest expenses

    (551,478     (93,532     (69,050     (110,615     (824,675

Depreciation and amortization

    (2,128,182     (37,320     (31,238     (178,429     (2,375,169

Impairment loss of property, plant and equipment and others

    (25,177     (34,544     (23,397     (995     (84,113

Impairment loss of available-for-sale financial assets

    (136,638                   (16,166     (152,804

Share of profit or loss of investment in associates and joint ventures

    (33,361                   (6,888     (40,249

Income tax expense

    (1,111,709     (35,322     (22,536     (16,454     (1,186,021

Segments profit

    3,689,461        195,298        154,618        155,277        4,194,654   

Segments assets

    67,961,383        12,120,560        8,764,698        6,663,297        95,509,938   

Investment in associates

    14,226,687        1,899,762        918,079        186,490        17,231,018   

Acquisition of non-current assets

    9,385,381        607,076        207,619        594,514        10,794,590   

Segments liabilities

    23,169,910        9,706,622        5,554,097        4,528,283        42,958,912   

2) As of and for the year ended December 31, 2012

 

     Steel     Trading     Engineering
and
Construction
    Other     Total  
    (in millions of Won)  

External revenues

      35,258,970        18,945,642        4,675,596        4,723,943          63,604,151   

Internal revenues

    17,609,789        7,467,872        5,050,287        2,857,139        32,985,087   

Total revenues

    52,868,759        26,413,514        9,725,883        7,581,082        96,589,238   

Interest income

    176,229        50,907        43,815        21,811        292,762   

Interest expenses

    (553,508     (174,607     (48,975     (116,499     (893,589

Depreciation and amortization

    (2,334,357     (35,788     (35,323     (218,515     (2,623,983

Impairment loss of property, plant and equipment and others

    (46,951     (30,073     (7,734     (16,257     (101,015

Impairment loss of available-for-sale financial assets

    (201,850     (254     (1,713     (20,354     (224,171

Share of profit or loss of investment in associates and joint ventures

    (39,806     (5,579     (27     (2,764     (48,176

Income tax expense

    (658,307     (184,318     (135,469     (77,139     (1,055,233

Segments profit

    2,245,977        325,197        345,295        301,670        3,218,139   

Segments assets

    69,920,261        10,904,747        10,775,895        7,723,374        99,324,277   

Investment in associates

    15,802,052        1,043,018        1,130,216        435,980        18,411,266   

Acquisition of non-current assets

    7,629,767        395,081        167,818        781,087        8,973,753   

Segments liabilities

    23,105,008        7,865,399        7,008,996        4,836,641        42,816,044   

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) As of and for the year ended December 31, 2013

 

      Steel     Trading     Engineering
and
Construction
    Other     Total  
     (in millions of Won)  

External revenues

       31,794,574        18,307,888        6,896,838        4,865,350      61,864,650   

Internal revenues

     16,229,002        7,611,372        3,885,190        3,019,246        30,744,810   

Total revenues

     48,023,576        25,919,260        10,782,028        7,884,596        92,609,460   

Interest income

     162,149        46,064        47,070        19,892        275,175   

Interest expenses

     (412,142     (77,375     (48,030     (106,824     (644,371

Depreciation and amortization

     (2,383,010     (43,775     (36,614     (235,365     (2,698,764

Impairment loss of property, plant and equipment and others

     (34,153     (975     (4,058     (11,875     (51,061

Impairment loss of available-for-sale financial assets

     (203,468     (435     (97,919     (10,172     (311,994

Share of profit or loss of investment in associates and joint ventures

     (250,084     (131,534     (71,068     (26,326     (479,012

Income tax expense

     (466,756     (27,549     (87,660     (73,371     (655,336

Segments profit

     1,449,446        9,516        147,177        197,449        1,803,588   

Segments assets

     73,860,997        11,640,931        9,888,590        8,843,652          104,234,170   

Investment in associates

     16,863,991        1,019,252        1,090,089        598,775        19,572,107   

Acquisition of non-current assets

     5,955,799        242,413        150,469        1,191,243        7,539,924   

Segments liabilities

     23,774,850        8,649,557        6,068,059        5,059,440        43,551,906   

(c) Reconciliations of total segment revenues, profit or loss, assets and liabilities, and other significant items to their respective consolidated financial statement line items are as follows:

1) Revenues

 

     2011     2012     2013  
     (in millions of Won)  

Total revenue for reportable segments

   99,046,240        96,589,238        92,609,460   

Elimination of inter-segment revenue

     (30,107,515     (32,985,087     (30,744,810
  

 

 

   

 

 

   

 

 

 
       68,938,725        63,604,151        61,864,650   
  

 

 

   

 

 

   

 

 

 

2) Profit

 

     2011     2012     2013  
     (in millions of Won)  

Total profit for reportable segments

   4,194,654        3,218,139        1,803,588   

Corporate fair value adjustments

     (39,489     (58,486     (91,718

Elimination of inter-segment profits

     (440,879     (774,047     (356,690

Income tax expense

     1,068,109        982,880        590,997   
  

 

 

   

 

 

   

 

 

 

Profit before income tax expense

       4,782,395        3,368,486        1,946,177   
  

 

 

   

 

 

   

 

 

 

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

3) Assets

 

     2012     2013  
     (in millions of Won)  

Total assets for reportable segments (*1)

   99,324,277        104,234,170   

Equity-accounted investees

     (15,365,984     (15,758,936

Goodwill and corporate FV adjustments

     3,657,016        3,560,873   

Elimination of inter-segment assets

     (8,349,458     (7,580,700
  

 

 

   

 

 

 
       79,265,851        84,455,407   
  

 

 

   

 

 

 

 

 

(*1) As segment assets and liabilities are determined based on separate financial statements, for subsidiaries which are in a different segment from that of its immediate parent company, their carrying amount in separate financial statements is eliminated upon consolidation. In addition, adjustments are made to adjust the amount of investment in associates and joint ventures from the amount reflected in segment assets to that determined using equity method in consolidated financial statements.

