20-F 1 h02217e20vf.htm POSCO POSCO
Table of Contents

As filed with the Securities and Exchange Commission on June 24, 2008
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
 
     
(Mark One)    
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o
  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, 892 Daechi-4-dong, Gangnam-gu
Seoul, Korea 135-777
(Address of principal executive offices)
 
Lee, Hyeong-Soo
POSCO Center, 892 Daechi-4-dong, Gangnam-gu,
Seoul, Korea 135-777
Telephone: +82-2-3457-1189; E-mail: sunrise77@posco.com; Facsimile: +82-2-3457-1982
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
American Depositary Shares, each representing
one-fourth of one share of common stock
  New York Stock Exchange, Inc.
Common Stock, par value Won 5,000 per share*   New York Stock Exchange, Inc.*
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
 
As of December 31, 2007, there were 75,540,201 shares of common stock, par value Won 5,000 per share, outstanding
(not including 11,646,634 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 þ  No o
 
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 o  No þ
 
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 þ  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  þ     Accelerated filer  o     Non-accelerated filer  o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing. U.S. GAAP o  IFRS o  Other þ
 
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 o  Item 18 þ
 
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 o  No þ
 
* Not for trading, but only in connection with the registration of the American Depositary Shares.
 


Table of Contents

 
TABLE OF CONTENTS
 
             
    1  
    2  
  IDENTITY OF DIRECTORS, SENIOR MANAGERS AND ADVISORS     2  
    Item 1.A. Directors and Senior Management     2  
    Item 1.B. Advisers     2  
    Item 1.C. Auditors     2  
  OFFER STATISTICS AND EXPECTED TIMETABLE     2  
    Item 2.A. Offer Statistics     2  
    Item 2.B. Method and Expected Timetable     2  
  KEY INFORMATION     2  
    Item 3.A. Selected Financial Data     2  
    Item 3.B. Capitalization and Indebtedness     5  
    Item 3.C. Reasons for Offer and Use of Proceeds     5  
    Item 3.D. Risk Factors     5  
  INFORMATION ON THE COMPANY     12  
    Item 4.A. History and Development of the Company     12  
    Item 4.B. Business Overview     12  
    Item 4.C. Organizational Structure     26  
    Item 4.D. Property, Plants and Equipment     27  
  UNRESOLVED STAFF COMMENTS     28  
  OPERATING AND FINANCIAL REVIEW AND PROSPECTS     29  
    Item 5.A. Operating Results     29  
    Item 5.B. Liquidity and Capital Resources     38  
    Item 5.C. Research and Development, Patents and Licenses, Etc.     43  
    Item 5.D. Trend Information     43  
    Item 5.E. Off-balance Sheet Arrangements     44  
    Item 5.F. Tabular Disclosure of Contractual Obligations     44  
    Item 5.G. Safe Harbor     44  
  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES     44  
    Item 6.A. Directors and Senior Management     44  
    Item 6.B. Compensation     47  
    Item 6.C. Board Practices     47  
    Item 6.D. Employees     50  
    Item 6.E. Share Ownership     51  
  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     53  
    Item 7.A. Major Shareholders     53  
    Item 7.B. Related Party Transactions     53  
    Item 7.C. Interests of Experts and Counsel     53  
  FINANCIAL INFORMATION     53  
    Item 8.A. Consolidated Statements and Other Financial Information     53  
    Item 8.B. Significant Changes     54  
  THE OFFER AND LISTING     54  
    Item 9.A. Offer and Listing Details     54  
    Item 9.B. Plan of Distribution     57  


i


Table of Contents

             
    Item 9.C. Markets     57  
    Item 9.D. Selling Shareholders     62  
    Item 9.E. Dilution     62  
    Item 9.F. Expenses of the Issuer     62  
  ADDITIONAL INFORMATION     62  
    Item 10.A. Share Capital     62  
    Item 10.B. Memorandum and Articles of Association     62  
    Item 10.C. Material Contracts     66  
    Item 10.D. Exchange Controls     67  
    Item 10.E. Taxation     70  
    Item 10.F. Dividends and Paying Agents     74  
    Item 10.G. Statements by Experts     75  
    Item 10.H. Documents on Display     75  
    Item 10.I. Subsidiary Information     75  
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     75  
  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     76  
    Item 12.A. Debt Securities     77  
    Item 12.B. Warrants and Rights     77  
    Item 12.C. Other Securities     77  
    Item 12.D. American Depositary Shares     77  
    77  
  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES     77  
  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS     77  
  CONTROLS AND PROCEDURES     77  
  [RESERVED]     78  
  AUDIT COMMITTEE FINANCIAL EXPERT     78  
  CODE OF ETHICS     78  
  PRINCIPAL ACCOUNTANT FEES AND SERVICES     79  
  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES     79  
  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     80  
    81  
  FINANCIAL STATEMENTS     81  
  FINANCIAL STATEMENTS     81  
  EXHIBITS     82  
 EX-7.1 COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES
 EX-8.1 LIST OF CONSOLIDATED SUBSIDIARIES
 EX-12.1 CertifEX-8.1 CERTIFICATION PURSUANT TO SECTION 302
 EX-12.2 CERTIFICATION PURSUANT TO SECTION 302
 EX-13.1 CERTIFICATION PURSUANT TO SECTION 906
 EX-15.1 CONSENT OF SAMIL PRICEWATERCOOPERS


ii


Table of Contents

 
GLOSSARY
 
     
“ADR”
  American Depositary Receipt evidencing ADSs.
“ADR depositary”
  The Bank of New York Mellon.
“ADS”
  American Depositary Share representing one-fourth of one share of Common Stock.
“Australian Dollar” or “A$”
  The currency of the Commonwealth of Australia.
“common stock”
  Common stock, par value Won 5,000 per share, of POSCO.
“deposit agreement”
  Deposit Agreement, dated as of September 26, 1994, among POSCO, the ADR Depositary and all holders and beneficial owners from time to time of ADRs issued thereunder, as amended by amendment no. 1 thereto dated June 25, 1997.
“Dollars,” “$” or “US$”
  The currency of the United States of America.
“Government”
  The government of the Republic of Korea.
“Yen” or “JPY”
  The currency of Japan.
“Korea”
  The Republic of Korea.
“Korean GAAP”
  Generally accepted accounting principles in the Republic of Korea.
“Gwangyang Works”
  Gwangyang Steel Works.
“We”
  POSCO and its consolidated subsidiaries.
“Pohang Works”
  Pohang Steel Works.
“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 “W
  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.


1


Table of Contents

 
PART I
 
Item 1.   Identity of Directors, Senior Managers and Advisors
 
Item 1.A.   Directors and Senior Management
 
Not applicable
 
Item 1.B.   Advisers
 
Not applicable
 
Item 1.C.   Auditors
 
Not applicable
 
Item 2.   Offer Statistics and Expected Timetable
 
Not applicable
 
Item 2.A.   Offer Statistics
 
Not applicable
 
Item 2.B.   Method and Expected Timetable
 
Not applicable
 
Item 3.   Key Information
 
Item 3.A.   Selected Financial Data
 
The selected financial data presented below should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data as of December 31, 2006 and 2007 and for each of the three years in the period ended December 31, 2007 is derived from our Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with Korean GAAP, which differ in significant respects from U.S. GAAP.


