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PKX Posco

Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

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

 

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

For the fiscal year ended December 31, 2019

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, Republic of Korea 06194

(Address of principal executive offices)

Sohn, Kyle

POSCO Center, 440 Teheran-ro, Gangnam-gu

Seoul, Republic of Korea 06194

Telephone: +82-2-3457-1386; E-mail: sohnkangil@posco.com; Facsimile: +82-2-3457-1997

(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

  Trading symbol  Name of Each Exchange on Which Registered

American Depositary Shares, each representingone-fourth of one share of common stock

  PKX  New York Stock Exchange, Inc.

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

  PKX  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, 2019, there were 80,115,641 shares of common stock, par value Won 5,000 per share, outstanding

(not including 7,071,194 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          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  

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          No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes          No  

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

Large accelerated filer          Accelerated filer          Non-accelerated filer          Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes          No  

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          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  

 

*

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.  Auditor   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   4 

ITEM 4.

 INFORMATION ON THE COMPANY   23 
 Item 4.A.  History and Development of the Company   23 
 Item 4.B.  Business Overview   23 
 Item 4.C.  Organizational Structure   37 
 Item 4.D.  Property, Plants and Equipment   37 

ITEM 4A.

 UNRESOLVED STAFF COMMENTS   40 

ITEM 5.

 OPERATING AND FINANCIAL REVIEW AND PROSPECTS   40 
 Item 5.A.  Operating Results   40 
 Item 5.B.  Liquidity and Capital Resources   73 
 Item 5.C.  Research and Development, Patents and Licenses, Etc.   76 
 Item 5.D.  Trend Information   77 
 Item 5.E.  Off-balance Sheet Arrangements   77 
 Item 5.F.  Tabular Disclosure of Contractual Obligations   77 
 Item 5.G.  Safe Harbor   77 

ITEM 6.

 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   77 
 Item 6.A.  Directors and Senior Management   77 
 Item 6.B.  Compensation   80 
 Item 6.C.  Board Practices   81 
 Item 6.D.  Employees   82 
 Item 6.E.  Share Ownership   83 

ITEM 7.

 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   84 
 Item 7.A.  Major Shareholders   84 
 Item 7.B.  Related Party Transactions   85 
 Item 7.C.  Interests of Experts and Counsel   85 

ITEM 8.

 FINANCIAL INFORMATION   85 
 Item 8.A.  Consolidated Statements and Other Financial Information   85 
 Item 8.B.  Significant Changes   87 

 

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ITEM 9.

 THE OFFER AND LISTING   87 
 Item 9.A.  Offer and Listing Details   87 
 Item 9.B.  Plan of Distribution   87 
 Item 9.C.  Markets   87 
 Item 9.D.  Selling Shareholders   88 
 Item 9.E.  Dilution   88 
 Item 9.F.  Expenses of the Issuer   88 

ITEM 10.

 ADDITIONAL INFORMATION   88 
 Item 10.A.  Share Capital   88 
 Item 10.B.  Memorandum and Articles of Association   88 
 Item 10.C.  Material Contracts   93 
 Item 10.D.  Exchange Controls   93 
 Item 10.E.  Taxation   98 
 Item 10.F.  Dividends and Paying Agents   104 
 Item 10.G.  Statements by Experts   104 
 Item 10.H.  Documents on Display   104 
 Item 10.I.  Subsidiary Information   104 

ITEM 11.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   104 

ITEM 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   106 
 Item 12.A.  Debt Securities   106 
 Item 12.B.  Warrants and Rights   106 
 Item 12.C.  Other Securities   106 
 Item 12.D.  American Depositary Shares   107 
PART II   108 

ITEM 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   108 

ITEM 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   108 

ITEM 15.

 CONTROLS AND PROCEDURES   108 

ITEM 16.

 [RESERVED]   109 
 Item 16.A.  Audit Committee Financial Expert   109 
 Item 16.B.  Code of Ethics   109 
 Item 16.C.  Principal Accountant Fees and Services   110 
 Item 16.D.  Exemptions from the Listing Standards for Audit Committees   110 
 Item 16.E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers   111 
 Item 16.F.  Change in Registrant’s Certifying Accountant   111 
 Item 16.G.  Corporate Governance   111 
 Item 16.H.  Mine Safety Disclosure   113 
PART III   113 

ITEM 17.

 FINANCIAL STATEMENTS   113 

ITEM 18.

 FINANCIAL STATEMENTS   113 

ITEM 19.

 EXHIBITS   113 

 

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GLOSSARY

 

“ADR”

  American Depositary Receipt evidencing ADSs.

“ADR depositary”

  Citibank, N.A.

“ADS”

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

“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”

  The currency of Japan.

“Korea”

  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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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.  Auditor

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, 2018 and 2019 and for each of the years in thethree-year period ended December 31, 2019 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 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 FSCMA. English translations of such financial statements are furnished to the SEC under Form6-K.K-IFRS differs in certain respects from IFRS as issued by the IASB in the presentation of operating profit. Additionally, underK-IFRS, revenue from the development and sale of certain real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer.As a result, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance withK-IFRS. See “Item 5.A. Operating Results — Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS.”

 

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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, 
       2015          2016          2017           2018           2019(1)      
   (In billions of Won, except per share data) 

Revenue

      58,522      52,940      60,187       65,155       64,786 

Cost of sales

   52,018   46,271   51,916    57,129    58,462 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Gross profit

   6,504   6,668   8,271    8,026    6,324 

Impairment loss (reversal of impairment loss) on trade accounts and notes receivable

   190   165   174    75    (28

Other administrative expenses

   2,206   2,126   2,003    1,986    2,041 

Selling expenses

   1,729   1,554   1,557    369    368 

Impairment loss on other receivables

   158   38   98    63    80 

Other operating income

   549   215   448    524    451 

Other operating expenses

   1,285   718   691    2,014    1,090 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Operating profit

   1,486   2,282   4,196    4,042    3,223 

Share of profit (loss) ofequity-accounted investees, net

   (506  (89  11    113    274 

Finance income

   2,557   2,232   2,373    1,706    1,872 

Finance costs

   3,387   3,014   2,484    2,244    2,242 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Profit before income tax

   150   1,412   4,095    3,616    3,127 

Income tax expense

   267   380   1,186    1,684    1,088 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

 

Profit (loss)

   (116  1,032   2,909    1,932    2,038 

Total comprehensive income (loss)

   (278  1,486   2,348    1,504    2,185 

Profit (loss) for the period attributable to:

        

Owners of the controlling company

   171   1,355   2,756    1,712    1,864 

Non-controlling interests

   (288  (323  153    220    174 

Total comprehensive income (loss) attributable to:

        

Owners of the controlling company

   24   1,814   2,184    1,293    2,027 

Non-controlling interests

   (302  (328  164    211    158 

Basic and diluted earnings per share(2)

   1,731   16,521   34,040    21,177    23,189 

Dividends per share of common stock

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

Selected consolidated statements of financial position data

 

   As of December 31, 
       2015           2016           2017           2018           2019(1)      
   (In billions of Won) 

Working capital(3)

      9,148       10,711       12,354       14,721       18,593 

Total current assets

   29,502    29,655    31,844    34,152    35,144 

Property, plant and equipment, net

   34,523    33,770    31,884    30,018    29,926 

Totalnon-current assets

   51,246    50,483    47,941    44,625    44,226 

Total assets

   80,748    80,138    79,786    78,777    79,371 

Short-term borrowings and current installments oflong-term borrowings

   12,371    10,195    11,275    10,290    8,548 

Long-term borrowings, excluding current installments

   12,849    12,510    9,789    9,920    11,893 

Total liabilities

   35,735    34,372    32,459    32,104    31,608 

Share capital

   482    482    482    482    482 

Total equity

   45,013    45,765    47,327    46,673    47,763 

 

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Selected consolidated statements of cash flows data

 

   For the Year Ended December 31, 
   2015  2016  2017  2018  2019(1) 
   (In billions of Won) 

Net cash provided by operating activities

      7,602      5,269      5,607      5,870      6,005 

Net cash used in investing activities

   (4,535  (3,755  (3,818  (2,648  (3,683

Net cash used in financing activities

   (2,242  (3,951  (1,566  (3,195  (1,512

Net increase (decrease) in cash and cash equivalents

   849   (2,424  165   31   871 

Cash and cash equivalents at beginning of the year

   4,022   4,871   2,448   2,613   2,644 

Cash and cash equivalents at end of the year

   4,871   2,448   2,613   2,644   3,515 

 

 

(1)

We have adopted IFRS No. 16 “Leases” from January 1, 2019 using the modified retrospective approach, under which the cumulative effect of initial application is recognized in our retained earnings at January 1, 2019. Accordingly, the comparative information presented for 2015, 2016, 2017 and 2018 has not been restated and is presented under IAS No. 17 and related interpretations. See Note 2 of Notes to Consolidated Financial Statements.

 

(2)

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 79,993,834 shares as of December 31, 2015, 79,996,389 shares as of December 31, 2016, 79,998,600 shares as of December 31, 2017, 80,000,606 shares as of December 31, 2018 and 80,113,759 shares as of December 31, 2019.

 

(3)

“Working capital” means current assets minus current liabilities.

Item 3.B.  Capitalization and Indebtedness

Not applicable

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

Not applicable

Item 3.D.  Risk Factors

You should carefully consider the risks described below.

The global economic downturn may adversely affect our business and performance. The global economic outlook for the near future remains 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. Global economic conditions have deteriorated in recent years, with global financial and capital markets experiencing substantial volatility. In particular, the ongoing global pandemic of a new strain of coronavirus(“COVID-19”) has materially and adversely affected the global economy and financial markets in recent months. See “— Earthquakes, tsunamis, floods, severe health epidemics (including the ongoing globalCOVID-19 pandemic and any possible recurrence of other types of widespread infectious diseases) and other natural calamities could materially adversely affect our business, results of operations or financial condition.” Such developments have also been caused by, and continue to be exacerbated by, among other things, the slowdown of economic growth in China and other major emerging market economies, adverse economic and political conditions in Europe and Latin America and continuing geopolitical and social instability in North Korea and various parts of the Middle East, as well as a deterioration in economic and trade relations between the United States and its major trading partners, particularly China.

 

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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 our sales volume of steel products as well as the prices at which they can be sold. The slowdown of global economic growth and the resulting decline in demand for steel products has adversely affected the overall sales volume of our principal steel products produced by us and directly sold to external customers in 2019 compared to 2018, and the continued deterioration in demand in the first quarter of 2020 has had a negative impact on our results of operations for the quarter compared to the first quarter of 2019. In the case of a prolonged decrease in demand, we will likely face pressure to reduce prices and we may need to rationalize our production capacity and reduce fixed costs. In the past, we have adjusted our crude steel production levels and sales prices in response to sluggish demand from our customers in industries adversely impacted by the deteriorating economic conditions.

We expect 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 anon-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.

Earthquakes, tsunamis, floods, severe health epidemics (including the ongoing globalCOVID-19 pandemic and any possible recurrence of other types of widespread infectious diseases) and other natural calamities could materially adversely affect our business, results of operations or financial condition.

If earthquakes, tsunamis, floods, severe health epidemics or any other natural calamities were to occur in the future in any area where any of our assets, suppliers or customers are located, our business, results of operations or financial condition could be adversely affected. A number of suppliers of our raw materials and customers of our products are located in countries that have historically suffered natural calamities from time to time, such as Australia, China and Japan, as well as Korea. Any occurrence of such natural calamities in countries where our suppliers are located may lead to shortages or delays in the supply of raw materials. In addition, natural calamities in areas where our customers are located, including China, Southeast Asia, Japan, Europe, North America and Korea, may cause disruptions in their businesses, which in turn could adversely impact their demand for our products.

In particular,COVID-19, an infectious disease caused by severe acute respiratory syndrome coronavirus 2 that was first reported to have been transmitted to humans in late 2019 and has since spread globally over the course of 2020 to date, has materially and adversely affected the global economy and financial markets in recent months as well as disrupted our business operations. The World Health Organization declared theCOVID-19 as a pandemic in March 2020.

Risks associated with prolonged outbreak ofCOVID-19 or other types of widespread infectious disease include:

 

  

an increase in unemployment among, and/or decrease in disposable income of, consumers who purchase the products manufactured by our customers and a decline in overall consumer confidence and spending levels, which in turn may decrease demand for our products;

 

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disruption in the normal operations of the businesses of our customers, which in turn may decrease demand for our products;

 

  

disruption in supply of raw materials from our vendors;

 

  

disruption in delivery of our products to our customers;

 

  

disruption in the normal operations of our business resulting from contraction ofCOVID-19 by our employees or quarantine measures imposed by governments, which may necessitate our employees to be quarantined and/or our manufacturing facilities, construction projects, energy and mineral development projects or offices to be temporarily shut down;

 

  

disruption resulting from the necessity for social distancing, including implementation of temporary adjustment of work arrangements requiring employees to work remotely, which may lead to a reduction in labor productivity (for example, from early March 2020 to early April 2020, we implemented staggered remote working arrangements for our employees at our headquarters, which we do not believe had a material impact on our operations);

 

  

depreciation of the Won against major foreign currencies, which in turn may increase the cost of imported raw materials;

 

  

unstable global and Korean financial markets, which may adversely affect our ability to meet our funding needs on a timely and cost-effective basis; and

 

  

impairments in the fair value of our investments in companies that may be adversely affected by the pandemic.

It is not possible to predict the duration or full magnitude of harm fromCOVID-19. In the event thatCOVID-19 or other types of widespread infectious diseases cannot be effectively and timely contained, our business, financial condition and results of operations may be materially adversely affected.

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 37.3% of our total revenue from steel products produced and sold by us in 2019. 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 POSCO International Corporation (“POSCO International” and formerly known as POSCO Daewoo Corporation) 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, and our performance and successful fulfillment of our operational strategies are largely dependent on the overall Korean economy. 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.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices and the general weakness of the global economy have contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies has also fluctuated significantly and, as a result of changing global and Korean economic conditions, there has been volatility in the stock prices of Korean companies in recent years. Future declines in the

 

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Korea Composite Stock Price Index (the “KOSPI”) and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea and the ability of Korean companies to raise capital. 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:

 

  

declines in consumer confidence and a slowdown in consumer spending;

 

  

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the ongoing trade disputes with Japan);

 

  

adverse conditions or developments in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, including as a result of deteriorating economic and trade relations between the United States and China as well as increased uncertainties resulting from the United Kingdom’s exit from the European Union on January 31, 2020;

 

  

the occurrence of severe health epidemics and pandemics in Korea or other parts of the world, such as the ongoing globalCOVID-19 pandemic;

 

  

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

 

  

increased sovereign default risk in select countries and the resulting adverse effects on the global financial markets;

 

  

investigations of large Korean business groups and their senior management for possible misconduct;

 

  

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail andsmall-andmedium-sized enterprise borrowers in Korea;

 

  

social and labor unrest;

 

  

decreases in the market prices of Korean real estate;

 

  

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

 

  

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

 

  

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

 

  

loss of investor confidence arising from corporate accounting irregularities or corporate governance issues concerning certain Korean companies;

 

  

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;

 

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natural orman-made disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

  

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 (including a potential escalation of hostilities between the U.S. and Iran) and Northern Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

  

increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;

 

  

the continued growth 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 manufacturing bases from Korea to China);

 

  

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets; 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 62.7% of our total revenue from steel products produced and sold by us in 2019. Our export sales to customers in Asia, including China, Japan, Indonesia, Thailand and Malaysia, accounted for 62.6% of our total export sales revenue from steel products produced and exported by us in 2019, and we expect our sales to these countries to remain important in the future. In particular, our export sales to China has increased in recent years and accounted for 29.3% of our total export sales revenue from steel products produced and exported by us in 2019. Accordingly, adverse economic and financial developments in these countries may have an adverse effect on demand for our products. Unfavorable or uncertain economic and market conditions, which can be caused, among others, by difficulties in the financial sector, corporate, political or other scandals that may reduce confidence in the markets, declines in business confidence, increases in inflation, natural disasters or pandemics, outbreaks of hostilities or other geopolitical instability. Deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the ongoing trade disputes with Japan), or a combination of these or other factors, have, in the past adversely affected, and may in the future adversely affect, 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 an increase in global production capacity, may also reduce export prices in Dollar terms of our principal products sold to customers in Asia. For a discussion of productionover-capacity in the global steel industry, see “— We operate in the highly competitive steel, trading and construction industries, and our failure to successfully compete would adversely affect our market position and business.” 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.

 

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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 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 2019, 62.7% 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 foreigncurrency-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 foreign-currency denominated 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.

The overall net impact from fluctuations of the Won against major currencies is difficult to estimate and varies from year to year. 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, POSCO 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 POSCO 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 POSCO 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 some of 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.

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.

 

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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 55 million dry metric tons of iron ore and 29 million wet metric tons of coal in 2019. Iron ore is imported primarily from Australia, Brazil and Canada. Coal is imported primarily from Australia, Canada and Russia. 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 (Premium Low Vol Coking Coal, FOB Australia Index announced by Platts) was US$188 in 2017, US$207 in 2018 and US$176 in 2019. The average market price of iron ore per dry metric ton (Iron Ore 62% Fe, CFR China Index announced by Platts) was US$71 in 2017, US$69 in 2018 and US$93 in 2019.

Ourlong-term supply contracts generally have terms of three to ten years and provide for periodic price adjustments to thethen-market prices.We typically adjust the prices on a quarterly basis and maintain approximately one month of inventory of raw materials. Such price adjustments 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. For both coal and iron ore, we typically agree on the purchase price with the suppliers primarily based on the spot market price periodically announced by Platts (Premium Low Vol Coking Coal, FOB Australia Index and Iron Ore 62% Fe, CFR China Index). As of December 31, 2019, 102 million tons of iron ore and 11 million tons of coal remained to be purchased underlong-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, while rapidly falling prices may increase loss on valuation of raw material inventory purchased when prices were higher, either of which could have an adverse effect on our business, financial condition and results of operations.

We operate in the highly competitive steel, trading and construction 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. 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 recent years, a slowdown in domestic demand for steel products in China resulting from slowed economic growth, combined with an expansion in steel production capacity, has led to production over-capacity in the Chinese steel industry, which in turn has led the Chinese government to pursue aggressive consolidation in the Chinese steel industry, such as the consolidation of Baosteel Group and Wuhan Iron and Steel in 2016, that has resulted in fewer but larger steel manufacturers that are able to compete more effectively in the global steel industry. In addition, the global steel industry has experienced consolidation in the past. Competition from such global steel manufacturers with expanded production capacity as well as competitors from emerging markets, especially from China and India, has resulted in significant price competition and may result in declining margins and reductions in revenue in the future. 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.

 

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In the past, increased production capacity, combined with decreased demand resulting from a slowdown of the global economy, has from time to time resulted in productionover-capacity in the global steel industry which in turn has resulted in downward pressure on global steel prices. Productionover-capacity in global steel industry may intensify if global economic growth slows or demand from developing countries, particularly from China, continues to lag behind the growth in production capacity. Productionover-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;

 

  

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 a slowdown of the global economy or productionover-capacity will not have a material adverse effect on our business, results of operations or financial condition.

Trading. POSCO International competes principally with other Korean general trading companies that are affiliated with major domestic business groups, 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 POSCO International operates are also highly competitive. POSCO International’s principal competitors in 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 POSCO 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 POSCO International’s competitors may be more experienced and have greater financial resources and pricing flexibility than POSCO International, as well as more extensive global networks and wider access to customers. There is no assurance that POSCO 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. In 2018 and 2019, we recognized impairment of goodwill of Won 158 billion and Won 55 billion, respectively, related to a decrease invalue-in-use of POSCO International.

 

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Construction.POSCO E&C, our consolidated subsidiary, 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 obtaininghigh-quality contractors and qualified employees.

In Korea, POSCO E&C’s main competition in the construction of residential andnon-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, many of which are member companies of other large business groups in Korea and are capable of undertakinglarger-scale,higher-value-added projects that offer greater potential returns. A series of measures introduced by the Government over the past several years to regulate housing prices in Korea, as well as increasing popularity oflow-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 and other major Korean construction companies with overseas operations, as well as international construction companies from other countries. 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, we have made investments in the past decade to secure 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, LNG and agricultural trading and production of anode and cathode materials for rechargeable batteries as well as other comprehensive materials such as lithium. From time to time, we may selectively acquire or invest in companies to pursue such diversification strategy.

The success of our diversification strategy will depend, in part, on our ability to realize the anticipated growth opportunities and synergies. Some of our diversification efforts have not been successful. For example, in 2018, we incurred impairment loss of Won 810 billion related to our synthetic natural gas production facility in Gwangyang due to our discontinuation of the business which we had launched in 2011, which was adversely impacted by a decline in the market price of liquefied natural gas (“LNG”). In 2019, we incurred impairment loss of Won 74 billion related to the discontinued operation of a ferrosilicon facility in Pohang and Won 70 billion related to the discontinued operation of a compact endless cast-rolling mill facility in Gwangyang. 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 andknow-how to engage in such businesses and decreases in the prices of competing products or services that make our products or services less competitive. The realization of the anticipated benefits may be impeded,

 

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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.

In addition, 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 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.

Expansion of our production operations abroad is important to ourlong-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 additional 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;

 

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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.

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

As a steel producer with global sales and operations, we are involved in trade remedy proceedings in markets worldwide, including in the United States. We actively participate in such proceedings to minimize any adverse effects and associated risks. While there has been an increase in the number of trade cases in recent years, and an increased focus on trade issues by government officials, such cases have been limited in scope relative to our global sales and operations. We continue to carefully monitor developments with respect to trade remedy policy in all markets in which we participate and, where necessary, vigorously defend our rights through litigation before tribunals such as the U.S. Court of International Trade. Our products that are subject toanti-dumping duties, safeguard duties, countervailing duties, quotas or tariffs in the aggregate currently 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, safeguard 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.

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

As part of our efforts to diversify our operations, we carefully seek out promising overseas natural resources exploration, development and production opportunities. We also participate in natural resources projects as part of consortia or through acquisitions of minority interests, such as a gas field exploration project in Myanmar through POSCO International. We may also selectively acquire or invest in companies or businesses that engage in such activities. 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, as well as our ability to finance such investments.

 

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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. Other risks to which such activities are subject include obtaining required regulatory approvals and licenses, securing and maintaining adequate property rights to land and natural resources, and managing local opposition to project development. A decrease in the market price of raw materials may also adversely impact the value of our investments related to natural resources projects, potentially resulting in impairment losses. For example, in 2019, we recognized impairment loss of Won 118 billion related to the termination of the BlockAD-7 exploration project in Myanmar by POSCO International.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.

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

We typically pursue our 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 ours;

 

  

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.

 

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

We engage in engineering and construction activities through POSCO E&C. The Construction Segment 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. From time to time, the construction industry has experienced significant and sometimes prolonged downturns, and our construction revenues have fluctuated in the past depending on the level of public and private sector construction activities in Korea and abroad. In addition, 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. In recent years, the demand for construction activities in Korea and abroad has remained weak, and the overall prospects for Korean construction companies in 2020 and beyond remain uncertain. A prolonged general downturn in the construction market resulting in weaker demand may adversely affect our business, results of operations or financial condition.