4) Liability

 

     2012     2013  
     (in millions of Won)  

Total liabilities for reportable segments

   42,816,044        43,551,906   

Corporate fair value adjustments

     330,791        337,442   

Elimination of inter-segment liabilities

     (6,310,403     (5,255,971
  

 

 

   

 

 

 
       36,836,432        38,633,377   
  

 

 

   

 

 

 

5) Other significant items

a) December 31, 2011

 

     Total Segment     Corporate fair
value
adjustments
    Elimination of
inter-segment
    Consolidated  
     (in millions of Won)  

Interest income

           243,282               (27,048     216,234   

Interest expenses

     (824,675     6,312        30,015        (788,348

Depreciation and amortization

     (2,375,169     (63,690     172,560        (2,266,299

Share of profit or loss of investment in associates

     (40,249            90,818        50,569   

Income tax expense

     (1,186,021     12,194        105,718        (1,068,109

Impairment loss of property, plant and equipment and others

     (84,113            (14,958     (99,071

Impairment loss of available-for-sale financial assets

     (152,804                   (152,804
  

 

 

   

 

 

   

 

 

   

 

 

 
   (4,419,749     (45,184     357,105        (4,107,828
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

b) December 31, 2012

 

     Total Segment     Corporate fair
value
adjustments
    Elimination of
inter-segment
    Consolidated  
     (in millions of Won)  

Interest income

           292,762               (13,955     278,807   

Interest expenses

     (893,589     1,372        20,760        (871,457

Depreciation and amortization

     (2,623,983     (77,496     137,719        (2,563,760

Share of profit or loss of investment in associates

     (48,176            25,474        (22,702

Income tax expense

     (1,055,233     15,150        57,203        (982,880

Impairment loss of property, plant and equipment and others

     (101,015     (258,451     24,070        (335,396

Impairment loss of available-for-sale financial assets

     (224,171                   (224,171
  

 

 

   

 

 

   

 

 

   

 

 

 
   (4,653,405     (319,425     251,271        (4,721,559
  

 

 

   

 

 

   

 

 

   

 

 

 

c) December 31, 2013

 

     Total Segment     Corporate
fair value
adjustments
    Elimination of
inter-segment
    Consolidated  
     (in millions of Won)  

Interest income

   275,175               (14,777     260,398   

Interest expenses

     (644,371     (34,814     21,504        (657,681

Depreciation and amortization

     (2,698,764     (84,223     97,437        (2,685,550

Share of profit or loss of investment in associates

     (479,012            299,203        (179,809

Income tax expense

     (655,336     25,074        39,265        (590,997

Impairment loss of property, plant and equipment and others

     (51,061            (97,424     (148,485

Impairment loss of available-for-sale financial assets

     (311,994            31,757        (280,237
  

 

 

   

 

 

   

 

 

   

 

 

 
   (4,565,363     (93,963     376,965        (4,282,361
  

 

 

   

 

 

   

 

 

   

 

 

 

(d) Revenue by geographic area for years ended December 31, 2011, 2012 and 2013 was as follows:

 

     2011      2012      2013  
     (in millions of Won)  

Domestic

   53,986,926         47,692,025         45,953,826   

Japan

     2,386,578         2,380,651         1,920,253   

China

     6,070,588         6,022,875         6,493,119   

Asia-other

     2,645,428         3,157,469         3,011,980   

North America

     1,281,906         1,792,706         1,720,895   

Others

     2,567,299         2,558,425         2,764,577   
  

 

 

    

 

 

    

 

 

 

Total

       68,938,725         63,604,151         61,864,650   
  

 

 

    

 

 

    

 

 

 

In presenting information on the basis of geography, consolidated revenue is based on the geographical location of customers.

 

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POSCO and Subsidiaries

Notes to the Consolidated Financial Statements, Continued

As of December 31, 2011, 2012 and 2013

 

 

 

(e) Non-current assets by geographic area as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  
     (in millions of Won)  

Domestic

   31,213,290         33,116,006   

Japan

     256,532         203,241   

China

     1,745,076         1,632,490   

Asia-other

     3,162,715         4,703,943   

North America

     125,206         167,468   

Others

     1,957,112         2,292,039   
  

 

 

    

 

 

 

Total

       38,459,931         42,115,187   
  

 

 

    

 

 

 

Non-current assets by geographic area include investment property, property, plant and equipment, goodwill and other intangible assets.

(f) There are no customers whose revenue is 10% or more of total consolidated revenues.

 

F-125


Table of Contents

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

POSCO

(Registrant)

 

/s/ Kwon, Oh-Joon
Name:   Kwon, Oh-Joon
Title:   Chief Executive Officer and Representative Director
Date:   May 12, 2014


Table of Contents

Exhibit Index

 

  1.1       Articles of incorporation of POSCO (English translation)
  2.1       Form of Common Stock Certificate (including English translation) (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement No. 33-81554)*
  2.2       Form of Deposit Agreement (including Form of American Depositary Receipts) (incorporated by reference to the Registrant’s Registration Statement (File No. 333-189473) on Form F-6)*
  8.1       List of consolidated subsidiaries
12.1       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1       Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

* Filed previously