2


Table of Contents

INCOME STATEMENT DATA
 
                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007     2007(11)  
    (In billions of won and millions of dollars, except per share data)  
 
Korean GAAP:
                                               
Sales(1)
  W 17,789     W 23,973     W 26,302     W 25,842     W 31,608     US$ 33,776  
Cost of goods sold(2)
    13,451       17,361       18,767       19,897       24,903       26,611  
Selling and administrative expenses
    1,075       1,293       1,451       1,556       1,785       1,908  
Operating income
    3,263       5,319       6,083       4,389       4,920       5,257  
Interest expense
    250       192       149       183       240       256  
Foreign currency transaction and translation gains (losses), net
    (105 )     179       159       99       (19 )     (20 )
Donations(3)
    103       170       153       155       197       211  
Income tax expenses
    730       1,502       1,474       922       1,274       1,362  
Net income
    2,017       3,841       4,007       3,353       3,678       3,930  
Net income attributable to controlling interest
    1,996       3,814       4,022       3,314       3,559       3,803  
Net income attributable to minority interest
    21       27       (15 )     39       119       127  
Basic and diluted earnings per share of common stock(4)
    24,496       47,185       50,790       42,115       46,854       50  
Dividends per share of common stock
    6,000       8,000       8,000       8,000       10,000       10.69  
U.S. GAAP (5):
                                               
Operating income
  W 3,235     W 5,299     W 5,671     W 4,259     W 4,967     US$ 5,308  
Net income
    1,997       3,460       4,102       3,408       3,565       3,810  
Basic and diluted earnings per share of common stock
    24,508       42,806       51,789       43,304       46,938       50.16  
 
BALANCE SHEET DATA
 
                                                 
    As of December 31,  
    2003     2004     2005     2006     2007     2007(11)  
    (In billions of won and millions of dollars, except per share data)  
 
Korean GAAP:
                                               
Working capital(6)
  W 3,450     W 5,493     W 5,759     W 7,155     W 7,769     US$ 8,302  
Property, plant and
                                               
equipment, net(7)
    9,846       10,440       12,272       14,643       15,582       16,651  
Total assets(7)
    20,769       24,129       27,507       31,149       36,275       38,763  
Long-term debt(8)(9)(10)
    2,952       2,051       1,131       2,726       3,306       3,533  
Total shareholders’ Equity(7)
    13,250       16,386       19,874       22,402       25,118       26,841  
U.S. GAAP (5):
                                               
Property, plant and equipment, net
  W 9,880     W 10,541     W 12,420     W 14,860     W 15,836     US$ 16,922  
Total assets
    20,838       24,279       27,525       31,208       36,349       38,843  
Total shareholders’ Equity
    13,018       16,208       19,498       21,972       24,561       26,246  
 
 
(1) Includes sales by our consolidated sales subsidiaries of steel products purchased by such subsidiaries from third parties, including trading companies to which we sell steel products.
 
(2) Includes purchases of steel products by our consolidated subsidiaries from third parties, including trading companies to which we sell steel products.


3


Table of Contents

 
(3) Includes donations to educational foundations supporting basic science and technology research. See “Item 5. Operating and Financial Review and Prospects — Item 5.C. Research and Development, Patents and Licenses, Etc.” and Note 24 of Notes to Consolidated Financial Statements.
 
(4) See Note 26 of Notes to Consolidated Financial Statements for method of calculation.
 
(5) A description of the material differences between Korean GAAP and U.S. GAAP as well as the reconciliation to U.S. GAAP are discussed in detail in Note 35 of Notes to Consolidated Financial Statements.
 
(6) “Working capital” means current assets minus current liabilities.
 
(7) Reflects revaluations of assets permitted under Korean law.
 
(8) Net of current portion and discount on debentures issued.
 
(9) For information regarding swap transactions entered into by us, see “Item 5. Operating and Financial Review and Prospects — Item 5.A. Operating Results — Exchange Rate Fluctuations” and Note 22 of Notes to Consolidated Financial Statements.
 
(10) Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the basic rates in effect at the balance sheet date and resulting translation gains and losses are recognized in current operations. See Notes 2 and 28 of Notes to Consolidated Financial Statements.
 
(11) Translated into U.S. Dollars at the rate of Won 935.80 to US$1.00, the noon buying rate of the Federal Reserve Bank of New York for Won in effect on December 31, 2007. This translation should not be construed as a representation that the Korean Won amounts represent, have been, or could be converted to U.S. Dollars at that rate or any other rate.
 
EXCHANGE RATE INFORMATION
 
The following table sets out information concerning the noon buying rate for the periods and dates indicated.
 
                                 
    At End
    Average
             
Period
  of Period     Rate(1)     High     Low  
    (Per US$1.00)  
 
2003
    1,192.0       1,183.0       1,262.0       1,146.0  
2004
    1,035.1       1,139.3       1,195.1       1,035.1  
2005
    1,010.0       1,023.2       1,059.8       997.0  
2006
    930.0       954.3       1002.9       913.7  
2007
    935.8       929.0       950.2       903.2  
2008 (through June 23)
    1,036.8       990.9       1,047.0       935.2  
January
    943.4       942.1       953.2       935.2  
February
    942.8       943.9       948.2       937.2  
March
    988.6       981.7       1,021.5       947.1  
April
    1,005.0       986.9       1,005.0       973.5  
May
    1,028.5       1,034.1       1,047.0       1,004.0  
June (through June 23)
    1,036.8       1,029.0       1,044.0       1,016.8  
 
 
Source: Federal Reserve Bank of New York.
 
(1) The average rate for each full year is calculated as the average of the noon buying rates on the last business day of each month during the relevant year. The average rate for a full month is calculated as the average of the noon buying rates on each business day during the relevant month (or portion thereof).
 
We have translated the Won amounts into Dollars in this prospectus solely for your convenience. We make no representation that the Won or Dollar amounts contained in this prospectus could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.


4


Table of Contents

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.
 
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 most of our operations and assets are located in Korea. In addition, Korea is our most important market, accounting for 66.2% of our total sales volume of steel products in 2007. Domestic demand for our products is affected by the condition of major steel consuming industries, such as construction, shipbuilding, automobile, electrical appliances and downstream steel processors, and the Korean economy in general. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea.
 
The economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control. Recent developments in the Middle East including the war in Iraq and its aftermath, higher oil prices, the general weakness of the global economy due in part to problems in the U.S. mortgage and housing markets and the reduced availability of credit have increased the uncertainty of global economic prospects and may continue to adversely affect the Korean economy. Any future deterioration of the Korean and 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:
 
  •  a slowdown in consumer spending and the overall economy;
 
  •  adverse changes or volatility in foreign currency reserve levels, commodity prices, exchange rates, interest rates or stock markets;
 
  •  adverse developments in the economies of countries that are important export markets for Korea, such as the United States, Japan and China, or in emerging market economies in Asia or elsewhere;
 
  •  the continued emergence of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);
 
  •  the economic impact of any pending or future free trade agreements, including the Free Trade Agreement recently negotiated with the United States;
 
  •  social and labor unrest;
 
  •  substantial decreases in the market prices of Korean real estate;
 
  •  a decrease in tax revenues and a substantial increase in the Government’s expenditures for unemployment compensation and other social programs that, together, would lead to an increased government budget deficit;
 
  •  financial problems or lack of progress in restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;
 
  •  loss of investor confidence arising from corporate accounting irregularities and corporate governance issues of certain Korean conglomerates;
 
  •  geo-political uncertainty and risk of further attacks by terrorist groups around the world;


5


Table of Contents

 
  •  the recurrence of severe acute respiratory syndrome or an outbreak of avian flu in Asia and other parts of the world;
 
  •  deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from trade disputes or disagreements in foreign policy;
 
  •  political uncertainty or increasing strife among or within political parties in Korea;
 
  •  hostilities involving oil producing countries in the Middle East and any material disruption in the supply of oil or increase in the price of oil; and
 
  •  an increase in the level of tension 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 33.8% of our total sales volume of steel products in 2007. Our export sales volume to customers in Asia, including China, Japan, Indonesia, Thailand and Malaysia, accounted for 68.5% of our total export sales volume for steel products in 2007, and we expect our sales to these countries, especially to China, to remain important in the future. Accordingly, adverse economic and financial developments in these countries may have an adverse effect on demand for our products. Economic weakness in Asia may also adversely affect our sales to the Korean companies that export to the region, especially companies in the construction, shipbuilding, automobile, electrical appliances and downstream steel processing industries. Weaker demand in these countries, combined with addition of new steel production capacity, particularly in China, may also reduce export prices in Dollar terms of our principal products. We attempt to maintain and expand our export sales to generate foreign currency receipts to cover our foreign currency purchases and debt service requirements. Consequently, any decrease in our export sales could also increase our foreign exchange risks.
 
Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the price of the ADSs.
 
Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:
 
  •  an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt, which accounted for approximately 45.2% of our total long-term debt (excluding discounts on debentures issued and including current portion) as of December 31, 2007;
 
  •  an increase in Won terms in the costs of raw materials and equipment that we purchase from overseas sources and a substantial portion of our freight costs, which are denominated primarily in Dollars; and
 
  •  foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.
 
Appreciation of the Won, on the other hand, (i) causes our export products to be less competitive by raising our prices in Dollar terms and (ii) reduces net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars. However, because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), appreciation of the Won generally has a positive impact on our results of operations.
 
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of the shares of our common stock on the Stock Market Division of the Korea Exchange (formerly the Korea Stock Exchange) 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.


6


Table of Contents

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. In 2007, POSCO imported approximately 45.5 million dry metric tons of iron ore and 24.4 million wet metric tons of coal. Iron ore is imported primarily from Australia, Brazil and India. Coal is imported primarily from Australia, China, 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 iron ore and nickel have increased substantially in recent years. The average price of iron ore per ton (including all associated costs such as insurance, freight costs and customs duties) increased from $45 in 2005 to $55 in 2006 and $64 in 2007 and increased further in the first half of 2008. The average price of nickel per ton (including insurance and freight costs) increased substantially in recent years from $15,230 in 2005 to $21,654 in 2006 and $40,619 in 2007 but decreased in the first half of 2008. In addition, the price of coal, which remained relatively stable in 2005, 2006 and 2007, has increased substantially in the first half of 2008. Further increases in prices of our key raw materials and our inability to pass along such increases to our customers could adversely affect our margins and profits. Increased prices may also cause potential customers to defer purchase of steel products, which would have an adverse effect on our business, financial condition and results of operations.
 
We expect global steel production capacity to continue to expand in the near future, and over-capacity in the global steel industry may return.
 
In recent years, driven in part by strong growth in steel consumption in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. World Steel Dynamics estimated the global crude steel production capacity to increase from 1,340 million tons in 2006 to 1,421 million tons in 2007 and expects the production capacity to continue to increase further in 2008, primarily as a result of additions of new capacity in China and India. Over-capacity in the global steel industry may return if increase in demand from developing countries that have experienced significant growth in the past several years does not meet this growth in production capacity. Over-capacity will affect our ability to expand export sales and to increase steel production in general, as well as reduce export prices in Dollar terms of our principal products.
 
Consolidation in the global steel industry may increase competition.
 
In recent years, there has been a trend toward industry consolidation among our competitors. For example, consolidation of Mittal and Arcelor in 2006 has created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal and new market entrants, especially from China and India, could result in significant price competition, declining margins and reductions in revenue. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.
 
Expansion of our production operations abroad is important to our long-term success, and our limited experience in the operation of our business outside Korea increases the risk that our international expansion efforts will not be successful.
 
We conduct international trading and construction operations abroad, and our business relies on a global trading network comprised of overseas subsidiaries, branches and representative offices. Although many of our subsidiaries and overseas branches are located in developed countries, we also operate in numerous countries with developing economies. In addition, we intend to continue to expand our production operations internationally by carefully seeking out promising investment opportunities, particularly in China, India and Vietnam, in part to prepare for the eventual maturation of the Korean steel market. We may enter into joint ventures with foreign steel producers that would enable us to rely on these businesses to conduct our operations, establish local networks and


7


Table of Contents

coordinate our sales and marketing efforts abroad. To the extent that we enter into these arrangements, our success will depend in part on the willingness of our partner companies to dedicate sufficient resources to their partnership with us.
 
In other situations, we may decide to establish manufacturing facilities by ourselves instead of relying on partners. The demand and market acceptance for our products produced abroad are subject to a high level of uncertainty and are substantially dependent upon the market condition of the global steel industry. We cannot assure you that our international expansion plan will be profitable or that we can recoup the costs related to such investments.
 
Expansion of our trading, construction and production operations abroad requires management attention and resources. In addition, we face additional risks associated with our expansion outside Korea, including:
 
  •  challenges caused by distance, language and cultural differences;
 
  •  higher costs associated with doing business internationally;
 
  •  legal and regulatory restrictions, including foreign exchange controls that might prevent us from repatriating cash earned in countries outside Korea;
 
  •  longer payment cycles in some countries;
 
  •  credit risk and higher levels of payment fraud;
 
  •  currency exchange risks;
 
  •  potentially adverse tax consequences;
 
  •  political and economic instability; and
 
  •  seasonal reductions in business activity during the summer months in some countries.
 
Several of our products have been and may become subject to anti-dumping or countervailing proceedings, which may have an adverse effect on our export sales.
 
In recent years, several of our products have been subject to anti-dumping or countervailing proceedings, including in the United States and China. In addition, the European Union initiated an anti-dumping investigation in October 2007 into our sales of stainless steel cold-rolled coils in European countries. We expect the European Union to announce its decision in early 2009. Further increases in or new imposition of anti-dumping duties, countervailing duties, quotas or tariffs on our sales in these markets may have a material adverse effect on our exports to these regions in the future. Our export sales and overseas sales to customers in the United States, China and Europe accounted for 14.0% of our sales volume of steel products in 2007. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”
 
Cyclical fluctuations based on macroeconomic factors may adversely affect the business and performance of our engineering and construction segment.
 