Many of POSCO E&C’s domestic and overseas construction projects are on afixed-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 afixed-price basis according to a predetermined timetable, pursuant to the terms of afixed-price contract. Under suchfixed-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 offixed-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 onfixed-price contracts. However, the costs incurred and gross profits realized on afixed-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. For example, we incurred losses in recent years in connection with a delay in the construction ofCSP-Companhia Siderurgia do Pecem steel plant complex in Brazil. 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.

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 environmental or health and safety issues, such as those resulting from discharge of pollutants and

 

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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 thirdparty-owned or operated sites, and hazardous wastes may be disposed of or treated at thirdparty-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.

Significant breaches of information security could lead to legal and financial exposure, damage to our reputation and a loss of confidence by our customers.

Our business relies heavily on mission-critical, complex and interdependent information technology systems that support our business processes. It involves the storage and transmission of confidential information relating to us as well as our customers and suppliers. Any significant breach in our information security could expose us to a risk of loss, improper use or disclosure of such information, and could give rise to significant liability or litigation, any of which could harm our reputation and adversely affect our business.

We believe that there has been no instance of a material breach in our information security to date that resulted in significant disruption of our operations and had a significant adverse effect on our operational results, or on third parties, including our customers and suppliers. However, there can be no assurance that we will be able to continue to prevent security incidents or other breaches in our information security from having a material adverse effect on our business, results of operation, financial viability or reputation.

In addition, our information security measures may fail due to external and internal security threats, outages, malicious intrusions and attacks, programming or human errors and malfeasance, or other similar events.

Instituting appropriate access controls and safeguards across our information technology infrastructure is challenging. Furthermore, outside parties may attempt to fraudulently induce employees to divulge sensitive information to gain access to our data or our customers’ data or access credentials. Because the techniques used to obtain unauthorized access, disable or degrade services or sabotage systems change frequently and often are not recognized until attacks are launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

If an actual or perceived breach of our cybersecurity occurs or the market perception of the effectiveness of our information security measures is compromised, this may lead to significant legal and financial exposure, including legal claims and regulatory fines and penalties, reputational harm and a loss of confidence of our customers, which could have an adverse effect on our business, financial condition and results of operations.

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, automotive steel manufacturing technology andhigh-manganese steel manufacturing technology, 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 take

 

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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 proprietaryknow-how to maintain our competitive position, and unauthorized disclosure of our trade secrets or other unpatented proprietaryknow-how could negatively affect our business.

We rely on trade secrets and unpatented proprietaryknow-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 otherknow-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 andknow-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.

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’s “ordinary wage” is used as the basis for calculating various statutory benefits. Prior to the Supreme Court of Korea’s decision described below,

 

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we and other companies in Korea had interpreted the previous guidelines issued by the Ministry of Employment and Labor as excluding fixed bonuses that are paid other than on a monthly basis, such as bi monthly, quarterly or biannually paid bonuses, from employees’ ordinary wages.

In December 2013, the Supreme Court of Korea ruled that regularly paid bonuses, including those that are paid other than on a monthly basis, are included in the scope of employees’ ordinary wages if these bonuses are paid (i) “regularly,” (ii) “uniformly” and (iii) on a “fixed basis,” notwithstanding differential amounts based on seniority. Under this decision, any provision of a collective bargaining agreement or other agreements that attempt to exclude such regular bonuses from employees’ ordinary wages will be deemed void for violation of the mandatory provisions of Korean law.

The Supreme Court of Korea’s decision clarified that if payment of a regular bonus is limited only to those working for the employer on a specific date, such bonus is not fixed and thus does not constitute part of an employee’s ordinary wage. The Ministry of Employment and Labor subsequently published guidelines in January 2014 (the “Guidelines”). According to the Guidelines, the Government excludes, from ordinary wages, regular bonuses contingent on employment on a specific date. Based on the Supreme Court of Korea’s decision and the Guidelines, we believe that regular bonuses we have paid to our employees are likely not required to be included in their ordinary wages because we have paid regular bonuses only to those working for us on the date of payment calculation, the 15th day of each month. However, if we are nonetheless determined to have underpaid employees by under-calculating their ordinary wages over the past three years or in the future, we may be liable for additional payments reflecting the expanded scope of employees’ ordinary wages. Any such additional payments 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 current and future events. In particular, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and ballistic missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

  

North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the Government also closed the inter-Korea Gaesong Industrial Complex in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

  

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

 

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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, which may further aggravate social and political pressures within North Korea.

Although bilateral summit meetings were held between Korea and North Korea in April, May and September 2018 and between the United States and North Korea in June 2018, February 2019 and June 2019, there can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis,high-level contacts between Korea or the United States and North Korea break down or further military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations and the market value of our common stock 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 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.

 

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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 andnon-U.S. experts named in this annual report.

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 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 and Cuba. 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, POSCO International engages in the trading of steel, raw materials and other items with entities in countries that are deemed Sanctions Targets, including Iran and Cuba.We believe that such activities and investments do not involve any U.S. goods or services. Our activities in Iran and Cuba accounted for approximately 0.6% of our consolidated revenues in 2017, 0.3% in 2018 and 0.01% in 2019.

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

 

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affected, and 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.

Uncertainty relating to benchmark regulation reforms may adversely affect our securities linked to a benchmark.

The London Interbank Offered Rate (“LIBOR”) and the Euro Interbank Offered Rate (“EURIBOR”) and other indices which are deemed to be “benchmarks” are the subject of recent national, international and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others have yet to be implemented. These reforms may cause such benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences which cannot be predicted. Any such consequence could have a material adverse effect on any securities linked to such benchmarks.

Regulation (EU) 2016/1011 (the “Benchmark Regulation”) was published in the Official Journal of the European Union on June 29, 2016 and has been in force since January 1, 2018. The Benchmark Regulation applies to the provision of benchmarks, the contribution of input data to a benchmark and the use of a benchmark, within the European Union. Among other things, (i) it requires benchmark administrators (such as ICE Benchmark Administration Limited and the European Money Market Institute, which currently administer LIBOR and EURIBOR, respectively) to be authorized or registered (or, ifnon-European Union based, to be subject to an equivalent regime or otherwise recognized or endorsed) and (ii) it prevents certain uses by European Union-supervised entities of benchmarks of administrators that are not authorized or registered (or, ifnon-European Union based, not deemed equivalent or recognized or endorsed). On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR after 2021. The FCA announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

The Benchmark Regulation could have a material impact on any securities linked to a rate or index deemed to be a benchmark, in particular, if the methodology or other terms of the benchmark are changed in order to comply with the requirements of the Benchmark Regulation. Such changes could, among other things, have the effect of reducing, increasing or otherwise affecting the volatility of the published rate or level of the benchmark. More broadly, any of the international, national or other proposals for reform, or the general increased regulatory scrutiny of benchmarks, could increase the costs and risks of administering or otherwise participating in the setting of a benchmark and complying with any such regulations or requirements.

Such factors may have the following effects on certain benchmarks: (i) discourage market participants from continuing to administer or contribute to such benchmark; (ii) trigger changes in the rules or methodologies used in the benchmarks or (iii) lead to the disappearance of the benchmark. Any of the above changes or any other consequential changes as a result of international, national or other proposals for reform or other initiatives or investigations, could have a material adverse effect on the value of and return on any securities linked to a benchmark. Moreover, if a benchmark ceases to be calculated or administered and no replacement base rate is identified or selected, the fallback provisions for the interest rate calculations under the securities may result in interest accruing at a fixed rate based on the rate which applied in the previous period when the benchmark was available, effectively converting the securities into fixed rate securities.

 

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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. Theforward-looking statements are subject to various risks and uncertainties. Theseforward-looking statements include, but are not limited to, those statements using words such as “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project,” “aim,” “plan,” “likely to,” “target,” “contemplate,” “predict,” “potential” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions generally intended to identify forward-looking statements. 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 anyforward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which ourforward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, theforward-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 theforward-looking statements. We do not undertake to release the results of any revisions of theseforward-looking statements to reflect future events or circumstances.

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, 440Teheran-ro,Gangnam-gu, Seoul, Korea 06194, and our telephone number is+82-2-3457-0114. The address of our English website ishttp://www.posco.com.

The SEC maintains a website (http://www.sec.gov), which contains reports, information statements and other information regarding issuers that file electronically with the SEC.

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 42.9 million tons of crude steel and stainless steel in 2019, a substantial portion of which was produced at Pohang Works and Gwangyang Works. As of December 31, 2019, we had approximately 47.5 million tons of annual crude steel and stainless steel production capacity, including 17.6 million tons of production capacity of Pohang Works and 24.8 million tons of production capacity of Gwangyang Works.We believe Pohang Works and Gwangyang Works are two of the most

 

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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.

Korea is our most important market. Domestic sales accounted for 37.3% of our total revenue from steel products produced and sold by us in 2019 and 38.4% in 2018. On anon-consolidated basis, we believe that our steel products constituted approximately 48% of the total sales volume of such steel products sold in Korea in 2019 and approximately 49% in 2018. Our export sales and overseas sales to customers abroad accounted for 62.7% of our total revenue from steel products produced and sold by us in 2019 and 61.6% in 2018. Our major export market is Asia, with China accounting for 29.3%, Asia other than China and Japan accounting for 22.5%, and Japan accounting for 10.8% of our total steel export revenue from steel products produced and exported by us in 2019 and China accounting for 28.9%, Asia other than China and Japan accounting for 23.4%, and Japan accounting for 10.3% of our total steel export revenue from steel products produced and exported by us in 2018.

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 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 throughout the world. 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. POSCO Energy Corporation is the largest private power generation company in Korea.

We generated revenue of Won 64,786 billion and profit of Won 2,038 billion in 2019, compared to revenue of Won 65,155 billion and profit of Won 1,932 billion in 2018. We had total assets of Won 79,371 billion and total equity of Won 47,763 billion as of December 31, 2019, compared to total assets of Won 78,777 billion and total equity of Won 46,673 billion as of December 31, 2018.

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 (either by us or through POSCO Processing & Service Co., Ltd. (“POSCO P&S”), our former subsidiary that primarily engaged in sales of steel products produced by us prior to the transfer of its steel product sales business to POSCO International in March 2017) 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 (including POSCO International) other than POSCO P&S. Commencing March 2017, our external revenue of the Steel Segment was negatively impacted by the recognition of the external

 

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revenue of POSCO P&S’s steel product sales business under the Trading Segment following the transfer of such business to POSCO International.

 

   For the Year Ended December 31, 
   2017  2018  2019 

Steel Products

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

Cold rolled products

  9,441    31.2 10,585    32.7 10,057    31.4

Hot rolled products

   5,101    16.9   5,620    17.4   5,252    16.4 

Stainless steel products

   6,624    21.9   6,624    20.5   6,956    21.7 

Plates

   3,087    10.2   3,587    11.1   4,070    12.7 

Wire rods

   1,880    6.2   1,882    5.8   1,749    5.5 

Silicon steel sheets

   1,025    3.4   1,012    3.1   923    2.9 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Sub-total

   27,159    89.8   29,309    90.6   29,007    90.6 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Others

   3,072    10.2   3,049    9.4   3,070    9.4 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

      30,230    100.0     32,358    100.0     32,078    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 (either by us or through POSCO P&S prior to the transfer of its steel product sales business to POSCO International in March 2017), 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 (including POSCO International) other than POSCO P&S. Commencing March 2017, our external sales volume of the Steel Segment was negatively impacted by the recognition of the external sales volume of POSCO P&S’s steel product sales business under the Trading Segment following the transfer of such business to POSCO International.

 

   For the Year Ended December 31, 
   2017  2018  2019 

Steel Products

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

Cold rolled products

   11,279    37.5  12,300    39.2  11,196    36.9

Hot rolled products

   7,786    25.9   8,153    26.0   7,891    26.0 

Stainless steel products

   2,874    9.6   2,853    9.1   2,973    9.8 

Plates

   4,896    16.3   4,957    15.8   5,399    17.8 

Wire rods

   2,333    7.8   2,227    7.1   2,095    6.9 

Silicon steel sheets

   877    2.9   892    2.8   816    2.7 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total(1)

   30,046    100.0  31,381    100.0  30,369    100.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

 

(1)

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

In addition to steel products produced by us and directly sold to external customers (either by us or through POSCO P&S prior to the transfer of its steel product sales business to POSCO International in March 2017), we engage our consolidated sales subsidiaries (including POSCO 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 7,385 billion in 2017, Won 7,492 billion in 2018 and Won 7,740 billion in 2019. 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.

 

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Our deliveries of cold rolled products produced by us and directly sold to external customers amounted to 11.2 million tons in 2019, representing 36.9% 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 2019, our sales volume of cold rolled products produced by us and directly sold to external customers decreased by 9.0% compared to our sales volume in 2018 primarily due to a decrease in sales of cold rolled products manufactured and sold by our subsidiaries in Southeast Asia.

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 believe we had a domestic market share for cold rolled products of approximately 59% on anon-consolidated basis in 2019.

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 thicknesses as the feedstock for highervalue-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 7.9 million tons in 2019, representing 26.0% 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 2019, our sales volume of hot rolled products produced by us and directly sold to external customers decreased by 3.2% compared to our sales volume in 2018 reflecting a decrease in demand for such products.

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 believe we had a domestic market share for hot rolled products of approximately 50% on anon-consolidated basis in 2019.

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.

Our deliveries of stainless steel products produced by us and directly sold to external customers amounted to 3.0 million tons in 2019, representing 9.8% 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 9.8% of total sales volume of the principal steel products produced by us and directly sold to external customers in 2019, they represented 21.7% of our total revenue from steel products in 2019. In 2019, our sales volume of stainless steel products produced by us and directly sold to external customers increased by 4.2% compared to our sales volume in 2018, in part due to an increase in sales of stainless steel products manufactured and sold by our Chinese subsidiaries.

 

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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 believe we had a domestic market share for stainless steel products of approximately 41% on anon-consolidated basis in 2019.

Plates

Plates are used in shipbuilding, structural steelwork, offshore oil and gas production, power generation, mining, and the manufacture ofearth-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 5.4 million tons in 2019, representing 17.8% 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 2019, our sales volume of plates produced by us and directly sold to external customers increased by 8.9% compared to our sales volume in 2018 primarily due to an increase 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 believe we had a domestic market share for plates of approximately 49% on anon-consolidated basis in 2019.

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 2.1 million tons in 2019, representing 6.9% 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 2019, our sales volume of wire rods produced by us and directly sold to external customers decreased by 5.9% compared to 2018 primarily due to a decrease in demand for such products in Korea.

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 believe we had a domestic market share for wire rods of approximately 55% on anon-consolidated basis in 2019.

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 0.8 million tons in 2019, representing 2.7% of our total sales volume of principal steel products produced by us and directly sold to external customers.

In 2019, our sales volume of silicon steel sheets produced by us and directly sold to external customers decreased by 8.6% compared to 2018 primarily due to a decrease in demand for silicon steel sheets in Europe and Southeast Asia.

 

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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 believe we had a domestic market share for silicon steel sheets of approximately 82% on anon-consolidated basis in 2019.

Others

Other products include lowervalue-addedsemi-finished products such as pig iron, billets, blooms and slab.

Markets

Korea is our most important market. Domestic sales represented 37.3% of our total revenue from steel products produced and sold by us in 2019. Our export sales and overseas sales to customers abroad represented 62.7% of our total revenue from steel products in 2019. 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 highervalue-added and other finished products toend-users andsemi-finished products to other steel manufacturers for further processing. Local distribution companies and sales affiliates sell finished steel products tolow-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 our steel products in Korea for the periods indicated based on sales volume.

 

   For the Year Ended December 31, 

Source

      2017          2018          2019     

POSCO’s sales(1)

   43.1  49.2  48.1

Other domestic steel companies’ sales

   28.4   27.9   27.0 

Imports

   28.5   22.9   24.9 
  

 

 

  

 

 

  

 

 

 

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.

Exports

Our export sales and overseas sales to customers abroad represented 62.7% of our total revenue from steel products produced and sold by us in 2019, 62.6% 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 increased by 1.7% from Won 24,551 billion in 2018 to Won 24,971 billion in 2019.

 

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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 (including our consolidated sales subsidiaries), by geographical market and by product for the periods indicated.

 

   For the Year Ended December 31, 
   2017   2018   2019 

Region

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

China

   6,542    28.5%    7,097    28.9%    7,322    29.3% 

Asia (other than China and Japan)

   5,354    23.3    5,749    23.4    5,622    22.5 

Japan

   2,601    11.3    2,530    10.3    2,686    10.8 

Europe

   2,181    9.5    2,212    9.0    2,662    10.7 

Middle East

   163    0.7  �� 204    0.8    271    1.1 

North America

   1,947    8.5    1,861    7.6    1,858    7.4 

Others

   4,176    18.2    4,898    19.9    4,551    18.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      22,963    100.0%       24,551    100.0%       24,971    100.0% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   For the Year Ended December 31, 
   2017   2018   2019 

Steel Products

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

Cold rolled products

  9,224    40.2%   10,499    42.8%    9,949    39.8% 

Hot rolled products

   2,604    11.3    2,738    11.2    3,159    12.6 

Stainless steel products

   5,345    23.3    5,661    23.1    5,918    23.7 

Plates

   2,000    8.7    1,812    7.4    2,128    8.5 

Wire rods

   606    2.6    677    2.8    729    2.9 

Silicon steel sheets

   950    4.1    1,021    4.2    988    4.0 

Others

   2,235    9.7    2,143    8.7    2,101    8.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      22,963    100.0%       24,551    100.0%       24,971    100.0% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We distribute our export products mostly through Korean trading companies, including POSCO International, and our overseas sales subsidiaries. Our largest export market in 2019 was China, which accounted for 29.3% of our export revenue from steel products produced and sold by us. The principal products exported to China were cold rolled products, including continuous galvanized products.Our exports to China increased by 3.2% from Won 7,097 billion in 2018 to Won 7,322 billion in 2019 primarily due to increases in sales of stainless steel products to steel processing companies in China.

Our second largest export market in 2019 was Asia (other than China and Japan), which accounted for 22.5% of our export revenue from steel products produced and sold by us. The principal products exported to Asia (other than China and Japan) were cold rolled products, including continuous galvanized products.Our exports to Asia (other than China and Japan) decreased by 2.2% from Won 5,749 billion in 2018 to Won 5,622 billion in 2019 primarily due to decreases in sales of steel products in Vietnam.

Anti-Dumping, Safeguard and Countervailing Duty Proceedings

From time to time, our exporting activities have become subject toanti-dumping, safeguard and countervailing proceedings. As a steel producer with global sales and operations, we are involved in trade remedy proceedings in markets worldwide, including in the United States. We actively participate in such proceedings to minimize any adverse effects and associated risks. While there has been an increase in the number of trade cases in recent years, and an increased focus on trade issues by government officials, such cases have been limited in scope relative to our global sales and operations. We continue to carefully monitor developments with respect to trade remedy policy in all markets in which we participate and, where necessary, vigorously defend our rights through litigation

 

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before tribunals such as the U.S. Court of International Trade. Our products that are subject toanti-dumping duties, safeguard duties, countervailing duties, quotas or tariffs in the aggregate currently 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, taking into consideration production outlook of the global steel industry and global economic conditions in general. 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 highervalue-added steel products in the largest markets are determined considering the prices of similar products charged by our competitors.

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 0.7 tons of coal to produce one ton of steel. We import all of the coal and virtually all of the iron ore that we use. In 2019, POSCO imported approximately 55 million dry metric tons of iron ore and 29 million wet metric tons of coal. Iron ore is imported primarily from Australia, Brazil and Canada. Coal is imported primarily from Australia, Canada and Russia.

We purchase a substantial portion of our iron ore and coal imports pursuant tolong-term contracts. Ourlong-term supply contracts generally have terms of three to ten years and provide for periodic price adjustments to thethen-market prices. We typically adjust the prices on a quarterly basis and maintain approximately one month of inventory of raw materials. Such price adjustments 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. For both coal and iron ore, we typically agree on the purchase price with the suppliers primarily based on the spot market price periodically announced by Platts (Premium Low Vol Coking Coal, FOB Australia Index and Iron Ore 62% Fe, CFR China Index). We or the suppliers may cancel thelong-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 engage in exploration and production projects abroad to enhance our ability to meet the requirements forhigh-quality raw materials, by acquiring mining rights of raw materials or by investing in projects either as part of a consortium or through an acquisition of a minority interest. In 2019, we purchased approximately 39% of our iron ore imports and 19% of our coal imports from foreign mines in which we have made investments. Our major investments to procure supplies of coal, iron ore and nickel are primarily located in Australia, Brazil, New Caledonia and Canada. 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 (Premium Low Vol Coking Coal, FOB Australia Index announced by Platts) was US$188 in 2017, US$207 in 2018 and US$176 in 2019. The average market price of iron ore per dry metric ton (Iron Ore 62% Fe, CFR China Index announced by Platts) was US$71 in 2017, US$69 in 2018 and US$93 in 2019. We currently do not depend on any single country or supplier for our coal or iron ore.

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 ferronickel primarily from suppliers in Korea that

 

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procure nickel ore from New Caledonia, and the remainder primarily from leading suppliers in Indonesia, Japan and Ukraine. 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 Southeast Asia. Revert scraps from the Pohang Steelworks are also used for our stainless steel production. The average market price of nickel per ton on the London Metal Exchange was US$10,411 in 2017, US$13,122 in 2018 and US$13,936 in 2019.

Transportation

In order to meet our transportation needs for iron ore and coal, we have entered intolong-term contracts with shipping companies in Korea to retain a fleet of dedicated vessels. Such contracts are on a consecutive voyage basis with maximum capacity loading, where the shipping company is compensated for the maximum amount of cargo on each trip regardless of whether the vessel is loaded to such amount. These dedicated vessels transported approximately 69% of the total requirements in 2019, and the remaining approximately 31% was transported by vessels retained through short to medium term contracts, depending on market conditions. We plan to continue to optimize the fleet of dedicated vessels that we use in order to cope with changes in the global shipping environment, as well as upgrade some of the existing vessels with others that utilize moreenergy-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 intosemi-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 aresemi-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 highervalue-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 highervalue-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 believe we had a market share of approximately 50% on anon-consolidated basis in 2019, we face competition from a Korean steel producer that operatesmini-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 believe we had a market share of approximately 59% and 41%, respectively, on anon-consolidated basis in 2019, 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 competitor in Korea is Hyundai Steel Co., Ltd.

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 the past decade, 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. In recent years, a slowdown in domestic demand for steel products in China resulting from slowed economic growth, combined with an expansion in steel production capacity, has led to production over-capacity in the Chinese steel industry, which in turn has led the Chinese government to pursue aggressive consolidation in the Chinese steel industry, such as the consolidation of Baosteel Group and Wuhan Iron and Steel in 2016, that has resulted in fewer but larger steel manufacturers that are able to compete more effectively in the global steel industry. Competition from global steel manufacturers with significant production capacity such as ArcelorMittal S.A. and Nippon Steel & Sumitomo Metal Corporation, as well as competitors from emerging markets, 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 in Korea and elsewhere around the world that engage in steel production activities.