In order to complement our steel operations, we engage in engineering and construction activities through POSCO Engineering & Construction Co., Ltd., a 90.9%-owned subsidiary. The engineering and construction segment, which accounted for approximately 8.6% of our consolidated sales in 2007, is highly cyclical and tends to fluctuate based on macroeconomic factors, such as consumer confidence and income, employment levels, interest rates, inflation rates, demographic trends and policies of the Government. Although we believe that our strategy of focusing on high-value-added plant construction and urban planning and development projects such as Songdo New City has enabled us to be exposed to a lesser degree to general economic conditions in Korea in comparison to some of our domestic competitors, our construction revenues have fluctuated in the past depending on the level of domestic construction activity including new construction orders. Our construction operations could suffer in the future in the event of a general downturn in the construction market resulting in weaker demand, which could adversely affect the business, financial condition and results of operations of our engineering and construction segment.


8


Table of Contents

Many of our engineering and construction segment’s domestic and overseas construction projects are on a fixed-price basis, which could result in losses for us in the event that unforeseen additional expenses arise with respect to the project.
 
Many of our engineering and construction segment’s domestic and overseas construction projects are carried out on a fixed-price basis according to a predetermined timetable, pursuant to the terms of a fixed-price contract. Under such fixed-price contracts, we retain all cost savings on completed contracts but are also liable for the full amount of all cost overruns and may be required to pay damages for late delivery. The pricing of fixed-price contracts is crucial to our profitability, as is our ability to quantify risks to be borne by us and to provide for contingencies in the contract accordingly.
 
We attempt to anticipate increases in costs of labor, raw materials and parts and components in our bids on fixed-price contracts. However, the costs incurred and gross profits realized on a fixed-price contract may vary from our 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 us, and our profit from the project will be correspondingly reduced or eliminated. If we experience significant unforeseen additional expenses with respect to our fixed price projects, we may incur losses on such projects, which could have a material adverse effect on our financial condition and results of operations of our engineering and construction segment.
 
The domestic residential property business of our engineering and construction segment is highly dependent on the real estate market in Korea, which is substantially affected by the Government’s real estate policies.
 
The performance of the domestic residential property business of our engineering and construction segment is highly dependent on the general condition of the real estate market in Korea. The Korean real estate market has been subject to substantial fluctuations in recent years, and some market analysts and commentators have warned of a property market “bubble” in certain regions of Korea, particularly in the residential sector. Such fluctuations have led the Government to introduce a series of measures over the past few years to mitigate increases in housing prices in Korea, which include constraints on the amount of mortgage loans and imposition of higher real estate and capital gains taxes, as well as discouraging redevelopment of existing apartment complexes in certain parts of Seoul. In addition, the Government began imposing ceilings on the prices at which developers can sell newly constructed apartments to the public and disclosure of certain costs related to the development and construction of apartments. In part due to such policies, the real estate market for new residential properties in Korea has experienced a slowdown in recent years, with an increase in new homes left unsold nationwide.
 
We cannot assure you that significant declines in demand or prices will not take place in the Korean real estate market in the future. Additional changes in the Government’s real estate policies may further reduce demand and depress prices for new residential properties in Korea, which could negatively affect our engineering and construction segment’s business, results of operations and financial conditions.
 
We may not be able to successfully execute our diversification strategy.
 
In part to prepare for the eventual maturation of the Korean steel market, our overall strategy includes securing new growth engines by diversifying into new businesses related to our steel operations that we believe will offer greater potential returns, such as liquefied natural gas production, logistics and magnesium coil and sheet production, as well as entering into new businesses not related to our steel operations such as power generation, development of alternative energy and advanced materials, information and technology related consulting services


9


Table of Contents

and wireless broadband Internet access service. Our ability to implement this diversification strategy will depend on a variety of factors, some of which are beyond our control, including the availability of qualified engineers and personnel, establishment of new relationships and expansion of existing relationships with various customers and suppliers, procurement of necessary technology and know-how to engage in such businesses and access to investment capital at reasonable costs. No assurance can be given that our diversification strategy can be completed profitably.
 
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 carbon dioxide into the environment, the handling, storage and disposal of solid or hazardous materials or wastes and the investigation and remediation of contaminated sites. We may be responsible for the investigation and remediation of environmental conditions at currently and formerly operated manufacturing or construction sites. We may also be subject to associated liabilities, including liabilities for natural resource damage, third party property damage or personal injury resulting from lawsuits brought by the government or private litigants. In the course of our operations, hazardous wastes may be generated at third party-owned or operated sites, and hazardous wastes may be disposed of or treated at third party-owned or operated disposal sites. If those sites become contaminated, we could also be held responsible for the cost of investigation and remediation of such sites, for any associated natural resource damage, and for civil or criminal fines or penalties.
 
Failure to protect our intellectual property rights could impair our competitiveness and harm our business and future prospects.
 
We believe that developing new steel manufacturing technologies that can be differentiated from those of our competitors, such as FINEX, strip casting and silicon steel manufacturing technologies, is critical to the success of our business. We take active measures to obtain protection of our intellectual property by obtaining patents and undertaking monitoring activities in our major markets. However, we cannot assure you that the measures we are taking will effectively deter competitors from improper use of our proprietary technologies. Our competitors may misappropriate our intellectual property, disputes as to ownership of intellectual property may arise and our intellectual property may otherwise become known or independently developed by our competitors. Any failure to protect our intellectual property could impair our competitiveness and harm our business and future prospects.
 
We rely on trade secrets and other unpatented proprietary know-how to maintain our competitive position, and unauthorized disclosure of our trade secrets or other unpatented proprietary know-how could negatively affect our business.
 
We rely on trade secrets and unpatented proprietary know-how and information. We enter into confidentiality agreements with each of our employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally provide that all inventions, ideas, discoveries, improvements and patentable material made or conceived by the individual arising out of the employment or consulting relationship and all confidential information developed or made known to the individual during the term of the relationship is our exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business.
 
Escalations in tension with North Korea could have an adverse effect on us and the market value of our securities.
 
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 recent years, there have been heightened security concerns stemming from North Korea’s nuclear weapons and long-range missile programs and increased uncertainty regarding North Korea’s actions and possible responses from the


10


Table of Contents

international community. In December 2002, North Korea removed the seals and surveillance equipment from its Yongbyon nuclear power plant and evicted inspectors from the United Nations International Atomic Energy Agency. In January 2003, North Korea renounced its obligations under the Nuclear Non-Proliferation Treaty. Since the renouncement, Korea, the United States, North Korea, China, Japan and Russia have held numerous rounds of six party multi-lateral talks in an effort to resolve issues relating to North Korea’s nuclear weapons program.
 
In addition to conducting test flights of long-range missiles, North Korea announced in October 2006 that it had successfully conducted a nuclear test, which increased tensions in the region and elicited strong objections worldwide. In response, the United Nations Security Council passed a resolution that prohibits any United Nations member state from conducting transactions with North Korea in connection with any large scale arms and material or technology related to missile development or weapons of mass destruction and from providing luxury goods to North Korea, imposes an asset freeze and travel ban on persons associated with North Korea’s weapons program, and calls upon all United Nations member states to take cooperative action, including through inspection of cargo to or from North Korea. In response, North Korea agreed in February 2007 at the six-party talks to shut down and seal the Yongbyon nuclear facility, including the reprocessing facility, and readmit international inspectors to conduct all necessary monitoring and verifications. In October 2007, Korea and North Korea held a summit meeting to discuss easing tensions and fostering peace on the Korean peninsula. Mr. Lee, Myung Bak, who became the President of Korea in February 2008, has announced that no further summit meetings will be held until North Korea discontinues its nuclear weapons program.
 
There can be no assurance that the level of tension on the Korean peninsula will not escalate in the future. Any further increase in tension, including a breakdown of high-level contacts between Korea and North Korea or occurrence of military hostilities, could have a material adverse effect on our operations.
 
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 of Korea 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.


11


Table of Contents

 
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.
 
This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.
 
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
 
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 of Korea, 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 Stock Market Division of the Korea Exchange. 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, 892 Daechi-4-dong, Gangnam-gu, Seoul, Korea, and our telephone number is (822) 3457-0114.
 
Item 4.B.   Business Overview
 
The Company
 
We are the largest and the only fully integrated steel producer in Korea, and one of the largest steel producers in the world, based on annual crude steel production in 2007. We produced approximately 32.8 million tons of crude steel in 2007 (including 2.5 million tons of stainless steel), a substantial portion of which was produced at Pohang Works and Gwangyang Works. Currently, Pohang Works has 15.0 million tons of annual crude steel and stainless steel production capacity, and Gwangyang Works has an annual crude steel production capacity of 18.0 million tons. We believe Pohang Works and Gwangyang Works are two of the most technologically advanced integrated steel facilities in the world. We manufacture and sell a diversified line of steel products, including hot rolled and cold rolled products, plates, wire rods, silicon steel sheets and stainless steel products, 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.


12


Table of Contents

We sell primarily to the Korean market, with domestic sales accounting for 66.2% of our total sales volume of steel products in 2007. We believe that we had an overall market share of approximately 38.6% of the total sales volume of steel products sold in Korea in 2007. Our export sales and overseas sales to customers abroad in 2006 and 2007 accounted for 32.3% and 33.8% of our total sales volume of steel products, respectively. Our major export market is Asia, with China accounting for 29.4%, Japan 19.7% and the rest of Asia 19.5% of our total steel export sales volume in 2007.
 
Business Strategy
 
Leveraging on our success during the past forty years, our goal is to strengthen our position as one of the leading steel producers in the world and strive to rank among the top three global steel companies in technology leadership, operational excellence and production capacity. In recent years, the global steel industry has undergone significant consolidation, resulting in the emergence of steel companies with expanded production capacity. We seek to achieve continued global excellence in this era of consolidation through a renewed emphasis on growth and innovation. Over the next decade, we seek to expand our position as a global company by adding significant production bases outside Korea. We also intend to secure growth by further solidifying our market position in the steel sector, while allocating additional resources into businesses that we believe will offer us greater potential returns and serve as our new growth engines, such as the engineering and construction, energy and information and technology businesses.
 
We seek to strengthen our competitiveness and pursue growth through the following core business strategies:
 
Continue to Seek Growth Opportunities in the Steel Sector
 
We carefully seek out promising investment opportunities abroad, primarily in China, India, Vietnam and Mexico, in part to prepare for the eventual maturation of the Korean steel market. We believe that China, India, Vietnam and Mexico will continue to offer substantial growth opportunities, and we plan to selectively seek investment opportunities and expand our production base in these countries. For example, in June 2005, we entered into a memorandum of understanding with Orissa State Government of India for the construction of an integrated steel mill and the development of iron ore mines in Orissa state. In Vietnam, we obtained an approval from the Vietnamese Government in November 2006 to construct steel mills with an annual production capacity of 1.2 million tons of cold rolled products and 3.0 million tons of hot rolled products. We began construction of a cold rolling mill with target completion in September 2009. We also submitted a feasibility report in June 2008 to the Vietnamese Government in order to obtain the Prime Minister’s approval for the construction and operation of an integrated steel mill in Vietnam. In Mexico, we are building a plant with an annual production capacity of 400 thousand tons to produce automotive steel sheets. We are also building a global distribution network of supply chain management centers to provide processing and logistics services and more effectively respond to changes in consumer trends in the global steel market. In 2007, we operated 28 supply chain management centers worldwide that recorded aggregate sales of 1,460 thousand tons of steel products. We plan to continue expanding our global network of supply chain management centers, and we expect to operate 35 centers by the end of 2008. In Korea, we plan to continue to expand our production facilities and upgrade our facilities that utilize advanced manufacturing technologies, and we plan to enhance the quality of our products through continued modernization and rationalization of our facilities.
 
Maintain Technology Leadership
 
As part of our strategy, we have identified core products that we plan to further develop, such as premium automobile steel sheets, silicon steel and API-grade steel, and we will continue to invest in developing innovative products that offer the greatest potential returns and enhance the overall quality of our products. In order to increase our competitiveness, we plan to make additional investments in the development of new manufacturing technologies, such as FINEX, strip casting, endless rolling and environment-friendly manufacturing processes. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages through elimination of major sources of pollution such as sintering and coking plants, as well as reducing operating and raw


13


Table of Contents

material costs. We also plan to accelerate development of other advanced technologies, such as strip casting that directly casts coils from liquid steel and a rolling process that rolls hot rolled coils up to 40 slabs at a time. We plan to further devote additional resources into our research and development efforts and increase the proportion of our sales of higher margin, higher value-added products.
 
Pursue Cost-Cutting through Operational and Process Innovations
 
We seek to achieve cost reductions in this era of increasing raw material costs through our company-wide process for innovation and enhancing efficiency of operations. We believe that strategic cost cutting measures through utilization of efficient production methods and management discipline will strengthen our corporate competitiveness. After implemention of Six Sigma innovations in recent years, we are now implementing Quick Six Sigma program, a customized program that we believe will enhance our corporate culture that rewards innovative ideas at all stages of our operations and enable us to benchmark successful innovations to all relevant processes within the company. We will also strive to invest more in human resources development to nurture employees who are capable of working in the global environment.
 
Secure Procurement of Raw Materials through Strategic Investments
 
We purchase substantially all of the principal raw materials we use, including iron ore, coal and nickel, from sources outside Korea. Import prices of many of the principal raw materials, including iron ore and nickel, have increased substantially in recent years. To secure adequate procurement of principal raw materials, we have invested and will continue to explore additional investment opportunities in various raw material development projects abroad, as well as enter into long-term contracts with leading suppliers of raw materials, principally in Australia and Brazil.
 
Selectively Seek Opportunities in Growth Industries
 
We will continue to selectively seek opportunities in growth industries to diversify our business both vertically and horizontally. New businesses not related to our steel operations in which we intend to focus our diversification include power generation, alternative energy development and information and technology. POSCO Power Corporation, our wholly-owned subsidiary that is the largest private power generation company in Korea, signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global leader in molten carbonate fuel cell technology, pursuant to which POSCO Power Corporation will explore opportunities to expand into the stationary fuel cell market. POSCO Power Corporation also began construction of a fuel cell manufacturing plant in Pohang in 2007. Through POSDATA, a 61.9%-owned subsidiary, we also engage in information and technology consulting and wireless broadband Internet access service. Businesses related to our steel operations in which we intend to devote more resources include engineering and construction. POSCO Engineering & Construction, our consolidated subsidiary and one of the leading engineering and construction companies in Korea, is primarily engaged in the planning, design and construction of industrial plants and architectural works and civil engineering. We will continue to selectively seek opportunities to identify new growth engines and diversify our operations.
 