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), which commenced production of stainless cold rolled steel products in December 1998. As of December 31, 2019, Zhangjiagang Pohang Stainless

 

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Steel had an annual production capacity of 1,100 thousand tons of stainless steel products and it produced 1,134 thousand tons of stainless steel products in 2019.See “— Production Facilities Abroad — Zhangjiagang Pohang Stainless Steel.”

Indonesia. We entered into an agreement with PT. Krakatau Steel (Persero) Tbk. to establish PT. Krakatau POSCO Co., Ltd. (“PT. Krakatau POSCO”), a joint venture company in Indonesia for the manufacture and sale of plates and slabs. We hold a 70.0% interest in the joint venture.We completed the construction of a steel manufacturing plant in December 2013. As of December 31, 2019, PT. Krakatau POSCO had an annual production capacity of 2,944 thousand tons of plates and slabs and it produced 3,018 thousand tons of plates and slabs in 2019. See “— Production Facilities Abroad — PT. Krakatau POSCO.”

Vietnam. We established POSCO SS VINA JOINT STOCK COMPANY (“POSCO SS VINA”), a wholly owned subsidiary engaged in the manufacture and sale of shape steel and steel reinforcement products. The plant became operational in June 2015. As of December 31, 2019, POSCO SS VINA had an annual production capacity of 1,100 thousand tons of shape steel and steel reinforcement products and it produced 789 thousand tons of shape steel and steel reinforcement products in 2019. See “Production Facilities Abroad — POSCO SS VINA.”

Trading

Our trading activities consist primarily of trading activities of POSCO International. Our consolidated subsidiaries that also engage in trading activities include POSCO Asia Co., Ltd. located in Hong Kong, POSCO Japan Co., Ltd. located in Tokyo, Japan, POSCO America Corporation located in Georgia, U.S.A., POSCO (Thailand) Company Limited located in Chonburi, Thailand and POSCO Singapore LNG Trading Pte. Ltd. in Singapore.

POSCO 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 agricultural commodities. POSCO 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. In order to expand and strengthen its core business and to further promote efficiency within the POSCO Group, POSCO International acquired the steel product sales business from POSCO P&S in March 2017.

 

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The following table sets forth a breakdown of POSCO International’s total consolidated sales by export sales, domestic sales andthird-country trades as well as product category for the periods indicated:

 

   For the Year Ended December 31, 

Product Category

  2017  2018  2019 
   (in billions of Won, except percentages) 

Export trading sales:

       

Steel and metal

  5,059   22.4 5,354   21.3 5,041   20.6

Chemical and commodities

   1,429   6.3   1,563   6.2   1,711   7.0 

Automobile and machinery parts

   2,224   9.9   1,795   7.1   1,015   4.2 

Other goods

         0   0.0   0   0.0 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

   8,712   38.6   8,712   34.6   7,767   31.8 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Domestic trading sales:

       

Steel and metal

  2,322   10.3 3,316   13.2 3,107   12.7

Chemical and commodities

   23   0.1   19   0.1   10   0.0 

Automobile and machinery parts

   59   0.2   36   0.1   97   0.4 

Other goods

   17   0.1             
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

   2,421   10.7   3,371   13.4   3,213   13.2 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Manufactured product sales

  502   2.2  547   2.2  635   2.6 

Others

  253   1.1  222   0.9  458   1.9 

Third-Country Trades:

       

Trading

      14,969   66.3     17,390   69.1     17,367   71.1

Natural resources development

   573   2.5   829   3.3   1,359   5.6 

Manufactured product trading

   221   1.0   329   1.3   101   0.4 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalthird-country trades

   15,763   69.8   18,547   73.7   18,827   77.1 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total sales prior to consolidation adjustments

   27,650   122.4   31,399   124.7   30,900   126.5 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidation adjustments

   (5,079  (22.4  (6,225  (24.7  (6,477  26.5 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total sales

  22,572   100.0 25,174   100.0 24,423   100.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Trading Activities.POSCO 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. POSCO International is also engaged inthird-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 POSCO 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, POSCO International enters into trading transactions after the underlying sale and purchase contracts have been matched, which mitigates inventory and price risks to POSCO International. POSCO 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, POSCO 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 POSCO International does not assume the risks and rewards of ownership of the goods. In the instances in which it acts as an arranger for a third country transaction, POSCO 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 POSCO International’s trading activities vary depending on a number of factors, including prevailing supply and

 

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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, POSCO International has accounts receivable and payable in a number of currencies, but principally in Dollars. POSCO 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 POSCO 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, POSCO International also periodically enters into derivative contracts, primarily currency forward contracts, to further hedge its foreign exchange risks.

In connection with its trading activities, POSCO 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 involvinglarge-scale industrial or construction projects, POSCO International also provides necessary project planning and organizing services to its customers.

Natural Resources Development Activities.POSCO International also invests in energy and mineral development projects throughout the world. In particular, POSCO International holds interests in several gas field projects in Myanmar, where production of gas commenced in July 2013. POSCO International recognized revenues of approximately Won 498 billion in 2017, Won 474 billion in 2018 and Won 723 billion in 2019 from the Myanmar gas field projects. Such natural resources development projects, while entailing higher risks than the traditional trading business, offer higher potential returns. POSCO International intends to continue to expand its operations by carefully seeking out promising energy development projects abroad.

Competition. POSCO International competes principally with other Korean general trading companies that are affiliated with major domestic business groups, 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. POSCO 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 POSCO 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 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

 

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itscutting-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.

Leveraging its technicalknow-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 ofhigh-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. In September 2015, we completed the sale of our 38.0% interest in POSCO E&C to PIF, the sovereign wealth fund of Saudi Arabia, for US$1.05 billion. In connection with the sale, POSCO E&C and PIF agreed to jointly explore additional business opportunities in Saudi Arabia, including participating in various infrastructure projects sponsored by the Saudi Arabian government.

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 LNG andcoal-fired thermal power plants. In recent years, POSCO E&C has obtained various orders for such power plants, including a coal-fired thermal power plant in Samcheok, Korea, an ultra-supercritical coal-fired power plant in Matarbari, Bangladesh, a combined cycle power plant in Erbil, Iraq and an integrated cycle power plant and an LNG terminal facility in Colón, Panama. In response to increasing demand from the energy industry, POSCO E&C plans to continue to target opportunities in power plant construction, especially in Asia and Africa, which it believes offers significant growth potential. In order to further promote efficiency among the member companies of the POSCO Group as well as to enhance the engineering expertise of POSCO E&C, POSCO Engineering Co., Ltd. merged into POSCO E&C in February 2017.

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 andnon-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 undertakinglarger-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 oflow-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 and other major Korean construction companies with overseas operations, as well as international construction companies from other countries.

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, manufacturing of various industrial materials 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 subsequently renamed it POSCO Energy Corporation. Since our acquisition, POSCO Energy Corporation has expanded its power generation capacity by constructing additional power plants in Korea and Southeast Asia. POSCO Energy Corporation’s total power generation capacity was approximately 3,794 megawatts as of December 31, 2019. 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.

 

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POSCO Energy Corporation also operates an LNG receiving terminal with an aggregate capacity to process up to 3.0 million tons of LNG annually in Gwangyang. In order to achieve maximum operational efficiency of our LNG terminal, it participates in the LNG trading and LNG ship gas trial businesses.

POSCO Chemical Co., Ltd.POSCO Chemical Co., Ltd. specializes in the manufacturing of refractories and lime used in steel manufacturing processes as well as a wide range of chemical products. It also expanded into the anode and cathode manufacturing business in 2018 following its merger with POSCO ESM Co., Ltd., our former subsidiary specializing in the production of battery materials.

Others. POSCOM-Tech Co., Ltd. produces aluminum deoxidizers, substances used to remove excess oxygen during the steel manufacturing process to improve durability of steel products, and it also provides integrated steel product packing solutions for steel production facilities. POSCO ICT Co., Ltd. provides information and technology consulting and system network integration and outsourcing services.

Insurance

We maintain property insurance for our property, plant and equipment that we believe to be consistent with market practice in Korea.

Item 4.C.  Organizational Structure

The following table sets out the jurisdiction of incorporation and our ownership interests of our significant subsidiaries as of December 31, 2019:

 

Name

  Jurisdiction of
Incorporation
  Percentage of
Ownership
 

POSCO International Corporation

  Korea   62.9

POSCO Engineering & Construction Co., Ltd

  Korea   52.8

POSCO Energy Corporation

  Korea   100.0

PT. Krakatau POSCO

  Indonesia   70.0

POSCO Asia Co., Ltd.

  Hong Kong   100.0

POSCO Maharashtra Steel Private Limited

  India   100.0

Zhangjiagang Pohang Stainless Steel Co., Ltd.

  China   82.5% (1) 

POSCO Chemical Co., Ltd.

  Korea   61.3

POSCO SS VINA

  Vietnam   100.0

 

 

(1)

POSCO holds a 58.6% interest and POSCO-China holds a 23.9% interest.

 

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 also maintain and operate production properties abroad, including plants operated by Zhangjiagang Pohang Stainless Steel in China, PT. Krakatau POSCO in Indonesia and POSCO SS VINA in Vietnam. We may increase our production capacity in the future when we increase our 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.”

We are vigorous in our efforts to engage in environmentally responsible management of, and to protect the environment from damage resulting from, our operations. Our levels of pollution control are higher than those mandated by Government standards. We established anon-line environmental

 

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monitoring system withreal-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. 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.

Production Facilities in Korea

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 17.6 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 ofiron-making, crude steelmaking and continuous casting and other rolling facilities. Pohang Works also has docking facilities capable of accommodating large ships for unloading raw materials, storage areas for raw materials and separate docking facilities for ships carrying products for export. Pohang Works is equipped with a highly advanced computerizedproduction-management system allowing constant monitoring and control of the production process.

Gwangyang Works

Construction of Gwangyang Works began in 1985 and ended in 1992. Gwangyang Works currently has an annual crude steel production capacity of 24.8 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.

Situated on a site of 13.7 million square meters reclaimed from the sea in Gwangyang City in the southwestern region of Korea, Gwangyang Works is comprised ofiron-making plants, steelmaking plants, continuous casting plants, hot strip mills andthin-slab hot rolling plants. The site also features docking and unloading facilities for raw materials capable of accommodating large ships for unloading raw materials, storage areas for raw materials and separate docking facilities for ships carrying products for export.

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, fromiron-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 computerizedproduction-management system allowing constant monitoring and control of the production process.

 

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Capacity Utilization Rates

The following table sets out the capacity utilization rates of our production facilities in Korea for the periods indicated.

 

       As of or for the Year Ended December 31,      
   2017  2018  2019 

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

   42.39   42.39   42.39 

Actual crude steel and stainless steel output (million tons)

   37.21   37.74   38.01 

Capacity utilization rate (%) (1)

   87.8  89.0  89.7

 

 

(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.

Production Facilities Abroad

Our various subsidiaries and joint ventures around the world, including Zhangjiagang Pohang Stainless Steel Co., Ltd. in China, PT. Krakatau POSCO in Indonesia and POSCO SS VINA in Vietnam, engage in steel production activities. For a discussion of such operations, see “Item 4. Information on the Company — Item 4.B. Business Overview — Subsidiaries and Joint Ventures.”

Zhangjiagang Pohang Stainless Steel

The following table sets out Zhangjiagang’s capacity utilization rates for the periods indicated.

 

       As of or for the Year Ended December 31,      
   2017  2018  2019 

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

   1.10   1.10   1.10 

Actual crude steel and stainless steel output (million tons)

   1.16   1.16   1.13 

Capacity utilization rate (%)(1)

   105.4  105.3  103.1

 

 

(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.

PT. Krakatau POSCO

The following table sets out PT. Krakatau POSCO’s capacity utilization rates for the periods indicated.

 

   As of or for the Year Ended December 31,     
   2017  2018  2019 

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

   3.00   3.00   2.94 

Actual crude steel output (million tons)

   2.92   3.01   3.02 

Capacity utilization rate (%) (1)

   97.4  100.3  102.5

 

 

(1)

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

 

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POSCO SS VINA

The following table sets out POSCO SS VINA’s capacity utilization rates for the periods indicated.

 

       As of or for the Year Ended December  31, 
   2017  2018  2019 

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

   1.10   1.10   1.10 

Actual crude steel output (million tons)

   0.91   0.97   0.79 

Capacity utilization rate (%) (1)

   82.3  87.7  71.7

 

 

(1)

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

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, a 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 primarily of global trading activities and natural resources development activities of POSCO International. POSCO International exports and imports 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, manufacturing of various industrial materials and network and system integration. See Note 40 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.

 

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

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 2018, unit sales prices in Won for each of our principal product lines of steel products produced by us and directly sold to external customers, other than silicon steel products, increased. The weighted average unit price for such products increased by 3.3% from 2017 to 2018, despite an appreciation in the average value of the Won against the Dollar in 2018 that decreased our export prices in Won terms. The average exchange rate of the Won against the Dollar, as announced by Seoul Money Brokerage Services, Ltd., appreciated from Won 1,130.8 to US$1.00 in 2017 to Won 1,100.3 to US$1.00 in 2018.

The unit sales price of plates, which accounted for 15.8% of total sales volume of the principal steel products produced by us and directly sold to external customers, increased by 14.8% in 2018. The unit sales price of hot rolled products, which accounted for 26.0% of total sales volume of such products, increased by 5.2% in 2018. The unit sales price of wire rods, which accounted for 7.1% of total sales volume of such products, increased by 4.9% in 2018. The unit sales price of cold rolled products, which accounted for 39.2% of total sales volume of such products, increased by 2.8% in 2018. The unit sales price of stainless steel products, which accounted for 9.1% of total sales volume of such products, increased by 0.8% in 2018. On the other hand, the unit sales price of silicon steel products, which accounted for 2.8% of total sales volume of such products, decreased by 2.9% in 2018.

In 2019, the unit sales prices in Won of cold rolled products, plates and stainless steel products produced by us and directly sold to external customers increased, while the unit sales prices in Won of the remainder of our principal product lines of steel products decreased. The weighted average unit price for such products increased by 2.3% from 2018 to 2019, which was enhanced by the depreciation in the average value of the Won against the Dollar in 2019 that increased our export prices in Won terms. The average exchange rate of the Won against the Dollar, as announced by Seoul Money Brokerage Services, Ltd., depreciated from Won 1,100.3 to US$1.00 in 2018 to Won 1,165.7 to US$1.00 in 2019.

The unit sales price of cold rolled products, which accounted for 36.9% of total sales volume of the principal steel products produced by us and directly sold to external customers, increased by 4.4% in 2019. The unit sales price of plates, which accounted for 17.8% of total sales volume of such products, increased by 4.2% in 2019. The unit sales price of stainless steel products, which accounted for 9.8% of total sales volume of such products, increased by 0.8% in 2019. On the other hand, the unit sales price of hot rolled products, which accounted for 26.0% of total sales volume of such products, decreased by 3.4% in 2019. The unit sales price of wire rods, which accounted for 6.9% of total sales volume of such products, decreased by 1.2% in 2019. The unit sales price of silicon steel sheets, which accounted for 2.7% of total sales volume of such products, decreased by 0.3% in 2019.

 

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

 

   For the Year Ended December 31, 

Products

      2017           2018           2019     
   (In thousands of Won per ton) 

Cold rolled products

  837   861   898 

Hot rolled products

   655    689    666 

Stainless steel products

       2,304        2,322        2,340 

Plates

   631    724    754 

Wire rods

   806    845    835 

Silicon steel sheets

   1,169    1,135    1,132 
  

 

 

   

 

 

   

 

 

 

Average(1)

  904   934   955 

 

 

(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,             
       2017          2018          2019     
   (Percentage of net sales) 

Cost of sales

   86.3  87.7  90.2

Selling and administrative expenses

   6.2   3.7   3.7 

Gross margin

   13.7   12.3   9.8 

Operating profit margin

   7.0   6.2   5.0 

Our operating profit margin decreased from 7.0% in 2017 to 6.2% in 2018 and 5.0% in 2019 as discussed below.

We are closely monitoring changes in market conditions and we implemented the following measures in recent years to improve our profit margins:

 

  

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

 

  

focusing on marketing activities to increase the sales of higher margin, highervalue-added products and to strengthen our domestic market position;

 

  

pursuing synergies among member companies of the POSCO Group through corporate restructurings; and

 

  

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

 

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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.

 

           For the Year Ended December 31,          
   2017  2018  2019 

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

   47.6   47.6   47.5 

POSCO

   42.4   42.4   42.4 

Zhangjiagang Pohang Stainless Steel Co., Ltd.

   1.1   1.1   1.1 

PT. Krakatau POSCO

   3.0   3.0   2.9 

POSCO SS VINA

   1.1   1.1   1.1 

Actual crude steel and stainless steel output (million tons)

   42.2   42.9   42.9 

POSCO

   37.2   37.7   38.0 

Zhangjiagang Pohang Stainless Steel Co., Ltd.

   1.2   1.2   1.1 

PT. Krakatau POSCO

   2.9   3.0   3.0 

POSCO SS VINA

   0.9   1.0   0.8 

Capacity utilization rate (%)

   88.7  90.1  90.4

POSCO

   87.8  89.0  89.7

Zhangjiagang Pohang Stainless Steel Co., Ltd.

   105.4  105.3  103.1

PT. Krakatau POSCO

   97.4  100.3  102.5

POSCO SS VINA

   82.3  87.7  71.7

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 2019, 62.7% 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 foreigncurrency-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 foreign-currency denominated 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.

The overall net impact from fluctuations of the Won against major currencies is difficult to estimate and varies from year to year. 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

 

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conducting business transactions in the local currency of the respective market in which the transactions occur. In particular, POSCO 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 POSCO 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 POSCO International and POSCO E&C, also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge some of 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.

Inflation

Inflation in Korea, which was 1.9% in 2017, 1.5% in 2018 and 0.5% in 2019 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 often require us to make difficult, subjective and 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 ourshort-term andlong-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, 2019, the percentage of allowance for doubtful accounts related to net trade accounts and notes receivables compared to our trade accounts and notes receivables was 6.96%. Our allowance for doubtful accounts decreased by 2.0%, or Won 19 billion, from Won 917 billion as of December 31, 2018 to Won 898 billion as of December 31, 2019. See Note 23 of Notes to Consolidated Financial Statements.

Lifetime expected credit losses are expected credit losses from any default that may occur over the expected life of a financial instrument.12-month expected credit losses are portions of lifetime expected credit losses that result from defaults that may occur within the 12 months after the reporting

 

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date. The expected life of a financial instrument is the entire contractual period over which we are exposed to credit risk. Expected credit losses are probability-weighted estimates of credit losses. Credit losses are measured as the present value of all cash shortfalls, such as the difference between cash flows specified under contracts and cash flows that we expect to receive.

The actual average annual uncollected percentage rate of accounts receivables resulting inwrite-offs for the three years in the period ended December 31, 2019 was 1.22%. 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 have estimated fair values of materialnon-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. As of December 31, 2019, if the discount rates used in these valuations were increased by 1%, then the estimated fair values would have decreased by approximately 10% in total.In addition, as of December 31, 2019, if the revenue growth rate assumptions were decreased by 1% in the cash flow models, then the estimated fair values would have decreased by approximately 11% in total.

We recognized impairment losses onavailable-for-sale financial assets of Won 123 billion in 2017, but we did not recognize any such impairment loss in 2018 and 2019 due to our adoption of IFRS 9 “Financial Instruments,” effective as of January 1, 2018, which classifiesavailable-for-sale financial assets as financial assets at fair value through other comprehensive income. See Note 33 of Notes to Consolidated Financial Statements.

 

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Our estimates and assumptions used to evaluate the fair value of investments are made taking into consideration our assessment of the latest information available. However, unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to revise the fair value 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 less costs to sell) and its value in use. When the book value oflong-lived asset exceeds the recoverable amount 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 amount and the resulting impairment loss is charged to current operations. Such recoverable amount is based on our estimates of the future use of assets and is subject to changes in market conditions. Based on an impairment test as of December 31, 2019, we recognized impairment loss on property, plant and equipment amounting to Won 443 billion in 2019, which related primarily to impairment loss of Won 205 billion incurred by POSCO SS VINA, Won 74 billion related to the discontinued operation of a ferrosilicon facility in Pohang and Won 70 billion related to the discontinued operation of a compact endless cast-rolling mill facility in Gwangyang.

The depreciable lives and salvage values of ourlong-lived assets are estimated and reviewed each year based on industry practices and prior experience to reflect economic lives oflong-lived assets. Our estimates of the useful lives and recoverable amount oflong-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 amount 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 three to five years. Beyond the specifically forecasted period, we extrapolate the cash flows for the remaining years based on an estimated growth rate. This estimated growth rate does not exceed the long-term average growth rate of our industry. As of December 31, 2019, for the applicable cash generating units, we estimated a discount rate of 6.25% to 9.00% and a revenue growth rate of 1.0% to 2.1%. 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. Results in actual transactions could differ from those estimates used to evaluate the impairment of suchlong-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 discount rates used in these valuations were increased by 1%, then the estimated recoverable amount would have decreased by 5.42% to 6.84% in total. If the estimated revenue growth rate were decreased by 1%, then the estimated recoverable amount would have decreased by 1.23% to 6.75% in total. We believe that any reasonably possible negative change in the key assumptions on which the recoverable amount is based would result in impairment loss of 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 ofcash-generating units are determined from the higher of their fair value less cost to sell or theirvalue-in-use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, terminal growth rates and estimated sales during the period.

Our management estimates discount rates usingpost-tax rates that reflect current market rates for investments of similar risk. Terminal growth rates are based on industry growth forecasts, and estimated sales 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 averagelong-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 discountedcash-flow model such as discount rates and the terminal growth rate was evaluated. As of December 31, 2019, if the estimated average discount rates used in these valuations were increased by 0.25%, the estimatedvalue-in-use for the respective cash generating units would have decreased by Won 158 billion or 4.65% in total. As of December 31, 2019, if the estimated terminal growth rates were decreased by 0.25%, the estimatedvalue-in-use for the respective cash generating units would have decreased by Won 69 billion or 2.05% in total. Based on an impairment test as of December 31, 2019, we recognized impairment loss on goodwill of Won 55 billion incurred by POSCO International.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 the cash-generating groups, and any reasonably possible changes in the key assumptions on which the recoverable amount is based would cause a change in impairment loss on 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 themoving-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

 

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the net realizable value of our inventories ranged from the inventory cost amount less 5.0% of the gross profit margin to the inventory cost amount plus 15.6% of the gross profit margin. For inventories in which expected selling prices are less than the cost amount, the necessary adjustment towrite-down the inventories to net realizable value is made. There was no recovery in 2017, 2018 and 2019. The valuation losses of inventories recognized within cost of goods sold were Won 79 billion in 2017, Won 142 billion in 2018 and Won 96 billion in 2019.

Investments in Associates and Joint Ventures

We hold a significant amount of investments in associates and joint ventures, which interests are accounted for using the equity method. As of December 31, 2019, the book value of our investments in associates and joint ventures was Won 3,928 billion. The carrying amounts of our investments in associates and joint ventures 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.

We estimate the recoverable amount of an individual asset. If it is impossible to measure the individual recoverable amount of an asset, then we estimate the recoverable amount ofcash-generating unit (“CGU”), which 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 value in use is estimated by applying apost-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. We treat individual operating entities as CGUs, and 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.