Major Products
 
We manufacture and sell a broad line of steel products, including the following:
 
  •  hot rolled products;
 
  •  plates;
 
  •  wire rods;
 
  •  cold rolled products;
 
  •  silicon steel sheets; and
 
  •  stainless steel products.


14


Table of Contents

 
The tables below set out our sales revenues and sales volume by major steel product categories for the periods indicated.
 
                                                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
    Billions
          Billions
          Billions
          Billions
          Billions
       
Steel Products
  of Won     %     of Won     %     of Won     %     of Won     %     of Won     %  
 
Hot rolled products
    4,185       26.1       5,449       25.1       5,877       25.0       4,650       20.8       4,495       16.1  
Plates
    1,320       8.2       1,987       9.1       2,253       9.6       2,380       10.7       2,847       10.2  
Wire rods
    1,064       6.6       1,351       6.2       1,528       6.5       1,243       5.6       1,458       5.2  
Cold rolled products
    5,208       32.4       6,564       30.2       7,527       32.0       6,765       30.3       8,672       31.1  
Silicon steel sheets
    431       2.7       531       2.4       688       2.9       681       3.0       1,105       4.0  
Stainless steel products
    3,172       19.7       4,920       22.6       4,543       19.3       5,751       25.8       8,268       29.7  
Others
    687       4.3       952       4.4       1,132       4.7       859       3.8       1,003       3.7  
                                                                                 
Total
    16,067       100.0       21,753       100.0       23,547       100.0       22,329       100.0       27,848       100.0  
                                                                                 
 
                                                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Steel Products
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
Hot rolled products
    11,514       37.6       10,966       34.5       10,330       33.2       9,604       31.0       8,221       25.6  
Plates
    3,047       9.9       3,385       10.6       3,193       10.3       3,615       11.7       3,926       12.2  
Wire rods
    2,777       9.1       2,503       7.9       2,366       7.6       2,153       6.9       2,222       6.9  
Cold rolled products
    9,770       31.9       10,242       32.2       10,468       33.6       10,864       35.1       12,146       37.8  
Silicon steel sheets
    671       2.2       705       2.2       737       2.4       686       2.2       934       2.9  
Stainless steel products
    1,778       5.8       2,069       6.5       1,919       6.2       2,260       7.3       2,694       8.4  
Others
    1,100       3.5       1,926       6.1       2,100       6.7       1,802       5.8       1,967       6.2  
                                                                                 
Total
    30,657       100.0       31,796       100.0       31,115       100.0       30,984       100.0       32,110       100.0  
                                                                                 
 
The sales revenues and sales volumes in the tables above represent the steel product sales of our consolidated entities which are steel-related companies but do not include the non-steel product sales of these entities. They include sales by our consolidated sales subsidiaries of steel products purchased by these subsidiaries from third parties, including trading companies to which we sell steel products. The sales of steel products purchased from third parties amounted to approximately 1.4 million tons in 2003, 1.0 million tons in 2004, 1.0 million tons in 2005, 0.8 million tons in 2006 and 1.0 million tons in 2007, accounting for Won 679 billion in 2003, Won 699 billion in 2004, Won 807 billion in 2005, Won 470 billion in 2006 and Won 623 billion in 2007, respectively.
 
Hot Rolled Products
 
Hot rolled coils and sheets have many different industrial applications. They are used to manufacture structural steel used in the construction of buildings, industrial pipes and tanks, and automobile chassis. Hot rolled coil is also manufactured in a wide range of widths and thickness as the feedstock for higher value-added products such as cold rolled products and silicon steel sheets.
 
Our deliveries of hot rolled products amounted to 8.2 million tons in 2007, representing 25.6% of our total sales volume of steel products. The Korean market accounted for 6.7 million tons or 81.4% of our hot rolled product sales in 2007, representing a domestic market share of approximately 40%. The largest customers of our hot rolled products are downstream steelmakers in Korea who use the products to manufacture pipes and cold rolled products.
 
Hot rolled products constitute one of our two largest product categories in terms of sales volume. In 2007, our sales volume of hot rolled products decreased by 14.4% compared to 2006 primarily due to an increase in the quantity set aside for use in the production of cold rolled products.


15


Table of Contents

Plates
 
Plates are used in shipbuilding, structural steelwork, offshore oil and gas production, power generation, mining, and the manufacture of earth-moving and mechanical handling equipment, boiler and pressure vessels and other industrial machinery.
 
Our deliveries of plates amounted to 3.9 million tons in 2007, representing 12.2% of our total sales volume of steel products. The Korean market accounted for 3.7 million tons or 94.1% of our plate sales in 2007, representing a domestic market share of approximately 35%. 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 2007, our sales volume of plates increased by 8.6% compared to 2006 primarily due to an increase in demand from the shipbuilding industry.
 
Wire Rods
 
Wire rods are used mainly by manufacturers of wire, nails, bolts, nuts and welding rods. Wire rods are also used in the manufacture of coil springs, tension bars and tire cords in the automobile industry.
 
Our deliveries of wire rods amounted to 2.2 million tons in 2007, representing 6.9% of our total sales volume of steel products. The Korean market accounted for 1.7 million tons or 77.4% of our wire rod sales in 2007, representing a domestic market share of approximately 50%. The largest customers for our wire rods are manufacturers of wire ropes and fasteners.
 
In 2007, our sales volume of wire rods increased by 3.2% compared to 2006 primarily due to an increase in demand from the automobile industry.
 
Cold Rolled Products
 
Cold rolled coils and further refined galvanized cold rolled products are used mainly in the automobile industry to produce car body panels. Other users include the household goods, electrical appliances, engineering and metal goods industries.
 
Our deliveries of cold rolled products amounted to 12.1 million tons in 2007, representing 37.8% of our total sales volume of steel products. The Korean market accounted for 6.0 million tons or 49.1% of our cold rolled product sales in 2007, representing a domestic market share of approximately 45%.
 
Cold rolled products constitute our largest product category in terms of sales volume and revenue. Sales of cold rolled products in recent years have experienced growth due to an increase in demand from the automobile industry, which we were able to satisfy through an increase in production resulting from the renovation of a cold rolling mill. In 2007, our sales volume of cold rolled products increased by 11.8% compared to our sales volume in 2006.
 
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 amounted to 934 thousand tons in 2007, representing 2.9% of our total sales volume of steel products. The Korean market accounted for 423 thousand tons or 45.3% of our silicon steel sheet sales in 2007, representing a domestic market share of approximately 95%.
 
In 2007, our sales volume of silicon steel sheets increased by 36.1% compared to 2006 due to an increase in demand from manufacturers of power transformers and generators, which we were able to satisfy through an increase in production resulting from the renovation of our silicon steel sheet manufacturing facilities.


16


Table of Contents

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 automobile industry, the construction industry and the food processing industry.
 
Our deliveries of stainless steel products amounted to 2.7 million tons in 2007, representing 8.4% of our total sales volume of steel products. The Korean market accounted for 1.0 million tons or 37.1% of our stainless steel product sales in 2007, representing a domestic market share of approximately 60%.
 
Stainless steel products constitute our second largest product category in terms of revenue. Although sales of stainless steel products accounted for only 8.4% of our total sales volume in 2007, they represented 29.7% of our total revenues from sales of steel products in 2007. Our sales volume of stainless steel products increased by 19.2% in 2007 compared to 2006 due to an increase in demand from the stainless steel products industry and stabilization of production from China.
 
Others
 
Other products include lower value-added semi-finished products such as pig iron, billets, blooms and slab.
 
Markets
 
Korea is our most important market. Domestic sales represented 66.2% of our total sales volume of steel products in 2007. Our export sales and overseas sales to customers abroad represented 33.8% of our total sales volume of steel products in 2007. 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
 
The total Korean market for steel products amounted to 55.1 million tons in 2007. We sold a total of 21.3 million tons of steel products in Korea in 2007, maintaining an overall domestic market share of approximately 38.6% for such period.
 
The table below sets out sales of steel products in Korea for the periods indicated.
 
                                                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Source
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
POSCO’s sales
    21,121       46.6       23,599       50.0       22,880       48.5       20,991       42.3       21,256       38.6  
Other Korean steel companies’ sales
    17,838       39.3       15,969       33.9       15,957       33.9       18,052       36.4       21,224       38.5  
Imports(1)
    6,411       14.1       7,595       16.1       8,287       17.6       10,591       21.3       12,628       22.9  
                                                                                 
Total domestic sales(1)
    45,370       100.0       47,163       100.0       47,124       100.0       49,634       100.0       55,108       100.0  
                                                                                 
 
 
(1) Source: 2007 Official Statistics, Korea Iron & Steel Association.
 
Total domestic sales increased by 4.0% in 2004, primarily resulting from an increase in demand from the automobile, consumer appliance, and shipbuilding industries which more than offset a decrease in demand from the construction industry. Imports from foreign competitors, primarily from Japan, China and Russia, showed strong growth as import sales volume increased by 18.5% in 2004 to 7.6 million tons. Growth in domestic sales volume of other Korean steel companies decreased by 10.5% in 2004 while our domestic sales volume increased by 11.7% in 2004 to 23.6 million tons. Accordingly, our market share increased to 50.0% in 2004 from 46.6% in 2003.
 
In 2005, total domestic sales decreased by 0.1%, primarily due to a decrease in demand from the construction industry, which more than offset an increase in demand from the automobile and shipbuilding industries. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume


17


Table of Contents

increased by 9.1% in 2005 to 8.3 million tons. Growth in domestic sales volume of other Korean steel companies decreased by 0.1% in 2005 while our domestic sales volume decreased by 3.0% in 2005 to 22.9 million tons. Accordingly, our market share decreased to 48.5% in 2005 from 50.0% in 2004.
 
In 2006, total domestic sales increased by 5.3%, primarily due to an increase in demand from the shipbuilding and automobile industries, which more than offset a decrease in demand from the construction industry. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume increased by 27.8% in 2006 to 10.6 million tons. Growth in domestic sales volume of other Korean steel companies increased by 13.1% in 2006 while our domestic sales volume decreased by 8.3% in 2006 to 21.0 million tons. Accordingly, our market share decreased to 42.3% in 2006 from 48.5% in 2005.
 
In 2007, total domestic sales increased by 11.0%, primarily due to an increase in demand from the shipbuilding and automobile industries, which more than offset a decrease in demand from the construction industry. Imports from foreign competitors, primarily from Japan, China, and Russia, showed strong growth as import sales volume increased by 19.2% in 2007 to 12.6 million tons. Growth in domestic sales volume of other Korean steel companies increased by 17.6% in 2007 and our domestic sales volume increased by 1.3% in 2007 to 21.3 million tons. Accordingly, our market share decreased to 38.6% in 2007 from 42.3% in 2006.
 
We sell in Korea higher value-added and other finished products to end-users and semi-finished products to other steel manufacturers for further processing. Local distribution companies and sales affiliates sell finished steel products to low-volume customers. We provide service technicians for large customers and distributors in each important product area.
 
For a discussion of our domestic sales of steel products and factors that may affect domestic sales in the future, see “Item 5. Operating and Financial Review and Prospects — Item 5.A. Operating Results.”
 
Exports
 
Our export sales and overseas sales to customers abroad represented 33.8% of our total sales volume of steel products in 2007, 68.5% 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 sales volume increased by 8.6% to 10.9 million tons in 2007. The tables below set out our export sales and overseas sales to customers abroad in terms of sales volume of steel products by geographical market and by product for the periods indicated.
 
                                                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Region
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
China
    3,510       36.8       3,138       38.3       2,640       32.1       2,524       25.3       3,186       29.4  
Japan
    1,719       18.0       1,661       20.3       1,843       22.4       1,959       19.6       2,137       19.7  
Asia (other than China and Japan)
    2,259       23.7       1,502       18.3       1,636       19.9       1,895       19.0       2,112       19.5  
North America
    715       7.5       737       9.0       761       9.2       963       9.6       756       7.0  
Europe
    236       2.5       116       1.4       34       0.4       318       3.2       546       5.0  
Others
    1,096       11.5       1,043       12.7       1,320       16.0       2,335       23.3       2,117       19.4  
                                                                                 
Total
    9,535       100.0       8,198       100.0       8,234       100.0       9,994       100.0       10,854       100.0  
                                                                                 
 


18


Table of Contents

                                                                                 
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
    Thousands
          Thousands
          Thousands
          Thousands
          Thousands
       
Steel Products
  of Tons     %     of Tons     %     of Tons     %     of Tons     %     of Tons     %  
 
Hot rolled products
    2,464       25.8       2,049       25.0       1,960       23.8       2,477       24.8       1,531       14.1  
Plates
    363       3.8       295       3.6       229       2.8       228       2.3       231       2.1  
Wire rods
    598       6.3       252       3.1       333       4.1       498       5.0       502       4.6  
Cold rolled products
    4,649       48.8       4,139       50.5       4,142       50.3       4,774       47.8       6,186       57.0  
Silicon steel sheets
    223       2.3       245       3.0       262       3.2       369       3.7       511       4.7  
Stainless steel products
    795       8.3       1,019       12.4       1,032       12.5       1,245       12.4       1,695       15.6  
Others
    443       4.7       199       2.4       276       3.3       403       4.0       198       1.9  
                                                                                 
Total
    9,535       100.0       8,198       100.0       8,234       100.0       9,994       100.0       10,854       100.0  
                                                                                 
 
The table below sets out our total sales, including non-steel sales, by geographical location of customers for the periods indicated. See Note 30 of Notes to Consolidated Financial Statements.
 
                         
    For the Year Ended December 31,  
Geographical Location of Customers
  2005     2006     2007  
    (In billions of won)  
 
Korea
  W 18,566     W 17,250     W 19,970  
China
    3,118       3,070       4,504  
Asia (other than China and Japan)
    1,502       1,486       2,042  
Japan
    1,372       1,312       1,742  
North America
    550       610       732  
Other
    1,194       2,114       2,618  
                         
Total
    26,302       25,842       31,608  
                         
 
The above tables include sales by our consolidated sales subsidiaries of steel products purchased by these subsidiaries from third parties, including trading companies to which we sell steel products.
 