As part of our impairment review, the operating results, net asset value and future performance forecasts of our associates and joint ventures as well as general market conditions are taken into consideration in order to assess whether there is any objective evidence of impairment, such as significant financial difficulty of the associate or joint venture. Unforeseen circumstances such as adverse market conditions that deviate significantly from our estimates may require us to recognize additional losses on impairment of our interest in our associates and joint ventures. We base our value in use 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 used to evaluate impairment of our interest in our associates and joint ventures and potentially have different impacts on our results of operations.

Revenue Recognized by the Input Method

POSCO E&C, our consolidated subsidiary, engages in various construction activities, including construction of industrial plants and civil engineering projects, and revenue recognition is different based on types of contracts. We recognize revenue over time when (i) our customers receive the benefits from our construction activities simultaneously with our performance of such activities, (ii) our construction activities create or improve an asset when such asset is under the customer’s control or (iii) our construction activities do not provide alternative benefits to us, and we have an enforceable right to payment for performance completed to date.

In the case of construction contracts where we construct plants or other similar structures, our customers control the assets as they are being constructed. Under such contracts, we perform construction of the projects according to the customers’on-going specifications, and if a contract is terminated by the customer, we are entitled to reimbursement of all costs incurred to date, including a reasonable margin. When the revenue and costs of a contract can be reliably estimated, we recognize

 

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such estimated revenue and costs based on the progress of construction as of the end of the reporting period. The percentage of completion is determined based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. If the revenue and costs of a contract cannot be reliably estimated, revenue is recognized only to the extent the recovery of contract costs are probable. If the total contract cost is likely to exceed the total contract revenue, expected losses are immediately recognized as costs.

Our contract revenue recognition policy requires our management to exercise judgment in estimating the outcome of our contracts and measuring the percentage of completion and actual costs incurred in respect of our projects, which affects the amount and timing of recognition of revenues and cost of sales, provisions for estimated losses, charges against current earnings, trade account receivables and advances. For example, due to factors causing variation in costs for 2019, the estimated total contract costs were changed. Details of changes in estimated total contract costs and the impact on profit before income taxes for 2019 and future periods are as follows:

 

   Amount 
   (In millions of Won) 

Changes in estimated total contract costs

      533,639 

Changes in profit before income taxes of construction contracts:

  

Current period

   (166,077

Future periods

   (43,584

The effect on current and future profit is estimated based on circumstances that have occurred from the commencement date of the contract to the end of 2019. The estimation is evaluated for total contract costs and expected total contract revenue as of the end of the period. Such estimate may change in future periods.

Our ability to measure reliably the estimated total cost of a project has a significant effect on the amount and timing of recognizing our sales and cost of sales. The timing of recognition of sales we report may differ materially from the timing of actual contract payments received. In addition, to the extent that sales recognized by us exceed the amount of payments to be received by us, such amount is reflected as trade account receivables on our balance sheet. To the extent payments received by us exceed the sales recognized, such amount is reflected under advances from customers on our balance sheet. Thus our ability to measure reliably the estimated total costs and the percentage of completion also affects the amount of our trade account receivables and advances from customers. For a discussion of uncertainty of estimates related to contract revenues and costs, see Note 29(d) of Notes to Consolidated Financial Statements.

Deferred Income Taxes

Our deferred income tax assets and liabilities reflect the tax consequences that would follow from the manner in which we expect, at the end of the reporting period, to recover or settle the carrying amount of our assets and liabilities. We recognize deferred income tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, except to the extent that we are 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. We recognize deferred income tax asset for deductible temporary differences 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 they can be utilized. However, deferred tax is not recognized for 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.

 

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We believe that recognition of deferred tax assets and liabilities is a significant accounting policy that requires our management’s estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws and tax planning. Changes in tax laws, projected levels of taxable income and tax planning could affect the effective tax rate and tax balances recorded by us in the future.

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 thethen-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 168 billion, or 6.9% in total, as of December 31, 2019. If the estimated future pay inflation rates were decreased by 1%, then the estimated provision for severance benefits would have decreased by Won 171 billion, or 7.0% in total, as of December 31, 2019.

Recent Accounting Changes

For a discussion of new standards, interpretations and amendments to existing standards that have been published, including our adoption of IFRS No. 16 “Leases” starting on January 1, 2019, see Note 2 of Notes to Consolidated Financial Statements.

Explanatory Note Regarding Presentation of Certain Financial Information underK-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 withK-IFRS as adopted by the KASB, which we are required to file with the Financial Services Commission and the Korea Exchange under the FSCMA.

K-IFRS differs in certain respects from IFRS as issued by the IASB in the presentation of operating profit. Additionally, underK-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of certain real estate is recognized when an individual unit of residential real estate is delivered to the buyer. As a result, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance withK-IFRS.

The table below sets forth a reconciliation of our operating profit and net income or loss 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, 2017, 2018 and 2019 to our

 

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operating profit and net income or loss in our consolidated statements of comprehensive income prepared in accordance withK-IFRS, for each of the corresponding years, taking into account such differences:

 

   For the Year Ended December 31, 
   2017  2018  2019 
   (In millions of Won) 

Operating profit under IFRS as issued by the IASB

      4,196,121      4,041,827      3,222,713 

Additions:

    

Impairment loss on other receivables

   98,177   63,092   80,323 

Impairment loss on assets held for sale

      50,829   38,328 

Loss on disposals of investments in subsidiaries, associates and joint ventures

   19,985   5,226   6,539 

Loss on disposals of property, plant and equipment

   151,343   117,614   120,227 

Impairment loss on property, plant and equipment

   117,231   1,004,704   442,700 

Impairment loss on investment property

      51,461   32,642 

Impairment loss on intangible assets

   167,995   337,519   191,021 

Increase to provisions

   33,964   134,632   23,074 

Loss on valuation of firm commitment

   43,164   66,281   37,685 

Donations

��  51,424   52,074   51,567 

Idle tangible asset expenses

   10,490   9,257   34,152 

Others

   95,780   184,865   112,029 
  

 

 

  

 

 

  

 

 

 
   789,553   2,077,554   1,170,287 

Deductions:

    

Gain on disposals of assets held for sale

   (1,180  (27,171  (37,461

Gain on disposals of investment in subsidiaries, associates and joint ventures

   (81,794  (45,241  (27,836

Gain on disposals of property, plant and equipment

   (32,145  (53,139  (49,367

Gain on disposals of intangible assets

   (23,391  (117,139  (1,896

Gain on valuation of firm commitment

   (56,301  (39,028  (60,201

Gain on valuation of emission rights

         (25,440

Gain on disposals of emission rights

         (11,141

Reversal of other provisions

      (3,557  (36,522

Others

   (253,670  (238,311  (201,027
  

 

 

  

 

 

  

 

 

 
   (448,481  (523,586  (450,891
  

 

 

  

 

 

  

 

 

 

Revenue recognition related to development and sale of real estate

   468,233   (176,859  (418,862

Cost of sales recognition related to development and sale of real estate

   (383,592  123,664   345,605 
  

 

 

  

 

 

  

 

 

 

Operating profit underK-IFRS

   4,621,834   5,542,600  3,868,854 
  

 

 

  

 

 

  

 

 

 

Net income under IFRS as issued by the IASB

  2,909,311  1,932,386  2,038,165 

Adjustments related to development and sale of real estate:

    

Revenue

   468,233   (176,859  (418,862

Cost of sales

   (383,592  123,664   345,605 

Income tax

   (20,483  12,873   17,728 
  

 

 

  

 

 

  

 

 

 

Net income underK-IFRS

   2,973,469   1,892,064  1,982,637 
  

 

 

  

 

 

  

 

 

 

 

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Operating Results — 2018 Compared to 2019

The following table presents our statement of comprehensive income information and changes therein for 2018 and 2019.

 

      Changes 
   For the Year Ended December 31,  2018 versus 2019 
   2018   2019  Amount  % 
   (In billions of Won) 

Revenue

      65,155       64,786  (369  (0.6)% 

Cost of sales

   57,129    58,462   1,333   2.3 
  

 

 

   

 

 

   

Gross profit

   8,026    6,324   (1,702  (21.2

Selling and administrative expenses:

      

Impairment loss (reversal of impairment loss) on trade accounts and notes receivable

   75    (28  (103  N.A. (1) 

Other administrative expenses

   1,986    2,041   56   2.8 

Selling expenses

   369    368   (1  (0.3

Other operating income and expenses:

      

Impairment loss on other receivables

   63    80   17   27.3 

Other operating income

   524    451   (73  (13.9

Other operating expenses

   2,014    1,090   (924  (45.9
  

 

 

   

 

 

   

Operating profit

   4,042    3,223   (819  (20.3

Share of profit ofequity-accounted investees, net

   113    274   161   143.0 

Finance income

   1,706    1,872   166   9.7 

Finance costs

   2,244    2,242   (2  (0.1
  

 

 

   

 

 

   

Profit before income tax

   3,616    3,127   (489  (13.5

Income tax expense

   1,684    1,088   (595  (35.4
  

 

 

   

 

 

   

Profit

   1,932    2,038   106   5.5 

Profit for the period attributable to owners of the controlling company

   1,712    1,864   152   8.9 

Profit for the period attributable tonon-controlling interests

   220    174   (46  (20.9

 

 

(1)

N.A. means not applicable.

 

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Revenue

The following table presents our revenue by segment and changes therein for 2018 and 2019.

 

      Changes 
   For the Year Ended December 31,  2018 versus 2019 
   2018  2019  Amount  % 
   (In billions of Won) 

Steel Segment:

     

External revenue

      32,358      32,078      (280  (0.9)% 

Internal revenue

   18,063   17,730   (333  (1.8
  

 

 

  

 

 

   

Total revenue from Steel Segment

   50,421   49,808   (613  (1.2
  

 

 

  

 

 

   

Trading Segment:

     

External revenue

   22,408   22,157   (251  (1.1

Internal revenue

   15,911   15,468   (443  (2.8
  

 

 

  

 

 

   

Total revenue from Trading Segment

   38,319   37,625   (694  (1.8
  

 

 

  

 

 

   

Construction Segment:

     

External revenue

   6,769   6,945   175   2.6 

Internal revenue

   551   743   192   34.8 
  

 

 

  

 

 

   

Total revenue from Construction Segment

   7,321   7,688   367   5.0 
  

 

 

  

 

 

   

Others Segment:

     

External revenue

   3,443   3,187   (256  (7.4

Internal revenue

   2,755   2,796   41   1.5 
  

 

 

  

 

 

   

Total revenue from Others Segment

   6,198   5,983   (215  (3.5
  

 

 

  

 

 

   

Total revenue prior to consolidation adjustments

   102,259   101,104   (1,154  (1.1
  

 

 

  

 

 

   

Consolidation adjustments

   (37,281  (36,737  543   (1.5

Basis difference adjustments (1)

   177   419   242   136.8 
  

 

 

  

 

 

   

Revenue

  65,155  64,786   (369  (0.6
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

Our revenue decreased by 0.6%, or Won 369 billion, from Won 65,155 billion in 2018 to Won 64,786 billion in 2019 due to decreases in external revenues from the Steel Segment, the Others Segment and the Trading Segment, which were offset in part by an increase in revenue from the Construction Segment. Specifically:

Steel Segment.External revenue from the Steel Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, decreased by 0.9%, or Won 280 billion, from Won 32,358 billion in 2018 to Won 32,078 billion in 2019 primarily due to a decrease in our sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products not included in any of our major product categories), which was partially offset by an increase in the average unit sales price per ton of the principal steel products produced by us and sold to external customers. The overall sales volume of the principal steel products produced by us and directly sold to external customers decreased by 3.2% from 31.4 million tons in 2018 to 30.4 million tons in 2019, while the weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external customers increased by 2.3% from Won 933,990 per ton in 2018 to Won 955,209 per ton in 2019. Such factors were principally attributable to the following:

 

  

The sales volume of each of our major product categories, other than plates and stainless steel products, decreased from 2018 to 2019. The sales volume of cold rolled products,

 

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silicon steel sheets, wire rods and hot rolled products produced by us and directly sold to external customers decreased by 9.0%, 8.6%, 5.9% and 3.2%, respectively, from 2018 to 2019. On the other hand, the sales volume of plates and stainless steel products produced by us and directly sold to external customers increased by 8.9% and 4.2%, respectively, from 2018 to 2019. For a discussion of changes in the sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

 

  

In 2019, the unit sales prices in Won of cold rolled products, plates and stainless steel products produced by us and directly sold to external customers increased, while the unit sales prices in Won of the remainder of our principal product lines of steel products decreased. The unit sales prices in Won of cold rolled products, plates and stainless steel products produced by us and directly sold to external customers increased by 4.4%, 4.2% and 0.8%, respectively, from 2018 to 2019. On the other hand, the unit sales prices in Won of hot rolled products, wire rods and silicon steel sheets produced by us and directly sold to external customers decreased by 3.4%, 1.2% and 0.3% from 2018 to 2019. 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.

Total revenue from the Steel Segment, which includes internal revenue frominter-company transactions, decreased by 1.2%, or Won 613 billion, from Won 50,421 billion in 2018 to Won 49,808 billion in 2019 as internal revenue frominter-company transactions decreased by 1.8%, or Won 333 billion, from Won 18,063 billion in 2018 to Won 17,730 billion in 2019 primarily due to a decrease in our steel sales activities through trading subsidiaries, particularly POSCO International.

Trading Segment.External revenue from the Trading Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, decreased by 1.1%, or Won 251 billion, from Won 22,408 billion in 2018 to Won 22,157 billion in 2019 primarily due to decreases in POSCO International’s export trading sales of automobiles and machinery parts as well as steel and metal products, which was offset in part by an increase in revenue from the natural resources development activities of POSCO International.

Total revenue from the Trading Segment, which includes internal revenue frominter-company transactions, decreased by 1.8%, or Won 694 billion, from Won 38,319 billion in 2018 to Won 37,625 billion in 2019 as internal revenue frominter-company transactions decreased by 2.8%, or Won 443 billion, from Won 15,911 billion in 2018 to Won 15,468 billion in 2019 primarily due to a decrease in our steel sales activities through trading subsidiaries.

Construction Segment.External revenue from the Construction Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, increased by 2.6%, or Won 175 billion, from Won 6,769 billion in 2018 to Won 6,945 billion in 2019 primarily due to an increase in external revenue from construction projects in Korea.

Total revenue from the Construction Segment, which includes internal revenue frominter-company transactions, increased by 5.0%, or Won 367 billion, from Won 7,321 billion in 2018 to Won 7,688 billion in 2019 as internal revenue frominter-company transactions increased by 34.8%, or Won 192 billion, from Won 551 billion in 2018 to Won 743 billion in 2019. Such increase in internal revenue reflected an increase in the amount of construction activities for member companies of the POSCO Group in 2019 compared to 2018.

Others Segment. The Others Segment primarily includes power generation, manufacturing of various industrial materials and information technology services. External revenue from the Others Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, decreased by 7.4%, or Won 256 billion, from Won 3,443 billion in 2018 to Won 3,187 billion in 2019, primarily due to decreases in revenue of

 

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POSCO Energy Corporation and revenue from information technology services, which were offset in part by an increase in revenue of POSCO Chemical Co., Ltd. from an increase in sales volume of anode and cathode materials.

Total revenue from the Others Segment, which includes internal revenue frominter-company transactions, decreased by 3.5%, or Won 215 billion, from Won 6,198 billion in 2018 to Won 5,983 billion in 2019 as external revenue decreased as discussed above. Such decrease was partially offset by an increase in internal revenue frominter-company transactions by 1.5%, or Won 41 billion, from Won 2,755 billion in 2018 to Won 2,796 billion in 2019 primarily due to an increase in inter-company sales related to POSCO ICT Co., Ltd.

Cost of Sales

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 basis difference, and changes therein for 2018 and 2019.

 

         Changes 
   For the Year Ended December 31,  2018 versus 2019 
   2018  2019  Amount  % 
   (In billions of Won) 

Steel Segment

   44,377   45,642      1,265   2.9

Trading Segment

   37,202   36,330   (872  (2.3

Construction Segment

   6,651   7,155   504   7.6 

Others Segment

   5,603   5,324   (279  (5.0

Consolidation adjustments

   (36,828  (36,334  494   (1.3

Basis difference adjustments (1)

   124   346   222   179.5 
  

 

 

  

 

 

   

Cost of sales

      57,129      58,462   1,333   2.3 
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

Our cost of sales increased by 2.3%, or Won 1,333 billion, from Won 57,129 billion in 2018 to Won 58,462 billion in 2019 due to increases in cost of sales of the Steel Segment and the Construction Segment, which were offset in part by decreases in cost of sales of the Trading Segment and the Others Segment. Specifically:

Steel Segment.The cost of sales of our Steel Segment, prior to consolidation and basis difference adjustments, increased by 2.9%, or Won 1,265 billion, from Won 44,377 billion in 2018 to Won 45,642 billion in 2019 primarily due to an increase in the average prices in Won terms of certain raw materials used to manufacture our steel products, which was offset in part by a slight decrease in our sales volume of principal steel products produced by us and sold to external customers.

Trading Segment.The cost of sales of our Trading Segment, prior to consolidation and basis difference adjustments, decreased by 2.3%, or Won 872 billion, from Won 37,202 billion in 2018 to Won 36,330 billion in 2019 primarily due to decreases in export and domestic trading activities of POSCO International, which were offset in part by an increase in its natural resources development activities.

Construction Segment.The cost of sales of our Construction Segment, prior to consolidation and basis difference adjustments, increased by 7.6%, or Won 504 billion, from Won 6,651 billion in 2018 to Won 7,155 billion in 2019, reflecting the progress of large-scale construction projects in Korea.

 

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Others Segment.The cost of sales of our Others Segment, prior to consolidation and basis difference adjustments, decreased by 5.0%, or Won 279 billion, from Won 5,603 billion in 2018 to Won 5,324 billion in 2019 primarily due to a decrease in the cost of sales of POSCO Energy Corporation.

Gross Profit

The following table presents our gross profit by segment, prior to adjusting for inter-company transactions that are eliminated during consolidation and basis difference, and changes therein for 2018 and 2019.

 

      Changes 
   For the Year Ended December 31,  2018 versus 2019 
   2018  2019  Amount  % 
   (In billions of Won) 

Steel Segment

  6,044  4,166  (1,878)   (31.1)% 

Trading Segment

   1,117   1,295           178   16.0 

Construction Segment

   669   533   (136  (20.4

Others Segment

   595   659   64   10.7 

Consolidation adjustments

   (453  (403  50   (11.1

Basis difference adjustments (1)

   53   73   20   37.7 
  

 

 

  

 

 

   

Gross profit

      8,026      6,324   (1,702  (21.2
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

Our gross profit decreased by 21.2%, or Won 1,702 billion, from Won 8,026 billion in 2018 to Won 6,324 billion in 2019 primarily due to decreases in gross profit of the Steel Segment and the Construction Segment, which were offset in part by increases in gross profit of the Trading Segment and the Others Segment. Our gross margin, which is gross profit as a percentage of total revenue, decreased from 12.3% in 2018 to 9.8% in 2019.

Steel Segment.The gross profit of our Steel Segment, prior to consolidation and basis difference adjustments, decreased by 31.1%, or Won 1,878 billion, from Won 6,044 billion in 2018 to Won 4,166 billion in 2019 primarily due to an increase in the average prices in Won terms of certain raw materials used to manufacture our finished steel products that outpaced an increase in the average unit sales price per ton of the principal steel products produced by us and sold to external and internal customers during the period. In particular, the average market price of iron ore per dry metric ton (Iron Ore 62% Fe, CFR China Index announced by Platts) was US$69 in 2018 and US$93 in 2019. The gross margin of our Steel Segment decreased from 12.0% in 2018 to 8.4% in 2019.

Trading Segment.The gross profit of our Trading Segment, prior to consolidation and basis difference adjustments, increased by 16.0%, or Won 178 billion, from Won 1,117 billion in 2018 to Won 1,295 billion in 2019 primarily due to an increase in gross profit from POSCO International’s natural resources development activities. The gross margin of our Trading Segment increased from 2.9% in 2018 to 3.4% in 2019.

Construction Segment.The gross profit of our Construction Segment, prior to consolidation and basis difference adjustments, decreased by 20.4%, or Won 136 billion, from Won 669 billion in 2018 to Won 533 billion in 2019 primarily reflecting a decrease in POSCO E&C’s participation in higher margin construction projects in 2019. The gross margin of our Construction Segment decreased from 9.1% in 2018 to 6.9% in 2019.

 

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Others Segment.The gross profit of our Others Segment, prior to consolidation and basis difference adjustments, increased by 10.7%, or Won 64 billion, from Won 595 billion in 2018 to Won 659 billion in 2019 primarily due to an increase in the gross profit of POSCO Chemical Co., Ltd. The gross margin of our Others Segment improved from 9.6% in 2018 to 11.0% in 2019.

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2018 and 2019.

 

          Changes 
   For the Year Ended December 31,  2018 versus 2019 
   2018   2019  Amount  % 
   (In billions of Won) 

Impairment loss (reversal of impairment loss) on trade accounts and notes receivable

  75   (28 (103)   N.A. (1) 
  

 

 

   

 

 

   

Freight and custody expenses

  185   180  (4  (2.3)% 

Sales commissions

   79    74   (5  (6.5

Sales promotion

   14    10   (4  (27.6

Sales insurance premium

   37    33   (5  (12.4

Contract cost

   17    38   21   124.1 

Others

   37    33   (4  (11.0
  

 

 

   

 

 

   

Total selling expenses

  369   368   (1  (0.3
  

 

 

   

 

 

   

Wages and salaries

  813    841          27   3.3

Expenses related topost-employment benefits

   73    89   16   21.3 

Other employee benefits

   176    178   2   0.9 

Depreciation

   101    131   30   29.7 

Amortization

   112    112   (0  (0.2

Taxes and public dues

   72    79   7   9.7 

Rental

   70    40   (30  (42.6

Advertising

   107    83   (24  (22.7

Research and development

   108    110   2   1.8 

Service fees

   166    193   28   16.6 

Others

   186    185   (1  (0.7
  

 

 

   

 

 

   

Total other administrative expenses

  1,986   2,041   56   2.8 
  

 

 

   

 

 

   

Total selling and administrative expenses

      2,430       2,381   (48  (2.0
  

 

 

   

 

 

   

 

 

(1)

N.A. means not applicable.

Our selling and administrative expenses decreased by 2.0%, or Won 48 billion, from Won 2,430 billion in 2018 to Won 2,381 billion in 2019, primarily due to an impairment loss on trade accounts and notes receivable in 2018 compared to a reversal of such impairment loss in 2019 as well as decreases in rental and advertising expenses, which were offset in part by increases in depreciation expenses and wages and salaries. Such factors were principally attributable to the following:

 

  

We recognized impairment loss on trade accounts and notes receivable of Won 75 billion in 2018 primarily related to impairment loss on trade accounts and notes receivables of POSCO E&C and its subsidiary in Vietnam. However, we recognized reversal of such impairment loss of Won 28 billion in 2019 primarily due to a reversal of impairment loss on trade accounts and notes receivables of POSCO E&C.

 

  

Our rental expenses decreased by 42.6%, or Won 30 billion, from Won 70 billion in 2018 to Won 40 billion in 2019 primarily due to the adoption of IFRS No. 16 in 2019 which has impacted rental expenses of POSCO E&C and POSCO International. See Note 2 of Notes to Consolidated Financial Statements.

 

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Our advertising expenses decreased by 22.7%, or Won 24 billion, from Won 107 billion in 2018 to Won 83 billion in 2019 primarily reflecting our advertising activities in 2018 related to our sponsorship of the 2018 PyeongChang Olympic Games compared to no such advertising activities in 2019.

 

  

Our depreciation expenses increased by 29.7%, or Won 30 billion, from Won 101 billion in 2018 to Won 131 billion in 2019 primarily due to our adoption of IFRS No. 16 in 2019, under which we recognized depreciation expenses related to ourright-of-use assets. See Note 2 of Notes to Consolidated Financial Statements.

 

  

Our wages and salaries increased by 3.3%, or Won 27 billion, from Won 813 billion in 2018 to Won 841 billion in 2019 primarily due to increases in base salaries at our domestic subsidiaries.

Other Operating Income and Expenses

The following table presents our impairment loss on other receivables and changes therein for 2018 and 2019.

 

       Changes 
   For the Year Ended December 31,   2018 versus 2019 
   2018   2019   Amount   % 
   (In billions of Won) 

Impairment loss on other receivables

      63           80           17    27.3

Our impairment loss on other receivables increased by 27.3%, or Won 17 billion, from Won 63 billion in 2018 to Won 80 billion in 2019 primarily due to a decrease in our reversals of allowances for bad debt, as well as an increase in allowance for bad debt of POSCO International.

The following table presents a breakdown of our other operating income and changes therein for 2018 and 2019.

 

       Changes 
   For the Year Ended December 31,   2018 versus 2019 
   2018   2019       Amount          %     
   (In billions of Won) 

Gain on disposal of assets held for sale

  27   37   10   37.9

Gain on disposal of investments in subsidiaries, associates and joint ventures

   45    28    (17  (38.5

Gain on disposal of property, plant and equipment

   53    49    (4  (7.1

Gain on disposal of intangible assets

   117    2    (115  (98.4

Gain on valuation of firm commitment

   39    60    21   54.3 

Gain on valuation of emission rights

       25    25   N.A. (1) 

Gain on disposal of emission rights

       11    11   N.A. (1) 

Reversal of other provisions

   4    37    33   926.8 

Others

   238    201    (37  (15.6
  

 

 

   

 

 

    

Total othernon-operating income

      524       451    (73  (13.9
  

 

 

   

 

 

    

 

 

(1)

N.A. means not applicable.

Our other operating income decreased by 13.9%, or Won 73 billion, from Won 524 billion in 2018 to Won 451 billion in 2019, primarily due to decreases in gain on disposal of intangible assets and the recognition of a tax refund in 2018, which were partially offset by increases in reversal of other provisions and gain on valuation of emission rights. Such factors were principally attributable to the following:

 

  

Our gain on disposal of intangible assets decreased by 98.4%, or Won 115 billion, from Won 117 billion in 2018 to Won 2 billion in 2019 primarily due to a gain from exchange or disposal of emission allowances in 2018, compared to no such gain in 2019.

 

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In 2018, we recognized a tax refund of Won 55 billion relating to a correction of the results of a tax investigation (which is included in “others”), compared to no such refund in 2019.

 

  

Our reversal of other provisions increased by 926.8%, or Won 33 billion, from Won 4 billion in 2018 to Won 37 billion in 2019 primarily due to a reversal of other provisions related to a lawsuit involving POSCO E&C.

 

  

We recognized gain on valuation of emission rights of Won 25 billion in 2019 compared to no such gain in 2018.

The following table presents a breakdown of our other operating expenses and changes therein for 2018 and 2019.

 

       Changes 
   For the Year Ended December 31,   2018 versus 2019 
   2018   2019   Amount  % 
   (In billions of Won) 

Impairment loss on assets held for sale

   51    38   (13  (24.6)% 

Loss on disposals of investments in subsidiaries, associates and joint ventures

   5    7    1   25.1 

Loss on disposals of property, plant and equipment

   118    120    3   2.2 

Impairment loss on property, plant and equipment

   1,005    443    (562  (55.9

Impairment loss on investment property

   51    33    (19  (36.6

Impairment loss on intangible assets

   338    191    (146  (43.4

Loss on valuation of firm commitment

   66    38    (29  (43.1

Idle tangible asset expenses

   9    34    25   268.9 

Increase to provisions

   135    23    (112  (82.9

Donations

   52    52    (1  (1.0

Others

   185    112    (73  (39.4
  

 

 

   

 

 

    

Total other operating expenses

      2,014       1,090    (924  (45.9
  

 

 

   

 

 

    

Our other operating expenses decreased by 45.9%, or Won 924 billion, from Won 2,014 billion in the 2018 to Won 1,090 billion in 2019, primarily due to decreases in impairment loss on property, plant and equipment and impairment loss on intangible assets. Such factors were principally attributable to the following:

 

  

Our impairment loss on property, plant and equipment decreased by 55.9%, or Won 562 billion, from Won 1,005 billion in 2018 to Won 443 billion in 2019. In 2018, we recognized impairment loss of Won 810 billion related to the discontinuation of our synthetic natural gas production facility in Gwangyang Works. In 2019, we recognized impairment loss of Won 205 billion incurred by POSCO SS VINA, Won 74 billion related to the discontinued operation of a ferro silicon facility in Pohang Works and Won 70 billion related to the discontinued operation of a compact endless cast-rolling mill in Gwangyang Works.

 

  

Our impairment loss on intangible assets decreased by 43.4%, or Won 146 billion, from Won 338 billion in 2018 to Won 191 billion in 2019. In 2018, our impairment loss on intangible assets related primarily to impairment loss on goodwill of Won 158 billion attributable to POSCO International and Won 66 billion attributable to POSCO E&C in connection with a decrease invalue-in-use of such entities due to reduced expected cash flow arising from the uncertain global economic climate, as well as impairment of industrial property rights of Won 78 billion related to our investment in Hume Coal Pty Limited, a coal mining company in Australia. In 2019, we recognized write-offs of intangible assets of Won 118 billion related to the termination of the BlockAD-7 exploration project in Myanmar by POSCO International.

 

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Operating Profit

Due to the factors described above, our operating profit decreased by 20.3%, or Won 819 billion, from Won 4,042 billion in 2018 to Won 3,223 billion in 2019. Our operating margin decreased from 6.2% in 2018 to 5.0% in 2019.

Share of Profit ofEquity-Accounted Investees

Our share of profit of equity-accounted investees increased by 143.0%, or Won 161 billion, from Won 113 billion in 2018 to Won 274 billion in 2019.

In 2018, we recognized a net gain for our proportionate share ofequity-accounted investees of Won 113 billion primarily due to our share of gains of Won 75 billion of KOBRASCO, Won 70 billion of POSCO Mitsubishi Carbon Technology Ltd., Won 59 billion of Roy Hill Holdings Pty Ltd. and Won 30 billion ofAES-VCM Mong Duong Power Company Limited, which were partially offset by our share of loss of Won 110 billion ofCSP-Compania Siderurgica do Pecem.

In 2019, we recognized a net gain for our proportionate share of equity-accounted investees of Won 274 billion primarily due to our share of gains of Won 158 billion of Roy Hill Holdings Pty Ltd, Won 64 billion of South-East Asia Gas Pipeline Company Ltd., Won 56 billion of KOBRASCO and Won 28 billion of SNNC Co., Ltd., which were offset in part by our share of loss of Won 58 billion of CSP – Compania Siderurgica do Pacem. 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 2018 and 2019.

 

       Changes 
   For the Year Ended December 31,   2018 versus 2019 
   2018   2019   Amount  % 
   (In billions of Won) 

Interest income

  337   352   15   4.5

Dividend income

   63    75    12   19.1 

Gain on foreign currency transactions

   716    825    109   15.2 

Gain on foreign currency translations

   212    206    (6  (3.0

Gain on derivatives transactions

   248    196    (52  (20.8

Gain on valuations of derivatives

   97    163    67   68.6 

Gain on disposals of financial assets at fair value through profit or loss

   9    9    (0  (2.5

Gain on valuations of financial assets at fair value through profit or loss

   16    42    26   161.9 

Others

   7    3    (4  (53.5
  

 

 

   

 

 

    

Total finance income

  1,706   1,872    166   9.7 
  

 

 

   

 

 

    

Interest expenses

  741   756    14   1.9

Loss on foreign currency transactions

   811    747    (64  (7.9

Loss on foreign currency translations

   322    319    (2  (0.7

Loss on derivatives transactions

   209    228    19   9.3 

Loss on valuations of derivatives

   41    47    7   16.7 

Loss on disposal of trade accounts and notes receivable

   40    37    (3  (7.6

Loss on disposal of financial assets at fair value through profit or loss

   1    3    1   101.4 

Loss on valuations of financial assets at fair value through profit or loss

   59    66    6   10.8 

Others

   20    39    19   92.9 
  

 

 

   

 

 

    

Total finance costs

  2,244   2,242    (2  (0.1
  

 

 

   

 

 

    

 

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We recognized net loss on foreign currency transactions of Won 95 billion in 2018 compared to a net gain on foreign currency transactions of Won 78 billion in 2019 and our net loss on foreign currency translations increased by 3.8%, or Won 4 billion, from Won 109 billion in 2018 to Won 113 billion in 2019, as the Won depreciated against the Dollar in 2018 and further depreciated in 2019. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won depreciated from Won 1,071.4 to US$1.00 as of December 31, 2017 to Won 1,118.1 to US$1.00 as of December 31, 2018 and further depreciated to Won 1,157.8 to US$1.00 as of December 31, 2019. Against such fluctuations, our net gain on valuations of derivatives increased by 106.1%, or Won 60 billion, from Won 56 billion in 2018 to Won 116 billion in 2019, and we recognized a net gain on transactions of derivatives of Won 39 billion in 2018 compared to a net loss on transactions of derivatives of Won 32 billion in 2019.

Profit before Income Taxes

Due to the factors described above, our profit before income taxes decreased by 13.5%, or Won 489 billion, from Won 3,616 billion in 2018 to Won 3,127 billion in 2019.

The following table presents our profit and loss by segment, prior to adjusting for goodwill and corporate fair value adjustments, elimination of inter-segment profits, income tax expense and basis difference, and changes therein for 2018 and 2019.

 

      Changes 
   For the Year Ended December 31,  2018 versus 2019 
           2018                  2019              Amount      % 
   (In billions of Won) 

Steel Segment

          1,268          586  (682  (53.8)% 

Trading Segment

   49   165   116   235.6 

Construction Segment

   0   28   28   N.M (2) 

Others Segment

   14   545   531   3,904.7 

Goodwill and corporate fair value adjustments

   (78  (80  (2  3.2 

Elimination ofinter-segment profits

   638   739   100   15.7 

Income tax expense

   1,671   1,071   (600  (35.9

Basis difference adjustments (1)

   53   73   20   37.7 
  

 

 

  

 

 

   

Profit before income taxes

  3,616  3,127   (489  (13.5
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

 

(2)

N.M. means not meaningful.

Income Tax Expense

Our income tax expense decreased by 35.4%, or Won 595 billion, from Won 1,684 billion in 2018 to Won 1,088 billion in 2019, primarily reflecting a decrease in profit before income tax described above. Our effective tax rate decreased from 46.6% in 2018 to 34.8% in 2019. In 2018, our effective tax rate was higher than the statutory rate of 27.5% primarily due to adjustments related to(i) non-deductible impairment loss related to a synthetic natural gas production facility in Gwangyang Works and (ii) a tax audit. In 2019, our effective tax rate was higher than the statutory rate primarily due to the effect of deductible temporary difference in our investments in subsidiaries, associates and joint ventures, for which no deferred tax assets were recognized. See Note 35 of Notes to Consolidated Financial Statements.

 

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Profit

Due to the factors described above, our profit increased by 5.5%, or Won 106 billion, from Won 1,932 billion in 2018 to Won 2,038 billion in 2019.

Operating Results – 2017 Compared to 2018

The following table presents our statement of comprehensive income information and changes therein for 2017 and 2018.

 

       Changes 
   For the Year Ended December 31,   2017 versus 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Revenue

      60,187       65,155       4,968   8.3

Cost of sales

   51,916    57,129    5,123   10.0 
  

 

 

   

 

 

    

Gross profit

   8,271    8,026    (246  (3.0

Selling and administrative expenses:

       

Impairment loss on trade accounts and notes receivable

   174    75    (99  (56.9

Other administrative expenses

   2,003    1,986    (17  (0.9

Selling expenses

   1,557    369    (1,188  (76.3

Other operating income and expenses:

       

Impairment loss on other receivables

   98    63    (35  (35.7

Other operating income

   448    524    75   16.7 

Other operating expenses

   691    2,014    1,323   191.4 
  

 

 

   

 

 

    

Operating profit

   4,196    4,042    (154  (3.7

Share of profit ofequity-accounted investees, net

   11    113    102   968.6 

Finance income

   2,373    1,706    (667  (28.1

Finance costs

   2,484    2,244    (240  (9.7
  

 

 

   

 

 

    

Profit before income tax

   4,095    3,616    (479  (11.7

Income tax expense

   1,186    1,684    498   42.0 
  

 

 

   

 

 

    

Profit

   2,909    1,932    (977  (33.6

Profit for the period attributable to owners of the controlling company

   2,756    1,712    (1,044  (37.9

Profit for the period attributable tonon-controlling interests

   153    220    67   44.0 

 

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Revenue

The following table presents our revenue by segment and changes therein for 2017 and 2018.

 

      Changes 
   For the Year Ended December 31,  2017 versus 2018 
   2017  2018  Amount  % 
   (In billions of Won) 

Steel Segment:

     

External revenue

  30,230  32,358  2,128   7.0

Internal revenue

   17,381   18,063   682   3.9 
  

 

 

  

 

 

   

Total revenue from Steel Segment

   47,611   50,421   2,810   5.9 
  

 

 

  

 

 

   

Trading Segment:

     

External revenue

   20,802   22,408   1,606   7.7

Internal revenue

   14,076   15,911   1,835   13.0 
  

 

 

  

 

 

   

Total revenue from Trading Segment

   34,878   38,319   3,441   9.9 
  

 

 

  

 

 

   

Construction Segment:

     

External revenue

   6,887   6,769   (117  (1.7

Internal revenue

   399   551   152   38.2 
  

 

 

  

 

 

   

Total revenue from Construction Segment

   7,286   7,321   35   0.5 
  

 

 

  

 

 

   

Others Segment:

     

External revenue

   2,736   3,443   707   25.8 

Internal revenue

   2,549   2,755   207   8.1 
  

 

 

  

 

 

   

Total revenue from Others Segment

   5,285   6,198   913   17.3 
  

 

 

  

 

 

   

Total revenue prior to consolidation adjustments and basis difference

   95,060   102,259   7,199   7.6 
  

 

 

  

 

 

   

Consolidation adjustments

   (34,405  (37,281  (2,876  8.4 

Basis difference adjustments (1)

   (468  177   645   N.A. (2) 
  

 

 

  

 

 

   

Revenue

  60,187  65,155   4,968   8.3
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

 

(2)

N.A. means not applicable.

Our revenue increased by 8.3%, or Won 4,968 billion, from Won 60,187 billion in 2017 to Won 65,155 billion in 2018 due to increases in external revenues from the Steel Segment, the Trading Segment and the Others Segment, which were offset in part by a decrease in external revenue from the Construction Segment. Specifically:

Steel Segment.External revenue from the Steel Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, increased by 7.0%, or Won 2,128 billion, from Won 30,230 billion in 2017 to Won 32,358 billion in 2018 due to an increase in our sales volume of the steel products produced by us and directly sold to external customers (including miscellaneous steel products not included in any of our major product categories), as well as an increase in the average unit sales price per ton of the principal steel products produced by us and directly sold to external customers. The overall sales volume of the principal steel products produced by us and directly sold to external customers increased by 4.4% from 30.0 million tons in 2017 to 31.4 million tons in 2018, while the weighted average unit sales price per ton of the principal steel products produced by us and directly sold to external

 

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customers increased by 3.3% from Won 903,897 per ton in 2017 to Won 933,990 per ton in 2018. Such factors were principally attributable to the following:

 

  

The sales volume of each of our major product categories, other than wire rods and stainless steel products, increased from 2017 to 2018. The sales volume of cold rolled products, hot rolled products, silicon steel products and plates produced by us and directly sold to external customers increased by 9.1%, 4.7%, 1.7% and 1.2%, respectively, from 2017 to 2018. On the other hand, the sales volume of wire rods and stainless steel products produced by us and directly sold to external customers decreased by 4.6% and 0.8%, respectively, from 2017 to 2018. For a discussion of changes in sales volume of each of our principal product lines, see “Item 4.B. Business Overview — Major Products.”

 

  

The unit sales prices in Won of each of our major product categories, other than silicon steel products, increased from 2017 to 2018. The unit sales prices in Won of plates, hot rolled products, wire rods, cold rolled products and stainless steel products produced by us and directly sold to external customers increased by 14.8%, 5.2%, 4.9%, 2.8% and 0.8%, respectively, from 2017 to 2018. On the other hand, the unit sales price in Won of silicon steel products produced by us and directly sold to external customers decreased by 2.9% from 2017 to 2018. 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.

Total revenue from the Steel Segment, which includes internal revenue frominter-company transactions, increased by 5.9%, or Won 2,810 billion, from Won 47,611 billion in 2017 to Won 50,421 billion in 2018 as internal revenue frominter-company transactions increased by 3.9%, or Won 682 billion, from Won 17,381 billion in 2017 to Won 18,063 billion in 2018.

Trading Segment.External revenue from the Trading Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, increased by 7.7%, or Won 1,606 billion, from Won 20,802 billion in 2017 to Won 22,408 billion in 2018 primarily due to an increase in third-country trades by POSCO International and our other trading subsidiaries from 2017 to 2018, reflecting an increase in trading of agricultural products and steel slabs, as well as the recognition of the sales of POSCO P&S’s steel product sales business under the Trading Segment commencing March 2017 following the transfer of such business to POSCO International.

Total revenue from the Trading Segment, which includes internal revenue frominter-company transactions, increased by 9.9%, or Won 3,441 billion, from Won 34,878 billion in 2017 to Won 38,319 billion in 2018 as internal revenue frominter-company transactions increased by 13.0%, or Won 1,835 billion, from Won 14,076 billion in 2017 to Won 15,911 billion in 2018.

Construction Segment.External revenue from the Construction Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, decreased by 1.7%, or Won 117 billion, from Won 6,887 billion in 2017 to Won 6,769 billion in 2018 primarily due to a decrease in POSCO E&C’s construction activities in Brazil following the completion of construction ofCSP-Companhia Siderurgia do Pecem steel plant complex in 2017.

Total revenue from the Construction Segment, which includes internal revenue frominter-company transactions, increased by 0.5%, or Won 35 billion, from Won 7,286 billion in 2017 to Won 7,321 billion in 2018 as internal revenue frominter-company transactions increased by 38.2%, or Won 152 billion, from Won 399 billion in 2017 to Won 551 billion in 2018. Such increase in internal revenue reflected an increase in the amount of construction activities for member companies of the POSCO Group in 2018 compared to 2017, which was partially offset by a decrease in external revenue as discussed above.

 

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Others Segment. The Others Segment primarily includes power generation, LNG logistics, manufacturing of various industrial materials and information technology service. External revenue from the Others Segment, which does not include internal revenue frominter-company transactions that are eliminated during consolidation and basis difference adjustments, increased by 25.8%, or Won 707 billion, from Won 2,736 billion in 2017 to Won 3,443 billion in 2018 primarily due to increases in revenue of POSCO Energy Corporation and POSCO Chemical Co., Ltd.

Total revenue from the Others Segment, which includes internal revenue frominter-company transactions, increased by 17.3%, or Won 913 billion, from Won 5,285 billion in 2017 to Won 6,198 billion in 2018 as internal revenue frominter-company transactions increased by 8.1% or Won 207 billion, from Won 2,549 billion in 2017 to Won 2,755 billion in 2018. Such increase primarily reflected an increase ininter-company sales of coal cokingby-products from POSCO Chemical Co., Ltd. to POSCO.

Cost of Sales

The following table presents a breakdown of our cost of sales by segment, prior to adjusting forinter-company transactions that are eliminated during consolidation and basis difference, and changes therein for 2017 and 2018.

 

      Changes 
   For the Year Ended December 31,  2017 versus 2018 
   2017  2018  Amount  % 
   (In billions of Won) 

Steel Segment

  41,479  44,377  2,898   7.0

Trading Segment

   33,388   37,202   3,814   11.4 

Construction Segment

   6,598   6,651   53   0.8 

Others Segment

   4,636   5,603   967   20.9 

Consolidation adjustments

   (33,802  (36,828  (3,026  9.0 

Basis difference adjustments(1)

   (383  124       507   N.A. (2) 
  

 

 

  

 

 

   

Cost of sales

      51,916      57,129      5,213   10.0
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

 

(2)

N.A. means not applicable.

Our cost of sales increased by 10.0%, or Won 5,213 billion, from Won 51,916 billion in 2017 to Won 57,129 billion in 2018. The increase in cost of sales was primarily due to increases in the average price in Won terms of key raw materials that were used to manufacture our finished goods sold as well as in our sales volume of steel products. Following our adoption of IFRS No. 15 “Revenue from Contracts with Customers” starting on January 1, 2018, we also began classifying a substantial majority of our freight and custody expenses as cost of sales, which had all been recognized as selling expenses in 2017. We recognized Won 1,415 billion as freight and custody expenses in 2018, of which we recognized Won 1,230 billion as cost of sales and Won 185 billion as selling expenses.

Steel Segment. The cost of sales of our Steel Segment, prior to consolidation and basis difference adjustments, increased by 7.0%, or Won 2,898 billion, from Won 41,479 billion in 2017 to Won 44,377 billion in 2018 primarily due to increases in our sales volume of the principal steel products produced by us and sold to external and internal customers and in the average price in Won terms of key raw materials that were used to manufacture our finished goods sold, as well as our classification of Won 919 billion of freight and custody expenses of the Steel Segment as cost of sales (instead of selling expenses) following our adoption of IFRS 15 starting in 2018.

 

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Trading Segment. The cost of sales of our Trading Segment, prior to consolidation and basis difference adjustments, increased by 11.4%, or Won 3,814 billion, from Won 33,388 billion in 2017 to Won 37,202 billion in 2018 primarily due to an increase in the volume of export and import products sold, as well as our classification of Won 307 billion of freight and custody expenses of the Trading Segment as cost of sales (instead of selling expenses) following our adoption of IFRS 15 starting in 2018.

Construction Segment. The cost of sales of our Construction Segment, prior to consolidation and basis difference adjustments, increased by 0.8%, or Won 53 billion, from Won 6,598 billion in 2017 to Won 6,651 billion in 2018 in line with an increase in the amount of construction activities described above.

Others Segment.The cost of sales of our Others Segment, prior to consolidation and basis difference adjustments, increased by 20.9%, or Won 967 billion, from Won 4,636 billion in 2017 to Won 5,603 billion in 2018 primarily due to increases in the average price in Won terms of key raw materials used by POSCO Energy Corporation.

Gross Profit

The following table presents our gross profit by segment, prior to adjusting forinter-company transactions that are eliminated during consolidation and basis difference, and changes therein for 2017 and 2018.

 

      Changes 
   For the Year Ended December 31,  2017 versus 2018 
   2017  2018  Amount  % 
   (In billions of Won) 

Steel Segment

  6,132  6,044  (88)   (1.4)% 

Trading Segment

   1,490   1,117   (374  (25.1

Construction Segment

   688   669   (18  (2.6

Others Segment

   649   595   (54  (8.3

Consolidation adjustments

   (603  (453  150   (24.8

Basis difference adjustments (1)

   (85  53       138   N.A. (2) 
  

 

 

  

 

 

   

Gross profit

      8,271      8,026  (246  (3.0
  

 

 

  

 

 

   

 

 

(1)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

 

(2)

N.A. means not applicable.

Our gross profit decreased by 3.0%, or Won 246 billion, from Won 8,271 billion in 2017 to Won 8,026 billion in 2018 due to decreases in gross profit of each of our four segments, particularly from the Trading Segment. Our gross margin decreased from 13.7% in 2017 to 12.3% in 2018.

Steel Segment. The gross profit of our Steel Segment, prior to consolidation and basis difference adjustments, decreased by 1.4%, or Won 88 billion, from Won 6,132 billion in 2017 to Won 6,044 billion in 2018 primarily due to our classification of Won 919 billion of freight and custody expenses of the Steel Segment as cost of sales (instead of selling expenses) following our adoption of IFRS 15 starting in 2018, which was largely offset by the impact from our external revenue from the Steel Segment increasing at a greater rate than its cost of sales (excluding freight and custody expenses), prior to consolidation and basis difference adjustments, as discussed above. Due to such factors, the gross margin of our Steel Segment, which is gross profit as a percentage of total revenue prior to consolidation and basis difference adjustments, decreased from 12.9% in 2017 to 12.0% in 2018.

 

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Trading Segment. The gross profit of our Trading Segment, prior to consolidation and basis difference adjustments, decreased by 25.1%, or Won 374 billion, from Won 1,490 billion in 2017 to Won 1,117 billion in 2018 primarily due to a decrease in trading margins resulting from our classification of Won 307 billion of freight and custody expenses of the Trading Segment as cost of sales (instead of selling expenses) following our adoption of IFRS 15 starting in 2018. The gross margin of our Trading Segment, prior to consolidation and basis difference adjustments, decreased from 4.3% in 2017 to 2.9% in 2018.

Construction Segment. The gross profit of our Construction Segment, prior to consolidation and basis difference adjustments, decreased by 2.6%, or Won 18 billion, from Won 688 billion in 2017 to Won 669 billion in 2018 primarily due to a decrease in POSCO E&C’s construction activities overseas as well as a decrease in its participation of construction projects with higher margins in 2018.The gross margin of our Construction Segment, prior to consolidation and basis difference adjustments, decreased from 9.4% in 2017 to 9.1% in 2018.

Others Segment.The gross profit of our Others Segment, prior to consolidation and basis difference adjustments, decreased by 8.3%, or Won 54 billion, from Won 649 billion in 2017 to Won 595 billion in 2018 primarily due to a decrease in gross profit of POSCO Energy Corporation.The gross margin of our Others Segment, prior to consolidation and basis difference adjustments, decreased from 12.3% in 2017 to 9.6% in 2018.

Selling and Administrative Expenses

The following table presents a breakdown of our selling and administrative expenses and changes therein for 2017 and 2018.

 

           Changes 
   For the Year Ended December 31,   2017 versus 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Impairment loss on trade accounts and notes receivable

  174   75   (99  (56.9)% 

Freight and custody expenses

  1,337   185   (1,152  (86.2)% 

Sales commissions

   116    79    (37  (31.8

Sales promotion

   12    14    1   11.1 

Sales insurance premium

   37    37    1   1.9 

Contract cost

   23    17    (6  (26.3

Others

   32    37    5   15.7 
  

 

 

   

 

 

    

Total selling expenses

  1,557   369    (1,188  (76.3
  

 

 

   

 

 

    

Wages and salaries

  775   813           39   5.0

Expenses related topost-employment benefits

   79    73    (5  (6.8

Other employee benefits

   160    176    16   10.2 

Depreciation

   97    101    4   4.1 

Amortization

   146    112    (34  (23.2

Taxes and public dues

   73    72    (1  (9.6

Rental

   70    70    (0  (0.7

Advertising

   120    107    (13  (10.7

Research and development

   126    108    (17  (13.9

Service fees

   193    166    (27  (14.2

Others

   164    186    22   13.4 
  

 

 

   

 

 

    

Total other administrative expenses

  2,003   1,986    (17  (0.9
  

 

 

   

 

 

    

Total selling and administrative expenses

      3,734       2,430    (1,304  (34.9
  

 

 

   

 

 

    

Our selling and administrative expenses decreased by 34.9%, or Won 1,304 billion, from Won 3,734 billion in 2017 to Won 2,430 billion in 2018 primarily due to our classification of a substantial majority of our freight and custody expenses as cost of sales starting in 2018 (as compared to the entire amount as selling expenses in 2017), as well as decreases in impairment loss on trade

 

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accounts and notes receivable, sales commissions, amortization expenses and service fees, which were partially offset by an increase in wages and salaries. Such factors were principally attributable to the following:

 

  

Our freight and custody expenses decreased by 86.2%, or Won 1,152 billion, from Won 1,337 billion in 2017 to Won 185 billion in 2018 primarily due to our classification of Won 1,230 billion of freight and custody expenses as cost of sales starting in 2018.

 

  

Our impairment loss on trade accounts and notes receivable decreased by 56.9%, or Won 99 billion, from Won 174 billion in 2017 to Won 75 billion in 2018 primarily due to a decrease in impairment loss on trade accounts and notes receivable of POSCO International.

 

  

Our sales commissions decreased by 31.8%, or Won 37 billion, from Won 116 billion in 2017 to Won 79 billion in 2018 primarily due to a largeone-time sales commission in 2017 that did not reoccur in 2018, as well as an increase in transactions without sales commissions.

 

  

Our amortization expenses decreased by 23.2%, or Won 34 billion, from Won 146 billion in 2017 to Won 112 billion in 2018 primarily due to a decrease in amortization of intangible assets related to upgrading of our information technology infrastructure.

 

  

Our wages and salaries increased by 5.0%, or Won 39 billion, From Won 775 billion in 2017 to Won 813 billion in 2018 primarily due to an increase in employee incentive bonuses.

Other Operating Income and Expenses

The following table presents our impairment loss on other receivables and changes therein for 2017 and 2018.

 

       Changes 
   For the Year Ended December 31,   2017 versus 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Impairment loss on other receivables

      98           63           (35)   (35.7)% 

Our impairment loss on other receivables decreased by 35.7%, or Won 35 billion, from Won 98 billion in 2017 to Won 63 billion in 2018. In 2017, our impairment loss on other receivables related primarily to joint venture projects of POSCO E&C. In 2018, our impairment loss on other receivables related primarily to uncollectible loans made by POSCO E&C to PT. POSCO E&C Indonesia.

The following table presents a breakdown of our other operating income and changes therein for 2017 and 2018.

 

       Changes 
   For the Year Ended December 31,   2017 versus 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Gain on disposal of assets held for sale

  1   27       26   2,202.6

Gain on disposal of investments in subsidiaries, associates and joint ventures

   82    45    (37  (44.7

Gain on disposal of property, plant and equipment

   32    53    21   65.3 

Gain on disposal of intangible assets

   23    117    94   400.8 

Gain on valuation of firm commitment

   56    39    (17  (30.7

Reversal of other provisions

       4    4   N.A. (1) 

Others

   254    238    (16  (6.3
  

 

 

   

 

 

    

Total other operating income

      448       524    75   16.7 
  

 

 

   

 

 

    

 

 

(1)

N.A. means not applicable.

 

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Our other operating income increased by 16.7%, or Won 75 billion, from Won 448 billion in 2017 to Won 524 billion in 2018 primarily due to increases in gain on disposal of intangible assets, gain on disposal of assets held for sale and gain on disposal of property, plant and equipment, which were partially offset by a decrease in gain on disposal of investments in subsidiaries, associates and joint ventures. Such factors were principally attributable to the following:

 

  

Our gain on disposal of intangible assets increased significantly, by Won 94 billion, from Won 23 billion in 2017 to Won 117 billion in 2018 primarily due to an increase in gain from disposal of our carbon credits.

 

  

Our gain on disposal of assets held for sale increased significantly, by Won 26 billion, from Won 1 billion in 2017 to Won 27 billion in 2018 primarily due to the disposal of assets of POSPower Co., Ltd. in 2018, compared to no such gain from our disposal of assets held for sale in 2017.

 

  

Our gain on disposal of property, plant and equipment increased by 65.3%, or Won 21 billion, from Won 32 billion in 2017 to Won 53 billion in 2018 primarily due to an increase in gains from sales of corporate housing units to employees.

 

  

Our gain on disposal of investments in subsidiaries, associates and joint ventures decreased by 44.7%, or Won 37 billion, from Won 82 billion in 2017 to Won 45 billion in 2018 primarily due to a decrease in disposition of our interests in some of our subsidiaries and associates as part of our reorganization efforts.

The following table presents a breakdown of our other operating expenses and changes therein for 2017 and 2018.

 

       Changes 
   For the Year Ended December 31,   2017 versus 2018 
   2017   2018   Amount  % 
   (In billions of Won) 

Impairment losses on assets held for sale

      51    51   N.A. (1)

Loss on disposal of investments in subsidiaries, associates and joint ventures

   20    5    (15  (73.9

Loss on disposal of property, plant and equipment

   151    118    (34  (22.3

Impairment losses on property, plant and equipment

   117    1,005    887   757.0 

Impairment losses on investment property

       51    51   N.A. (1) 

Impairment losses on intangible assets

   168    338    170   100.9 

Increase to provisions

   34    135    101   296.4 

Loss on valuation of firm commitment

   43    66    23   53.6 

Donations

   51    52    1   1.3 

Idle tangible assets expenses

   10    9    (1  (11.8

Others

   96    185    89   92.7 
  

 

 

   

 

 

    

Total other operating expenses

      691       2,014    1,323   191.4 
  

 

 

   

 

 

    

 

 

(1)

N.A. means not applicable.

Our other operating expenses increased by 191.4%, or Won 1,323 billion, from Won 691 billion in 2017 to Won 2,014 billion in 2018 primarily due to increases in impairment losses on property, plant and equipment, impairment losses on intangible assets and increase to provisions, which were partially offset by a decrease in loss on disposal of property, plant and equipment. Such factors were principally attributable to the following:

 

  

Our impairment losses on property, plant and equipment increased significantly, by Won 887 billion, from Won 117 billion in 2017 to Won 1,005 billion in 2018. In 2017, our impairment losses on property, plant and equipment related primarily to SkyCube operated by Suncheon Eco Trans Co., Ltd. as well as disposal plans regarding certain assets. In

 

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2018, we recognized impairment losses on property, plant and equipment of Won 810 billion related to our synthetic natural gas production facility in Gwangyang due to our discontinuation of such business, as well as impairment losses of Won 54 billion related to the operating loss of POSCO Energy Corporation’s fuel cell business.

 

  

Our impairment losses on intangible assets increased significantly, by Won 170 billion, from Won 168 billion in 2017 to Won 338 billion in 2018. In 2017, our impairment losses on intangible assets related primarily to losses of POSCO Engineering, which merged into POSCO E&C. In 2018, our impairment losses on intangible assets related primarily to impairment losses on goodwill of Won 158 billion incurred by POSCO International and Won 66 billion incurred by POSCO E&C in connection with a decrease invalue-in-use of such entities due to reduced expected cash flow arising from the uncertain global economic climate, as well as impairment of industrial property rights of Won 78 billion related to our investment in Hume Coal Pty Limited, a coal mining company in Australia.

 

  

Our increase to provisions increased significantly, by Won 101 billion, from Won 34 billion in 2017 to Won 135 billion in 2018 primarily due to an increase in provisions related to our synthetic natural gas production facility in Gwangyang due to our discontinuation of such business in 2018.

 

  

Our loss on disposal of property, plant and equipment decreased by 22.3%, or Won 34 billion, from Won 151 billion in 2017 to Won 118 billion in 2018. In 2017, our loss on disposal of property, plant and equipment related primarily to our blast furnace upgrading project at Pohang Works. In 2018, our loss on disposal of property, plant and equipment related primarily to rationalization of the LNG plants at Gwangyang Works.

Operating Profit

Due to the factors described above, our operating profit decreased by 3.7%, or Won 154 billion, from Won 4,196 billion in 2017 to Won 4,042 billion in 2018. Our operating margin decreased from 7.0% in 2017 to 6.2% in 2018.

Share of Profit (Loss) ofEquity-Accounted Investees

Our share of profit of equity-accounted investees increased significantly, by Won 102 billion, from Won 11 billion in 2017 to Won 113 billion in 2018. In 2017, we recognized a net gain for our proportionate share ofequity-accounted investees of Won 11 billion primarily due to our share of gains of Won 56 billion of KOBRASCO, Won 46 billion of Roy Hill Holdings Pty Ltd., Won 43 billion of South-East Asia Gas Pipeline Company Ltd. and Won 28 billion of POSCO Mitsubishi Carbon Technology Ltd., which were partially offset by our share of loss of Won 148 billion ofCSP-Compania Siderurgica do Pecem. In 2018, we recognized a net gain for our proportionate share ofequity-accounted investees of Won 113 billion primarily due to our share of gains of Won 75 billion of KOBRASCO, Won 70 billion of POSCO Mitsubishi Carbon Technology Ltd., Won 59 billion of Roy Hill Holdings Pty Ltd. and Won 30 billion ofAES-VCM Mong Duong Power Company Limited, which were partially offset by our share of loss of Won 110 billion ofCSP-Compania Siderurgica do Pecem. 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 2017 and 2018.

 

       Changes 
   For the Year Ended December 31,   2017 versus 2018 
           2017                   2018               Amount      % 
   (In billions of Won) 

Interest income

  212   337   125   58.7

Dividend income

   93    63    (30  (31.9

Gain on foreign currency transactions

   786    716    (70  (8.9

Gain on foreign currency translations

   564    212    (352  (62.3

Gain on derivatives transactions

   211    248    37   17.5 

Gain on valuation of derivatives

   65    97    32   49.8 

Gain on disposals ofavailable-for-sale financial assets

   426        (426  (100.0

Gain on valuations of financial assets at fair value through profit or loss

       16    16   N.A. (1) 

Others

   16    16    (0  (1.6
  

 

 

   

 

 

    

Total finance income

      2,373       1,706    (667  (28.1
  

 

 

   

 

 

    

Interest expenses

  653   741    88   13.5

Loss on foreign currency transactions

   757    811    54   7.2 

Loss on foreign currency translations

   423    322    (101  (23.9

Loss on derivatives transactions

   236    209    (28  (11.6

Loss on valuation of derivatives

   226    41    (186  (82.0

Impairment losses onavailable-for-sale financial assets

   123        (123  (100.0

Loss on valuations of financial assets at fair value through profit or loss

       59    59   N.A. (1) 

Others

   66    62    (4  (6.1
  

 

 

   

 

 

    

Total finance costs

  2,484   2,244    (240  (9.7
  

 

 

   

 

 

    

 

 

(1)

N.A. means not applicable.

We recognized a net gain on foreign currency translations of Won 141 billion in 2017 compared to a net loss on foreign currency translations of Won 109 billion in 2018, and we recorded a net gain on foreign currency transactions of Won 29 billion in 2017 compared to a net loss on foreign currency transactions of Won 95 billion in 2018, as the Won appreciated against the Dollar in 2017 but depreciated in 2018. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from Won 1,208.5 to US$1.00 as of December 31, 2016 to Won 1,071.4 to US$1.00 as of December 31, 2017 but depreciated to Won 1,118.1 to US$1.00 as of December 31, 2018. Against such fluctuations, we recognized a net loss on valuations of derivatives of Won 162 billion in 2017 compared to a net gain on valuations of derivatives of Won 56 billion in 2018, as well as a net loss on transactions of derivatives of Won 26 billion in 2017 compared to a net gain on transactions of derivatives of Won 39 billion in 2018.

We recognized a gain on disposals ofavailable-for-sale financial assets of Won 426 billion in 2017 related primarily to disposals of our interests in Hyundai Heavy Industries Co., Ltd. and KB Financial Group Inc., compared to no such gain in 2018.

Our interest income increased by 58.7%, or Won 125 billion, from Won 212 billion in 2017 to Won 337 billion in 2018 primarily due to an increase in interest-earning financial assets, as well as a general increase in interest rates in Korea in 2018.

We recognized impairment losses onavailable-for-sale financial assets of Won 123 billion in 2017 related primarily to a significant and prolonged decline in the fair value of shares of Congonhas Minèrios S.A. below cost, compared to no such impairment loss in 2018.

 

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Profit before Income Taxes

Due to the factors described above, our profit before income taxes decreased by 11.7%, or Won 479 billion, from Won 4,095 billion in 2017 to Won 3,616 billion in 2018.

The following table presents our profit and loss by segment, prior to adjusting for goodwill and corporatefair-value adjustments, elimination of inter-segment profits, income tax expense and basis difference, and changes therein for 2017 and 2018.

 

      Changes 
   For the Year Ended December 31,  2017 versus 2018 
       2017                  2018              Amount      % 
   (In billions of Won) 

Steel Segment

  2,791  1,268      (1,523  (54.6)% 

Trading Segment

   113   49   (63  (56.3

Construction Segment

   25   0   (24  (99.0

Others Segment

   233   14   (219  (94.2

Goodwill and corporate fair value adjustments

   (84  (78  7   (7.8

Elimination ofinter-segment profits

   (103  638   741   N.A. (1) 

Income tax expense

   1,206   1,671   465   38.5 

Basis difference adjustments (2)

   (85  53   137   N.A. (1) 
  

 

 

  

 

 

   

Profit before income taxes

      4,095      3,616   (479  (11.7
  

 

 

  

 

 

   

 

 

(1)

N.A. means not applicable.

 

(2)

Basis difference adjustments are related to the difference in recognizing revenue and expenses of the Construction Segment in connection with development and sale of certain residential real estate between the report reviewed by the chief executive officer and the consolidated financial statements. See Notes 3 and 40 of Notes to Consolidated Financial Statements.

Income Tax Expense

Our income tax expense increased by 42.0%, or Won 498 billion, from Won 1,186 billion in 2017 to Won 1,684 billion in 2018. Our effective tax rate increased from 29.0% in 2017 to 46.6% in 2018 primarily due to the following:

 

  

an increase in income tax expenses from Won 28 billion in 2017 to Won 272 billion in 2018 (that resulted in an increase in effective tax rate of 6.8%) in connection withnon-deductible impairment losses on property, plant and equipment that we recognized on our synthetic natural gas production facility in Gwangyang in 2018.

 

  

a tax effect of Won 130 billion in 2018 in connection with the reconciliation of discrepancies in the interpretation of certain tax laws between the tax authority and us (that resulted in an increase in effective tax rate of 3.6%) compared to no such effect in 2017.

See Note 35 of Notes to Consolidated Financial Statements.

Profit

Due to the factors described above, our profit decreased by 33.6%, or Won 977 billion, from Won 2,909 billion in 2017 to Won 1,932 billion in 2018.

 

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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, 
   2017  2018  2019 
   (In billions of Won) 

Net cash provided by operating activities

      5,607      5,870      6,005 

Net cash used in investing activities

   (3,818  (2,648  (3,683

Net cash used in financing activities

   (1,566  (3,195  (1,512

Effect of exchange rate fluctuation on cash held

   (59  5   62 

Cash and cash equivalents at beginning of the period

   2,448   2,613   2,644 

Cash and cash equivalents at end of the period

   2,613   2,644   3,515 

Net increase in cash and cash equivalents

   165   31   871 

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 also use cash for repurchases of our shares.

Net cash used in investing activities was Won 3,818 billion in 2017, Won 2,648 billion in 2018 and Won 3,683 billion in 2019. Our cash outflows for acquisition of property, plant and equipment were Won 2,288 billion in 2017, Won 2,136 billion in 2018 and Won 2,519 billion in 2019. We plan to spend approximately Won 6.0 trillion in capital expenditures in 2020, which we may adjust on anon-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 acquisitions ofshort-term financial instruments of Won 1,697 billion in 2017, Won 1,068 billion in 2018 and Won 647 billion in 2019.

In our financing activities, we used cash of Won 3,136 billion in 2017, Won 3,136 billion in 2018 and Won 3,747 billion in 2019 for repayments of borrowings. We paid dividends on common stock in the amount of Won 863 billion in 2017, Won 724 billion in 2018 and Won 946 billion in 2019. In April 2020, we entered into a trust contract to engage in repurchases of our shares until April 2021 for up to Won 1.0 trillion.

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. 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 indebtedness of our related parties and others. For our contingent liabilities on outstanding guarantees provided by us, see Note 38(b) of Notes to Consolidated Financial Statements. The following table sets forth the amount oflong-term debt and lease obligations as of December 31, 2019.

 

   Payments Due by Period 
   Total   Less than
1 Year
   1 to 3 Years   4 to 5 Years   More than
5 Years
 
   (In billions of Won) 

Long-term debt obligations(a)

  15,230   3,118   6,851   3,599   1,662 

Interest payments onlong-term debt(b)

   1,290    503    520    202    66 

Lease obligations

   242    34    107    78    23 

Purchase obligations(c)

   24,311    10,047    8,958    3,637    1,669 

Long-term shipping service contract

   21,079    2,329    4,659    4,659    9,423 

Accrued severance benefits(d)

   2,902    280    603    483    1,536 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      65,054       16,311       21,698       12,658       14,379 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(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, 2019, a portion of ourlong-term debt carried variable interest rates. We used the interest rate in effect as of December 31, 2019 in calculating the interest payments onlong-term debt for the periods indicated.

 

(c)

Our purchase obligations include supply contracts to purchase iron ore, coal, nickel, LNG and other raw materials. These contracts generally have terms of one to ten years and thelong-term contracts provide for periodic price adjustments according to the market prices. As of December 31, 2019, 102 million tons of iron ore and 11 million tons of coal remained to be purchased underlong-term contracts. In addition, we entered into an agreement with Tangguh 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, 2019 in calculating the iron ore, coal and LNG purchase obligations described above for the periods indicated.

 

(d)

Represents, as of December 31, 2019, 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 throughlong-term debt andshort-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 issuance of hybrid bonds and sale of treasury shares and our holdings inavailable-for-sale securities.

Our net cash provided by operating activities increased by 4.7%, or Won 263 billion, from Won 5,607 billion in 2017 to Won 5,870 billion in 2018. Our gross cash flow from our sales activities increased as discussed above. In addition, our outstanding trade accounts and notes payable increased in 2018, as we lengthened payment terms of some of our key suppliers, which further enhanced our net cash provided by operating activities. However, our inventory of raw materials andmaterials-in-transit increased in 2018, which in turn negatively impacted our cash provided by operating activities.

Our net cash provided by operating activities increased by 2.3%, or Won 135 billion, from Won 5,870 billion in 2018 to Won 6,005 billion in 2019. Our gross cash flow from our sales activities

 

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decreased as discussed above. However, we recorded cash outflow related to the buildup of inventories in 2018 compared to cash inflow related to more efficient management of inventories in 2019, which in turn positively impacted our net cash provided by operating activities. On the other hand, we recorded cash inflow related to our management of trade accounts and notes payable in 2018 compared to cash outflow in 2019, which in turn negatively impacted our net cash provided by operating activities. In addition, cash outflows related to income taxes paid increased from Won 1,140 billion in 2018 to Won 1,513 billion in 2019.

We had net repayments of borrowings, after adjusting for proceeds from borrowings, of Won 1,410 billion in 2017 and Won 374 billion in 2018 and net proceeds from borrowings, after adjusting for repayments of borrowings, of Won 1,900 billion in 2019. We had net proceeds of short-term borrowings, after deducting for repayment of short-term borrowings, of Won 558 billion in 2017, and net repayment of short-term borrowings, after deducting for proceeds of short-term borrowings, of Won 855 billion in 2018 and Won 2,195 billion in 2019.Long-term borrowings, excluding current installments, were Won 9,789 billion as of December 31, 2017, Won 9,920 billion as of December 31, 2018 and Won 11,893 billion as of December 31, 2019. Totalshort-term borrowings and current installments oflong-term borrowings were Won 11,275 billion as of December 31, 2017, Won 10,290 billion as of December 31, 2018 and Won 8,548 billion as of December 31, 2019. Outstanding hybrid bonds were Won 997 billion as of December 31, 2017 and Won 199 billion as of December 31, 2018 and 2019. Our netborrowings-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 38.99% as of December 31, 2017, 37.64% as of December 31, 2018 and 35.43% as of December 31, 2019.

We periodically increase ourshort-term borrowings and adjust ourlong-term debt financing levels depending on changes in our capital requirements. From time to time, we also generate cash from the sale of our treasury shares. 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 12,354 billion as of December 31, 2017, Won 14,721 billion as of December 31, 2018 and Won 18,593 billion as of December 31, 2019. Our holdings of cash and cash equivalents (which do not include cash and cash equivalents categorized under “assets held for sale”) were Won 2,613 billion as of December 31, 2017, Won 2,644 billion as of December 31, 2018 and Won 3,515 billion as of December 31, 2019. See Notes 5 and 10 of Notes to Consolidated Financial Statements. Our holding of other receivables and othershort-term financial assets were Won 8,682 billion as of December 31, 2017, Won 9,467 billion as of December 31, 2018 and Won 10,578 billion as of December 31, 2019. As of December 31, 2019, approximately 14% of our cash and cash equivalents, other receivables and othershort-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 1,064 billion as of December 31, 2019, none of which was used as of such date. We have not had, and do not believe that we will have, difficulty gaining access toshort-term financing sufficient to meet our current requirements.

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

 

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Capital Expenditures and Capacity Expansion

Cash used for acquisitions of property, plant and equipment was Won 2,288 billion in 2017, Won 2,136 billion in 2018 and Won 2,519 billion in 2019. We plan to spend approximately Won 6.0 trillion in capital expenditures in 2020, which we may adjust on anon-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 highervalue-added products, improvements in the efficiency of older facilities in order to reduce operating costs and construction and expansion of facilities related to ournon-steel businesses. The following table sets out the major items of our capital expenditures as of December 31, 2019:

 

Project

  Expected
Completion Date
   Total Cost of
Project
   Estimated
Remaining Cost of
Completion as of
December 31,
2019
 
       (In billions of Won) 

Rationalization of furnace no. 3 at Gwangyang Works and construction of facilities for removing nitrogen oxide during iron ore processing at Pohang Works

   December 2021       2,027       1,159 

Construction ofby-product gas plant at Pohang Works and expansion of hyper-strength steel manufacturing facilities at Gwangyang Works

   August 2022    615    474 

Construction of cathode materials production facilities at Gwangyang Works

   March 2020    225    73 

Additional major capital expenditure projects that we plan to start in 2020 include the following:

 

Project

  Expected
Spending in
2020
   Expected
Spending in
2021
   Expected
Spending in
2022
   Total 
       (In billions of Won) 

Rationalization and upgrading of facilities at Gwangyang Works and Pohang Works related to periodic maintenance and improvement of steel products

      233       816       670       1,720 

Rationalization and upgrading of facilities at Gwangyang Works and Pohang Works related to cost reduction

   122    239    317    678 

Construction and expansion of anode materials production facilities

   59    66        125 

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, 2019, POSCO Technical Research Laboratories employed 914 personnel, including 500 researchers.Our technology development department also works closely with the Pohang University of Science & Technology, Korea’s firstresearch-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.

Our research and development program has filed approximately 44,500 industrial rights applications relating tosteel-making technology, approximately 14,000 of which were registered as of December 31, 2019, and has successfully applied many of these to the improvement of our manufacturing process.

 

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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, 2018 and 2019, 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 facilitatingoff-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 and Management Committee”) after the committee reviews such candidates’ qualifications. Pursuant to the Korean Commercial Act and our articles of incorporation, any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation and Management Committee.

Our board of directors maintains the following fivesub-committees:

 

  

the Director Candidate Recommendation and Management Committee;

 

  

the Evaluation and Compensation Committee;

 

  

the Finance and Related Party Transactions Committee;

 

  

the Executive Management Committee; and

 

  

the Audit 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.

 

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Inside Directors

As of March 31, 2020, our Inside Directors are as follows:

 

Name

  

Position

  

Responsibilities and
Division

  Years
as
Director
   Age   Expiration
of Term of
Office

Choi,Jeong-Woo

  Chief Executive Officer and Representative Director  —                       2    62   March
2021

Chang,In-Hwa

  President and Representative Director  Head of Steel Business Unit   3    64   March
2021

Chon,Jung-Son

  Senior Executive Vice President  Head of Global & Infra Business Unit and Head of Corporate Strategy & Planning Division   2    57   March
2021

Kim,Hag-Dong

  Senior Executive Vice President  Head of Steel Production & Technology Division   1    60   March
2021

Jeong, Tak

  Senior Executive Vice President  Head of Marketing Division   1    60   March
2021

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

Outside Directors

Each of our Outside Directors meets the applicable independence standards set forth under the rules of the FSCMA.

 

Name

  Position  

Principal Occupation

  Years
as
Director
   Age   Expiration
of Term of
Office
 

Chung,Moon-Ki

  Chairman  Professor of Accounting, Sungkyunkwan University   3    60    March 2022 

Kim,Joo-Hyun

  Director  Former President, the Financial News   5    67    March 2021 

Bahk,Byong-Won

  Director  Former Chairman, Korea Employers Federation   5    67    March 2021 

Kim,Shin-Bae

  Director  Former Vice Chairman, SK Group   3    65    March 2022 

Chang,Seung-Wha

  Director  Professor of Law, Seoul National University   2    56    March 2023 

Kim,Sung-Jin

  Director  Former Minister, Ministry of Oceans and Fisheries   2    70    March 2021 

Pahk,Heui-Jae

  Director  Professor of Mechanical & Aerospace Engineering, Seoul National University   1    58    March 2022 

The term of office of the Director elected in March 2020 is up to three 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 as of March 19, 2020:

 

Name

  

Position

  

Responsibility and Division

  Age 

Oh,Gyu-Seok

  Senior Executive Vice President  Head of New Growth Business Unit   57 

Kim,Jhi-Yong

  Senior Executive Vice President  President, PT Krakatau POSCO Co., Ltd.   58 

Chung,Chang-Hwa

  Senior Executive Vice President  Head of Management Support Division   59 

Yoo,Byeong-Og

  Senior Executive Vice President  Head of Purchasing and Investment Division   58 

Lee,Si-Woo

  Senior Executive Vice President  Head of Gwangyang Works   60 

Lee,Duk-Lak

  Senior Executive Vice President  Head of Technical Research Laboratories   60 

Nam,Soo-Hi

  Senior Executive Vice President  Head of Pohang Works   61 

Lee, Sung-Wook

  Senior Executive Vice President  Head of Legal Affairs Office   56 

Kim,Gyo-Sung

  Executive Vice President  Head of Automotive Steel Research Lab   59 

Yang,Weon-Jun

  Executive Vice President  Head of Corporate Citizenship Office   55 

Lim,Seung-Kyu

  Executive Vice President  Head of Finance Office   57 

Choo,Se-Don

  Executive Vice President  Head of Steel Solution Research Lab   59 

Jung,Duk-Kyoon

  Executive Vice President  Head of Information Planning Office   58 

Choi,In-Suk

  Executive Vice President  Deputy Head of Pohang Works (Administration)   57 

Lee,Ju-Tae

  Executive Vice President  Head of Corporate Strategy Office   56 

Ha,Dae-Ryong

  Executive Vice President  Head of Europe Office   56 

Kim,Soon-Ki

  Executive Vice President  Head of Labor and Cooperation Office   56 

Kim,Bok-Tae

  Executive Vice President  Logistics Integration TF Team Leader   58 

Kim,Jeoung-Su

  Executive Vice President  Deputy Head of Gwangyang Works (Administration)   57 

Kim,Kwang-Moo

  Executive Vice President  Head of Steel Business Planning & Coordination Office   56 

Kim,Kyung-Han

  Executive Vice President  Head of International Trade Office   55 

Kim,Min-Chul

  Executive Vice President  Head of Investment Planning & Engineering Office   58 

Kim,Ki-Soo

  Executive Vice President  Head of Process and Engineering Research Lab   55 

Choi,Yong-Jun

  Executive Vice President  Deputy Head of Pohang Works (Process & Quality)   56 

Lee,Jae-Yeol

  Executive Vice President  Head of Business & Administration Support Office   59 

Park, Hyeon

  Senior Vice President  Head of Safety & Environmental Planning Office   53 

Song,Kyung-Hwa

  Senior Vice President  Head of Stainless Steel Marketing Office   58 

Lee,Jean-Su

  Senior Vice President  Deputy Head of Gwangyang Works (Hot and Cold Rolling)   57 

Kim, Young-Joong

  Senior Vice President  Head of Marketing Strategy Office   55 

Song,Yong-Sam

  Senior Vice President  Head of Automotive Materials Marketing Office   57 

Lee,Yu-Kyung

  Senior Vice President  Head of Plant, Equipment and Materials Procurement Office   53 

Lee,Hee-Geun

  Senior Vice President  Deputy Head of Pohang Works (Iron and Steel Making)   58 

Lee,Ju-Hyeob

  Senior Vice President  Deputy Head of Pohang Works (Stainless Steel Production)   56 

An,Geun-Sik

  Senior Vice President  Deputy Head of Gwangyang Works (Process & Quality)   59 

Lee,Kyung-Sub

  Senior Vice President  Head of Investment Strategy Office   55 

Jung,Bum-Su

  Senior Vice President  Deputy Head of Gwangyang Works (Maintenance)   56 

 

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Name

  

Position

  

Responsibility and Division

  Age 

Nam,Jae-Bok

  Senior Vice President  Giga Steel Commercialization TF Team Leader, Gwangyang Works   59 

Lee,Sang-Ho

  Senior Vice President  Head of Production Division, PT Krakatau POSCO Co., Ltd.   56 

Kim, Sang-Gyun

  Senior Vice President  Head of Construction Steel Materials Marketing Office   56 

Chung,Seok-Mo

  Senior Vice President  Head of LiB Materials Business Office   54 

Kim,Won-Hee

  Senior Vice President  Head of Global Infra Business Management Office   55 

Ahn,Sang-Bog

  Senior Vice President  Head of Steel Product Research Lab   58 

Han,Soo-Ho

  Senior Vice President  PT KP Downstream Construction Cooperation TF Team Leader   59 

Choi, Young

  Senior Vice President  Head of Communication Office   52 

Lee,Cheol-Ho

  Senior Vice President  Head of Labor and Management Development Group   55 

Yoon,Chang-Woo

  Senior Vice President  Head of Electrical and Electronic Materials Marketing Office   56 

Jeong,Dae-Hyung

  Senior Vice President  Head of Business Assessment Office   52 

Yang,Byeong-Ho

  Senior Vice President  Head of Human Resources and Corporate Culture Office   54 

Hwang,Guy-Sam

  Senior Vice President  Deputy Head of Pohang Works (Hot and Cold Rolling)   56 

Kim, Sang-Chul

  Senior Vice President  Head of Energy and Shipbuilding Materials Marketing Office   53 

Cho,Ju-Ik

  Senior Vice President  Head of New Growth Planning Office   55 

Kim,Yong-Soo

  Senior Vice President  Head of Human Resources Management Office   55 

Oh, Kyung-Shik

  Senior Vice President  PosMC Technology Development TF Team Leader   62 

Kim, Kyeong-Chan

  Senior Vice President  Head of Steel Business Planning & Coordination Group   51 

Choi,Jong-Kyo

  Senior Vice President  High Manganese Steel Solutions TF Team Leader   59 

Chung,Kyung-Jin

  Senior Vice President  Head of Corporate Audit Office   55 

Song,Chi-Young

  Senior Vice President  Deputy Head of Pohang Works (Safety and Environment)   56 

Choun,Si-Youl

  Senior Vice President  Head of Steel Production Technology Strategy Office   55 

Kang, Sung-Wook

  Senior Vice President  Head of Raw Materials Office I   55 

Lee,Chan-Gi

  Senior Vice President  Deputy Head of Pohang Works (Maintenance)   57 

Lee, Chang-Hyun

  Senior Vice President  Deputy Head of Gwangyang Works (Safety and Environment)   59 

Park,Sung-Jin

  Senior Vice President  Head of Industry-Academy-Research Cooperation Office   52 

Do,Han-Eui

  Senior Vice President  Head of International Trade, Europe Office   55 

Kim, Hee

  Senior Vice President  Head of Steel Production Coordination Office   53 

Park,Nam-Sik

  Senior Vice President  Head of Sales & Production and Technology Planning Group   53 

Yang,Keun-Sik

  Senior Vice President  Head of Global Quality & Service Management Office   57 

Kim,Dae-Up

  Senior Vice President  Head of Hot Rolled Steel & Wire Rod Marketing Office   56 

Yoon,Sung-Won

  Senior Vice President  Head of Raw Materials Office II   55 

Lee, Dong-Ryeol

  Senior Vice President  Deputy Head of Gwangyang Works (Iron and Steel Making)   56 

 

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. In 2019, the aggregate compensation paid and accrued to all Directors and executive officers was approximately Won 47 billion and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 12 billion.

 

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Among those who received total annual compensation exceeding Won 500 million in 2019, the highest-paid five individuals were as follows:

 

Name

 

Position

 Total
Compensation in
2019
  Long-term Incentive Compensation for
Payment Subsequent to 2019
 
    (In millions of Won) 

You, Seong

 Former Senior Executive Vice President  2,143   287 

Choi,Jeong-Woo

 Chief Executive Officer and Representative Director  1,617    

Oh,In-Hwan

 President and Representative Director  1,450   186 

Chang,In-Hwa

 President and Representative Director  1,141    

Min,Kyung-Jun

 Former Senior Executive Vice President  1,135    

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 and Management Committee

The Director Candidate Recommendation and Management Committee is composed of three Outside Directors, Bahk,Byong-Won, Kim,Joo-Hyun and Pahk,Heui-Jae, and one Inside Director, Chon,Jung-Son. The Director Candidate Recommendation and Management Committee reviews the qualifications of potential candidates and proposes nominees to serve on our board of directors as an Outside Director. It also reviews operational matters of our board of directors. Any shareholder holding our outstanding shares with voting rights may suggest candidates for Outside Directors to the Director Candidate Recommendation and Management Committee.

Evaluation and Compensation Committee

The Evaluation and Compensation Committee is composed of four Outside Directors, Chang,Seung-Wha, Kim,Joo-Hyun, Kim,Shin-Bae and Kim,Sung-Jin. 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 Related Party Transactions Committee

The Finance and Related Party Transactions Committee is composed of three Outside Directors, Chang,Seung-Hwa, Kim,Shin-Bae, Kim,Sung-Jin and one Inside Director, Chang,In-Hwa. 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 prospectivecapital-raising activities. It also reviews related party and other internal transactions and ensures compliance with the Monopoly Regulation and Fair Trade Act.

Executive Management Committee

The Executive Management Committee is composed of five Inside Directors, Choi,Jeong-Woo, Chang,In-Hwa, Chon,Jung-Son, Kim,Hag-Dong and Jeong, Tak. This committee oversees decisions with respect to our operational and management matters, including review of management’s proposals

 

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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 theSarbanes-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 Chung,Moon-Ki, Bahk,Byong-Won and Pahk,Heui-Jae.

The duties of the Audit Committee include:

 

  

engaging independent auditors;

 

  

approving independent audit fees;

 

  

approving audit andnon-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.

Item 6.D.Employees

As of December 31, 2019, we had 35,261 employees, including 17,758 persons employed by our subsidiaries. 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 33,784 employees, including 16,634 persons employed by our subsidiaries, as of December 31, 2018, and 32,287 employees, including 15,232 persons employed by our subsidiaries, as of December 31, 2017.

We consider our relations with our work force to be satisfactory. 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 negotiations between the management and the majority labor union. A limited number of our employees are members of the Federation of Korean Metal Workers’ Trade Unions or the Korean Metal Workers’ Union. The Federation of Korean Metal Workers’ Trade Unions currently negotiates the terms of employment with the management.

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 asnon-executive employees, are subject to a pension insurance system, under which we make

 

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monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid from their pension accounts. Prior to 2011, our executive andnon-executive employees were subject to alump-sum severance payment system, under which they were entitled to receive alump-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 suchlump-sum severance payment system with our current pension insurance system in the form of either a defined benefit plan or a defined contribution plan. Our employees have the option of choosing either the defined benefit plan or the defined contribution plan. See Note 21 of Notes to Consolidated Financial Statements.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, acompany-sponsored pension program, an employee welfare fund, industrial disaster insurance and cultural and athletic facilities.

As of December 31, 2019, our employees owned, through our employee stock ownership association, approximately 1.71% of our common stock in their employee accounts.

 

Item 6.E.

Share Ownership

The persons who are currently our Directors or executive officers held, as a group, 35,388 common shares as of March 31, 2020, 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.

 

Name

  Number of
Common Shares
 

Choi,Jeong-Woo

   1,526 

Kim,Hag-Dong

   1,460 

Chang,In-Hwa

   1,389 

Kim,Soon-Ki

   1,332 

Jeong, Tak

   1,299 

Chon,Jung-Son

   1,262 

Yoo,Byeong-Og

   1,149 

Kim,Gyo-Sung

   1,041 

Lee, Chang-Hyun

   1,023 

Nam,Soo-Hi

   987 

Lee,Si-Woo

   905 

Choi,In-Suk

   859 

Song,Chi-Young

   800 

Lee,Duk-Lak

   774 

Kim,Bok-Tae

   738 

Lee,Chan-Gi

   737 

Lim,Seung-Kyu

   692 

Kim,Min-Chul

   680 

Chung,Chang-Hwa

   650 

Lee,Jean-Su

   648 

Lee,Ju-Tae

   623 

Jung,Bum-Su

   583 

Kim,Jeoung-Su

   578 

Yang, Weon-Jun

   576 

Park, Hyeon

   523 

Lee,Cheol-Ho

   509 

Choo,Se-Don

   505 

Oh,Gyu-Seok

   500 

Lee,Ju-Hyeob

   500 

Lee,Jae-Yeol

   450 

Kim,Dae-Up

   441 

Lee,Yu-Kyung

   437 

Kim, Hee

   433 

Ahn,Sang-Bog

   420 

 

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Name

  Number of
Common Shares
 

Ha,Dae-Ryong

   402 

Kim,Jhi-Yong

   385 

Kim, Sang-Gyun

   380 

Kim,Ki-Soo

   373 

Han,Soo-Ho

   359 

Choi, Young

   355 

Kim, Young-Joong

   350 

Choi,Yong-Jun

   344 

Lee,Hee-Geun

   335 

Choi,Jong-Kyo

   324 

Lee,Sang-Ho

   312 

An,Geun-Sik

   300 

Chung,Kyung-Jin

   294 

Oh, Kyung-Shik

   274 

Choun,Si-Youl

   264 

Song,Yong-Sam

   260 

Park,Nam-Sik

   244 

Nam,Jae-Bok

   217 

Yang,Keun-Sik

   208 

Lee, Sung-Wook

   200 

Kim,Kyung-Han

   200 

Lee,Kyung-Sub

   200 

Chung,Seok-Mo

   200 

Kim, Sang-Chul

   200 

Cho,Ju-Ik

   200 

Park,Sung-Jin

   200 

Hwang,Guy-Sam

   157 

Jeong,Dae-Hyung

   130 

Yang,Byeong-Ho

   123 

Kim,Won-Hee

   120 

Kang, Sung-Wook

   104 

Yoon,Chang-Woo

   100 

Lee, Dong-Ryeol

   100 

Kim,Kwang-Moo

   73 

Yoon,Sung-Won

   50 

Kim,Yong-Soo

   12 

Jung,Duk-Kyoon

   10 
  

 

 

 

Total

   35,388 
  

 

 

 

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, 2019.

 

Shareholders

  Number of Shares
Owned
   Percentage 

National Pension Service

   10,291,670    11.80

BlackRock Fund Advisors(1) (2) (3)

   5,429,071    6.23 

Nippon Steel Corporation(1)

   2,894,712    3.32 

Samsung Group and subsidiaries(2)

   2,401,789    2.75 

GIC Private Limited

   1,777,316    2.04 

Others

   64,392,277    73.86 
  

 

 

   

 

 

 

Total issued shares of common stock

   87,186,835    100.00
  

 

 

   

 

 

 

 

 

(1)

Includes ADRs.

(2)

Includes shares held by subsidiaries and others.

(3)

The number of shares owned by the shareholder is based on the status report of large-scale shareholders filed with the Korea Exchange on April 16, 2019.

 

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As of December 31, 2019, there were 8,706,978 shares of common stock outstanding in the form of ADRs, representing 9.99% of the total issued shares of common stock.

Item 7.B.  Related Party Transactions

We have issued guarantees in favor of affiliated and related companies, and 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, 2017, 2018 and 2019, we had no loans outstanding to our executive officers and Directors.

Item 7.C.  Interests of Experts and Counsel

Not applicable

Item 8.  Financial Information

Item 8.A.  Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through F-143.

Legal Proceedings

As a steel producer with global sales and operations, we are involved in trade remedy proceedings in markets worldwide, including in the United States. We proactively participate in and plan for such proceedings to minimize any adverse effects and associated risks. While there has been an increase in the number of trade cases in recent years, and an increased focus on trade issues by government officials, all such cases have been product andmarket-specific, and thus have been limited in scope relative to our global sales and operations. We continue to carefully monitor developments with respect to trade remedy policy in all markets in which we participate and, where necessary, vigorously defend our rights through litigation before tribunals such as the U.S. Court of International Trade. Our products that are subject toanti-dumping, safeguard 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, safeguard 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 2013, the Korea Fair Trade Commission imposed a total fine of Won 108.6 billion on us and POSCO Coated & Color Steel Co., Ltd. (“POSCO Coated & Color Steel”), our consolidated subsidiary, as well as two corrective orders on us for alleged antitrust violations in Korea relating to galvanized steel sheets and color sheets. Subsequent to paying such fines, we and POSCO Coated & Color Steel each filed for judicial review of such fines in the Seoul High Court in February 2013. In July 2015, the Seoul High Court ruled in our favor for the Won 89.3 billion fine imposed on us, which was subsequently appealed by the Korea Fair Trade Commission to the Supreme Court of Korea. In November 2016, the Supreme Court of Korea vacated the Seoul High Court’s ruling and remanded the proceeding in November 2016. In February 2019, the Seoul High Court revoked the fine and one of the two corrective orders initially imposed on us, which was subsequently appealed by both us and the Korea Fair Trade Commission. In July 2019, the Supreme Court of Korea dismissed the appeal, and the Korea Fair Trade Commission is recalculating the fine to be imposed on us. We intend to continue to vigorously defend against such administrative action if necessary. In January 2016, the Seoul High Court ruled against POSCO Coated & Color Steel with respect to the fine of Won 19.3 billion imposed against it. POSCO Coated & Color Steel appealed with respect to Won 3.0 billion of such fine, which it lost in November 2016.

 

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In May 2002, Industrial Development Bank of India brought a suit against Daewoo International Corporation (currently, POSCO International), Daewoo Motors India Ltd., Daewoo Corporation and Daewoo Construction & Engineering Co., Ltd. in the India Delhi Mumbai Court, regarding its loans to Daewoo Motors India Ltd. guaranteed by Daewoo Co., Ltd. (predecessor of POSCO International). The total claim amount is 4.46 billion Indian Rupees, and POSCO International recorded provision of Won 22 billion relating to its portion of the guarantee alleged by Industrial Development Bank of India. Daewoo International Corporation challenged the jurisdiction of the court in 2003. The outcome of such lawsuits remains uncertain and POSCO International’s provision is classified as anon-current liability as of December 31, 2019.

In March 2019, affiliates of Gale Investments Company, LLC, a former joint venture partner of POSCO E&C in the urban planning and development project in Songdo International City in Incheon (the “Songdo Project”), filed a claim in the United States District Court for the Southern District of New York and filed a request for arbitration pursuant to the rules of the International Court of Arbitration of the International Chamber of Commerce against POSCO E&C, claiming POSCO E&C wrongfully seized and sold certain properties of the claimants. In December 2013, POSCO E&C and one of the claimants entered into a series of loan facility agreements with several lenders to finance the Songdo Project, with their respective stakes in the joint venture pledged as collateral. The loan facility agreements entitled POSCO E&C to certain subrogation rights related to guaranteeing the obligations of the claimant to repay the principal amounts of the loans. In 2017, upon default of certain series of the loans, POSCO E&C exercised such subrogation rights, claimed the pledged assets of the claimant and sold such assets. The claimants are seeking damages of approximately Won 2,400 billion allegedly resulting from POSCO E&C’s purported wrongful seizure and sale of such properties as well as alleged overcharges made by POSCO E&C while serving as the construction contractor for the Songdo Project. POSCO E&C believes that its actions were legally permissible and plans to vigorously defend against the claims made by the claimants.

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.

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 quarterly dividends under our articles of incorporation. If we decide to pay quarterly dividends, our articles of incorporation authorize us to pay them in cash to the shareholders of record as of the end of March, June and September of the relevant fiscal year. We may pay cash dividends out of retained earnings that have not been appropriated to statutory reserves.

 

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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 (including quarterly dividends starting in the second half of 2016), declared on the outstanding common stock to applicable shareholders of record of the years indicated. A total of 87,186,835 shares of common stock were issued as of December 31, 2019. Of these shares and as of such date, 80,115,641 shares were outstanding and 7,071,194 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) 

2015

  6,000  2,000   8,000 

2016

  5,750  2,250   8,000 

2017

  3,500  4,500   8,000 

2018

  5,000  5,000   10,000 

2019

  4,000  6,000   10,000 

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

Notes

Not applicable

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 KRX KOSPI Market since June 1988 under the identifying code 005490.

ADSs

Our common stock is also listed on the New York Stock Exchange in the form of ADSs. The ADSs have been issued by Citibank, N.A. as ADR depositary and are listed on the New York Stock Exchange under the symbol “PKX.” One ADS representsone-fourth of one share of common stock. As of December 31, 2019, 34,827,912 ADSs representing 8,706,978 common shares were outstanding, representing 9.99% of total issued shares of common stock.

Item 9.B.Plan of Distribution

Not applicable

Item 9.C.Markets

See “Item 9.A. Offering and Listing Details.”

 

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Item 9.D.Selling Shareholders

Not applicable

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 ofnon-voting stock, par value Won 5,000 per share(“Non-Voting Preferred Shares”). OurNon-Voting Preferred Shares have a preferential right to dividend payments. Common Shares andNon-Voting Preferred Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issueNon-Voting Preferred Shares up to the limit prescribed by applicable law, the aggregate of which currently isone-quarter of our total issued and outstanding capital stock. As of December 31, 2019, 87,186,835 Common Shares were issued, of which 7,071,194 shares were held by us in treasury. We have never issued anyNon-Voting Preferred Shares. All of the issued and outstanding Common Shares arefully-paid andnon-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.

Item 10.B.  Memorandum and Articles of Association

Under Article 2 of our articles of incorporation, the primary purpose of POSCO is to engage in, among others: manufacturing, marketing, promoting, selling and distributing iron, steel and rolled products; harbor loading and unloading, transportation and warehousing businesses; power generation and distribution as well as resources development; technology license sales and engineering businesses; and any other activities that are related, directly or indirectly, to the attainment and continuation of the foregoing.

The following 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.

Board of Directors

Under our articles of incorporation and the Commercial Code, any director who has a special interest in a proposal or a resolution is prohibited from voting on such proposal or resolution at the meeting of the board of directors. Any resolution of the board of directors must be approved by an affirmative majority vote of the directors present at the meeting of the board of directors. The compensation for directors, including severance benefits, is paid within the limitation approved by the annual general meeting of shareholders.

 

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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 ofNon-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 theNon-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 theNon-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. In addition, we may declare quarterly dividends pursuant to a board resolution each fiscal year to the eligible shareholders recorded as of the end of March, June and September of the relevant fiscal year. We may distribute the annual dividend in cash, Shares or other form of property. However, we may distribute the quarterly dividend only in cash. A dividend of Shares must be distributed at par value and may not exceedone-half of the annual and quarterly dividends declared each fiscal year in the aggregate. We have no obligation to pay any dividend unclaimed for five years from the payment date.

Under the Commercial Code, we may pay dividends 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 earned surplus reserve accumulated up to the end of the relevant dividend period, (iii) the legal reserve to be set aside for dividends, and (iv) unrealized profits determined in the Presidential Decree to the Commercial Code. We may not pay dividends unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of dividends or unless we have accumulated earned surplus reserve of not less thanone-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 times and, unless otherwise provided in the Commercial Code or our articles of incorporation, 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.

 

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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 and other applicable regulations;

 

  

issued to members of our employee stock ownership association pursuant to the FSCMA and other applicable regulations;

 

  

represented by depositary receipts pursuant to the FSCMA and other applicable regulations;

 

  

issued in a general public offering pursuant to a board resolution in accordance with the FSCMA and other applicable regulations, the amount of which is no more than 10% of the outstanding Shares;

 

  

issued to our creditors pursuant to adebt-equity swap;

 

  

issued to domestic or foreign entities pursuant to a joint venture agreement, strategic coalition or technology license or transfer 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 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, 2019, our employees owned, through our employee stock ownership association, approximately 1.71% 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, court approval or other applicable laws and regulations, 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 ofNon-Voting Preferred Shares may request a general meeting of shareholders only after theNon-Voting Preferred Shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

We must give shareholders written notice or electronic document setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders.

 

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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 useThe Seoul Shinmunpublished in Seoul,The Maeil Shinmunpublished in Taegu andThe Kwangju Ilbopublished 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 ofNon-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 10% (or more) 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 leastone-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 leasttwo-thirds of the voting Shares present or represented at a meeting, where the affirmative votes also represent at leastone-third of our total voting Shares then issued and outstanding:

 

  

amending our articles of incorporation;

 

  

removing a director;

 

  

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 ofNon-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 theNon-Voting Preferred Shares, approval of the holders ofNon-Voting Preferred Shares is required. We may obtain the approval by a resolution of holders of at leasttwo-thirds of theNon-Voting Preferred Shares present or represented at a class meeting of the holders ofNon-Voting Preferred Shares, where the affirmative votes also represent at leastone-third of our total issued and outstandingNon-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.

 

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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 ofNon-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 the20-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 thetwo-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

We maintain the register of our shareholders electronically through Kookmin Bank, our transfer agent. Kookmin Bank performs electronic registration of our Shares, manages the electronic register of our shareholders and oversees other matters related to our Shares.

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 may continue while the register of shareholders is closed. However, pursuant to the Act on Electronic Registration of Stocks, Bonds, etc., which became effective on September 16, 2019, the closure of the register of shareholders is not required in order to determine the shareholders entitled to certain shareholder rights. Instead, we may set the record date by a board resolution and determine the shareholders of record as of such record date without closing the register of shareholders.

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) ahalf-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

 

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reports are or will be available for public inspection at websites of the Financial Services Commission and the Korea Exchange.

Transfer of Shares

Under the Commercial Code, the transfer of Shares is effected by electronic registration of such transfer. 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. Anon-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, anon-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 bynon-residents ornon-Koreans. See “Item 10. Additional Information — Item 10.D. Exchange Controls.”

Our transfer agent is Kookmin Bank, located at 26,Gukjegeumyung-ro8-gil,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.

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 ofNon-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 bynon-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

 

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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 Economy 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 Economy and Finance may (i) 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), (ii) impose an obligation to deposit,safe-keep or sell precious metal or any other means of payment to The Bank of Korea, a foreign exchange stabilization fund or certain other governmental agencies or financial companies or (iii) require Korean creditors to collect debts owned bynon-Korean debtors and deposit them in their bank accounts in Korea; 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 its currency policies, exchange rate policies or other macroeconomic policies, the Ministry of Economy 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 or 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 Economy 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.

Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of a listed company’s shares with voting rights, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares andequity-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 of such listed company 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

 

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deadline of such reporting requirement is extended (1) for certain professional investors, as specified by the Presidential Decrees under the FSCMA, (i) to the tenth day of the month immediately following the month of such change in their shareholding if the shares are held with the intention of actively exercising shareholder rights as provided by the applicable laws, but without the intention of exercising management control or (ii) to the tenth day of the month immediately following the quarter of such change in their shareholding if the shares are held for portfolio investment purposes; and (2) for persons other than such professional investors, (i) to the tenth business day of the date of such change in their shareholding if the shares are held with the intention of exercising the statutory rights of shareholders as provided by the applicable laws, but without the intention of exercising management control or (ii) to the tenth day of the month immediately following the month of such change in their shareholding if the shares are held for portfolio investment purposes. 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 Equity Securities for which the reporting requirements were violated.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of a listed company’s voting stock accounts for 10% or more of the total issued and outstanding voting stock (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 his or her ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange within five business days. However, the reporting deadline of such reporting requirement is extended (i) to the tenth day of the month immediately following the month of such change in their shareholding for certain professional investors, as specified by the Presidential Decree under the FSCMA, who hold shares with the intention of actively exercising shareholder rights as provided by the applicable laws, but without the intention of exercising management control or (ii) to the tenth day of the month immediately following the quarter of such change in their shareholding if the shares are held for portfolio investment purposes. 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 bede-listed from the foreign stock exchange or actually lists on, orde-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, exchange right under exchangeable 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 shares of a public service corporation for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded with certain exceptions;

 

  

acquisition of shares by direct investment as defined in the Foreign Investment Promotion Law or disposal of such shares;

 

  

disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;

 

  

acquisition or disposal of shares in connection with a tender offer;

 

  

acquisition of underlying 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.

Forover-the-counter transactions between foreign investors outside the KRX KOSPI Market or the KRX KOSDAQ Market involving shares of a public service corporation for which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary.Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve an investment dealer licensed in Korea. Foreign investors are prohibited from engaging in margin trading by borrowing shares from investment brokers or investment dealers with respect to shares that are subject to foreign ownership limitation.

The Investment Rules require a foreign investor who wishes to invest in or dispose of 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 or disposal; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the

 

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intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in anover-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 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 shares of certain public service corporations 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 (including domestic branches of foreign financial investment companies) 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 owned by a foreign investor 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 (including domestic branches of foreign financial investment companies), the Korea Securities Depository and internationally recognized custodians are eligible to act as a custodian of shares for anon-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 service corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public service corporations may set a ceiling on the acquisition of shares by a single foreign investor according to its articles of incorporation. Furthermore, an investment by a foreign investor of not less than 10% of the outstanding shares with voting rights and in the amount of not less than Won 10 million of a Korean company is defined as a foreign direct investment under the Foreign Investment Promotion Law, which is, in general, subject to 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

 

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event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. Changes in ownership of a Korean company by a foreign direct investor, as well as changes in certain aspects of the foreign direct investment (including changes in the foreign direct investor’s name, address or business), are also subject to reporting requirements.

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 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 anon-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 may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as counterparty to or on behalf of 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 Form20-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 arenon-resident individuals ornon-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.

 

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Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to aNon-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 suchNon-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.

The tax is withheld by the payer of the dividend. While it is the payer which is required to withhold the tax, Korean law generally entitles the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld, upon providing evidence that it was entitled to have tax withheld at a lower rate, if certain conditions are met.

Tax on Capital Gains

As a general rule, capital gains earned byNon-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 theNon-resident Holder’s country of tax residence or Korean tax law.

However, aNon-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 theNon-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 suchNon-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 a tax resident of 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 the rate varies from 10% to 50% depending on the value of the property.

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 and consequently, the Korea inheritance and gift taxes will be imposed on transfers of the securities by inheritance or gift.

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 0.45% 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

 

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transaction tax is imposed generally at the rate of (i) 0.25% 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, 0.45% 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 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 aNon-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, including, 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 anon-resident from the transfer of securities issued by a Korean company is often eliminated.

EachNon-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.

For anon-resident of Korea to obtain the benefits oftreaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires suchnon-resident (or its agents) to submit to the payer of such Korean source income an application fortreaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is anon-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. 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.

If Korean source income is paid to anon-resident through an overseas investment vehicle, such investment vehicle must obtain an application for tax exemption or reduced tax rates from eachnon-resident, who is the beneficial owner of such investment vehicle and submit to the payer of such Korean source incomes an overseas investment vehicle report, together with the applications for tax exemptions or reduced tax rates prepared by thenon-resident beneficial owner. An overseas investment vehicle means an organization established outside of Korea that manages funds collected

 

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through investment solicitation by way of acquiring, disposing, or otherwise investing in investment targets and then distributes the outcome of such management to investors. An application for tax exemption or reduced tax rates submitted by thenon-resident remains effective for three years from submission, and if any material changes occur with respect to information provided in the application, an application reflecting such change must be newly submitted.

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 amark-to-market method of accounting for your securities holdings;

 

  

a bank;

 

  

a life insurance company;

 

  

atax-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 10% or more of the combined voting power or value of all of our classes of stock; or

 

  

an entity treated as a partnership for U.S. federal income tax purposes that holds shares of common stock or ADSs, or an investor 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

 

  

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the shares of common stock or ADS.

 

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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 forshort-term and hedged positions, the Dollar amount of dividends received by an individual U.S. holder with respect to the ADSs and common stock will be subject to taxation at a preferential rate applicable tolong-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 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 is 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 2018 or 2019 taxable year. In addition, based on 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 2020 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 apro-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 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 belong-term capital gain or loss to the extent that the shares of common stock or ADSs sold or disposed of 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.

 

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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 a16-day period that includes theex-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 certainshort-term or 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. federal income tax unless you can use the credit against U.S. federal income tax due on otherforeign-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.

Specified Foreign Financial Assets

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 on the last day of the taxable year or US$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at anon-U.S. financial institution, as well as securities issued by anon-U.S. issuer (which would include the common stock or ADSs) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Prospective investors should consult their own tax advisors concerning the application of these rules to their investment in the common stock or ADSs, including the application of the rules to their particular circumstances.

U.S. Information Reporting and Backup Withholding Rules

Payments in respect of shares of common stock or ADSs that are made within the United States or through certainU.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 and demonstrates this when required 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 itsnon-U.S. status in connection with payments received within the United States or through aU.S.-related financial intermediary.

 

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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 Citibank, N.A.

Item 10.G.Statements by Experts

Not applicable

Item 10.H.Documents on Display

We file reports, including annual reports on Form20-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. You may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s website 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 loss on valuation of derivatives of Won 162 billion and net loss on derivatives transactions of Won 26 billion in 2017, net gain on valuation of derivatives of Won 56 billion and net gain on derivatives transactions of Won 39 billion in 2018 and net gain on valuation of derivatives of Won 116 billion and net loss on derivatives transactions of Won 32 billion in 2019.

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

 

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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, POSCO 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 POSCO 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 POSCO International and POSCO E&C, also periodically enter into derivative contracts, primarily foreign currency swaps and forward exchange contracts, to further hedge some of 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, 
   2017  2018  2019 
   Increase  Decrease  Increase  Decrease  Increase  Decrease 
   (In billions of Won) 

US Dollars

      (173 173      (204     204      (174     174 

Japanese Yen

   (54  54   (29  29   (17  17 

Euro

   10   (10  15   (15  41   (41

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, 
           2017                   2018                   2019         
   (In billions of Won) 

Increase or decrease in annual profit and net equity

  100   85   79 

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 ourshort-term andlong-term liabilities as of December 31, 2019 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency.

 

  Maturities 
                    December 31,
2019
  December 31,
2018
 
  2020  2021  2022  2023  2024  Thereafter  Total  Fair
Value
  Total  Fair
Value
 
  (In billions of Won except rates) 
Local currency:                              

Fixed rate

  1,105   882   1,008   150   449   2,968   6,562   6,475   5,707   5,620 

Average weighted rate(1)

  2.41  3.35  2.18  2.79  2.01  0.33  1.55   2.92 

Variable rate

  252   78   30   3   0   7   370   369   512   511 

Average weighted rate(1)

  2.71  3.86  2.84  0.49  0.00  1.60  2.93   2.80 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  1,357   960   1,038   153   449   2,975   6,932   6,844   6,219   6,131 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Foreign currency, principally Dollars and Yen:

          

Fixed rate

  2,666   1,230   658   612   573   331   6,070   5,990   6,026   5,944 

Average weighted rate(1)

  3.71  3.89  2.16  4.06  2.78  0.55  3.41   3.33 

Variable rate

  3,832   900   317   215   38   2,139   7,441   7,439   7,964   7,966 

Average weighted rate(1)

  2.90  3.32  2.67  2.78  5.15  6.67  4.03   4.80 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  6,498   2,130   975   827   611   2,470   13,511   13,429   13,909   13,910 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  7,855   3,090   2,013   980   1,060   5,445   20,443   20,273   20,209   20,041 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(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

  Up to $5.00 per 100 ADSs held

Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs

  Up to $5.00 per 100 ADSs held

Distribution of securities other than ADSs or rights to purchase additional ADSs

  Up to $5.00 per 100 ADSs held

General depositary services

  Up to $5.00 per 100 ADSs held

Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary 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 (including applicable interest and penalties) and other governmental charges;

 

  

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 2019, we received approximately $1.5 million from the depositary for reimbursement of various costs, including preparation of SEC filing and submission, listing fees, proxy process expenses (printing, postage and distribution), legal fees and contributions for our investor relations activities.

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 aninternet-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 Rules13a-15(e) and15d-15(e) under the Exchange Act, as of December 31, 2019. 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, 2019 based on criteria in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

c.    Report of the Independent Registered Public Accounting Firm

The report of our independent registered public accounting firm, KPMG Samjong Accounting Corp. (“KPMG”), on the effectiveness of our internal control over financial reporting as of December 31, 2019 is included in Item 18 of this Form20-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. Our adoption of Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission did not have, and is not reasonably likely to have, any material effect on our internal control over financial reporting.

Item 16.[Reserved]

Item 16.A.Audit Committee Financial Expert

The board of directors has determined that Chung,Moon-Ki is an audit committee financial expert and is independent within the meaning of applicable SEC rules.

Item 16.B.Code of Ethics

We have adopted a code of business conduct and ethics, as defined in Item 16B. of Form20-F under the Securities Exchange Act of 1934, as amended. Our code of business conduct and ethics, called Code of Ethics, applies to our chief executive officer and chief financial officer, as well as to our directors, other officers and employees. Our Code of Ethics is available on our website athttp://www.posco.com. If we amend the provisions of our Code of Ethics 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 website at the same address.

 

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Item 16.C.Principal Accountant Fees and Services

Audit andNon-Audit Fees

The following table sets forth the fees billed to us by our independent registered public accounting firm, KPMG, in 2018 and 2019:

 

   For the Year Ended
December 31,
 
   2018   2019 
   (In millions of Won) 

Audit fees

  6,019   7,448 

Audit-related fees

   167    422 

Tax fees

   841    1,002 

Other fees

   989    971 
  

 

 

   

 

 

 

Total fees

      8,016       9,843 
  

 

 

   

 

 

 

Audit fees in 2018 and 2019 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 2018 and 2019 as set forth in the above table are fees billed by KPMG for issuing comfort letters in connection with our securities offering.

Tax fees in 2018 and 2019 as set forth in the above table are fees billed by KPMG for our tax compliance and tax planning, as well as compliance related to transfer pricing.

Other fees in 2018 and 2019 as set forth in the above table are fees billed by KPMG in connection with statutory audits unrelated to the audit of our annual financial statements.

Audit CommitteePre-Approval Policies and Procedures

Under our Audit Committee’spre-approval policies and procedures, all audit andnon-audit services to be provided to us by an independent registered public accounting firm must bepre-approved by our Audit Committee. Our Audit Committee does notpre-approve any audit andnon-audit services that are prohibited from being provided to us by an independent registered public accounting firm under the rules of SEC and applicable law.

Item 16.D.Exemptions from the Listing Standards for Audit Committees

Not applicable

 

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Item 16.E.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, 2019:

 

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 16.F.Change in Registrants Certifying Accountant

Not applicable

Item 16.G.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 seven out of 12 directors are Outside Directors. Under our articles of incorporation, we may have up to five Inside Directors and eight 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 and Management 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 theDodd-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 Rule10A-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 Rule10A-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. Matters related to the Employee Stock Ownership Program are not subject to shareholders’ approval under Korean law.

Shareholder Approval of Equity Offerings

  
Listed companies must allow its shareholders to exercise their voting rights with respect to equity offerings that do not qualify as public offerings for cash, and offerings of equity of related parties.  Our board of directors is generally authorized to issue new shares, subject to certain limitations as provided by our articles of incorporation.

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 ou