The table below sets out the world’s apparent crude steel use for the periods indicated.
 
                                         
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
 
Apparent crude steel use (million metric tons)
    984       1,091       1,113       1,178       1,250  
Percentage of annual increase (decrease)
    7.3 %     10.9 %     2.0 %     5.8 %     6.1 %
 
 
Source: International Iron and Steel Institute.
 
In recent years, driven in part by strong growth in steel consumption in China, the global steel industry has experienced renewed interest in expansion of steel production capacity. World Steel Dynamics estimated the global crude steel production capacity to increase from 1,340 million tons in 2006 to 1,421 million tons in 2007 and expects the production capacity to increase further in 2008, primarily as a result of additions of new capacity in China and India. Over-capacity in the global steel industry may return if increase in demand from developing countries that have experienced significant growth in recent years does not meet this growth in production capacity.
 
We distribute our export products mostly through Korean trading companies and our overseas sales subsidiaries. Our largest export market in 2007 was China, which accounted for 29.4% of our export volume of steel products, including sales by our overseas subsidiaries. The principal products exported to China are cold rolled products and stainless steel products. Our exports to China amounted to 2.6 million tons in 2005, 2.5 million tons in 2006 and 3.2 million tons in 2007. Exports to China decreased by 15.9% in 2005 and 4.4% in 2006 primarily due to our decision to focus on meeting increased domestic demand and an adjustment of our sales volume from China to other countries with more favorable market price conditions. Our exports to China increased by 26.2% in 2007

19


Table of Contents

primarily due to favorable market price conditions in China in 2007. Our exports to Japan increased from 1.8 million tons in 2005 to 2.0 million tons in 2006 and 2.1 million tons in 2007 primarily due to a general increase in the Japanese market price for our products. Sales volume to Asian countries other than China and Japan increased from 1.6 million tons in 2005 to 1.9 million tons in 2006 and 2.1 million tons primarily due to a general increase in demand from Asian countries.
 
In 2006, our exports to the United States and Europe increased from an aggregate of 0.8 million tons in 2005 to an aggregate of 1.3 million tons in 2006, primarily due to favorable market price conditions in these regions during the first half of 2006. Our sales volume to the United States and Europe remained stable at an aggregate of 1.3 million tons in 2007.
 
A significant part of our sales in North America are made to USS-POSCO Industries (“UPI”), a 50-50 joint venture between U.S. Steel Corporation and us. We sell hot rolled products to UPI, which uses such products to manufacture cold rolled and galvanized steel products for sale in the United States. Our sales to UPI were 572 thousand tons in 2005, 730 thousand tons in 2006 and 494 thousand tons in 2007, accounting for approximately 75% of our sales to North America in 2005, 76% in 2006 and 65% in 2007.
 
In the United States, a number of our products have been subject to anti-dumping and countervailing proceedings since 1992. As a result of these proceedings, our sales of corrosion resistant steel are subject to a countervailing duty margin of 0.07% and an anti-dumping duty margin of 0.35%, but none is actually imposed pursuant to the de minimis margin rule. Our sales of stainless steel plates are subject to an anti-dumping duty of 1.19% and our sales of stainless steel sheets are subject to an anti-dumping duty of 0.92%.
 
In China, we are subject to an anti-dumping duty of 11.0% on our sales of stainless cold rolled steel since December 2000. However, we entered into a suspension agreement in December 2000 with China and agreed to certain price undertakings. Since then, we have been exporting certain types of stainless cold rolled steel products to China that are exempt from such anti-dumping duty.
 
In Europe, the European Union initiated an anti-dumping investigation in October 2007 into our sales of stainless steel cold-rolled coils in European countries. We expect the European Union to announce its decision in early 2009.
 
Our products that have been subject to anti-dumping or countervailing proceedings in the aggregate have not accounted for a material portion of our total sales in recent years. Consequently, the anti-dumping or countervailing duties imposed on our products have not had a material adverse effect on our total sales. However, there can be no assurance that further increases in or new imposition of dumping duties, countervailing duties, quotas or tariffs on our sales in the United States, China, Europe or elsewhere may not have a material adverse effect on our exports to these or other regions in the future.
 
Pricing Policy
 
We determine the sales price of our products based on market conditions. In setting prices, we take into account our costs, including those of raw materials, supply and demand in the Korean market, exchange rates, and conditions in the international steel market.
 
Our export prices can fluctuate considerably over time, depending on market conditions and other factors. The export prices of our higher value-added steel products in the largest markets are determined considering the prices of the similar products charged by our competitors. Export prices in Dollar terms increased in the first half of 2005, primarily as a result of general recovery of the global economy and continued increase in steel consumption in China, as well as increases in transportation costs and prices of raw materials. However, our export prices in Dollar terms decreased in the second half of 2005 due to excessive supply of steel products from China. Our export prices in Dollar terms rebounded in the first half of 2006 due to the recovery of the global steel markets resulting primarily from an increase in demand from the United States and Europe starting in the second quarter, but decreased in the second half of 2006 as such demand slowed. Our export prices in Dollar terms increased in 2007 due to strong demand from China and Japan. Our export prices in Dollar terms have increased further in the first half of 2008, driven primarily by increases in prices of raw materials such as iron ore and coal and strong market demand.


20


Table of Contents

Raw Materials
 
Steel Production
 
The principal raw materials used in producing steel through the basic oxygen steelmaking method are iron ore and coal. We import all of the coal and virtually all of the iron ore that we use. In 2007, POSCO imported approximately 45.5 million dry metric tons of iron ore and 24.4 million wet metric tons of coal. Iron ore is imported primarily from Australia, Brazil and India. Coal is imported primarily from Australia, China, Canada and Russia.
 
In 2007, we purchased most of our iron ore and coal imports pursuant to long-term contracts. POSCO purchased approximately 12.8% of its iron ore and coal imports in 2007 from foreign mines in which we have made an investment. The long-term contracts generally have terms of three to ten years and provide for periodic price adjustments to the then-market prices. The long-term contracts require us to purchase certain fixed amounts of relevant raw materials each year, and we typically have an option to increase or decrease such fixed amounts up to 5% or 10% each year. We or the suppliers may cancel the long-term contracts only if performance under the contracts is prevented by causes beyond our or their control and these causes continue for a specified period.
 
The average price of coal per ton (including all associated costs such as insurance, freight costs and customs duties) decreased from $114 in 2005 to $111 in 2006 and $104 in 2007, but has increased substantially in the first half of 2008. The average price of iron ore per ton (including all associated costs such as insurance, freight costs and customs duties) increased from $45 in 2005 to $55 in 2006 and $64 in 2007 and increased further in the first half of 2008. We currently do not depend on any single country or supplier for our coal or iron ore.
 
In April 2002, we entered into an agreement with BHP Billiton, Itochu Corporation and Mitsui Corporation and invested A$16.3 million to establish the largest iron ore development project in Australia. We have a 20% interest in the project, while BHP Billiton, Itochu and Mitsui have 65%, 8% and 7% interests, respectively. We are obligated under the agreement to purchase 3.0 million tons of iron ore each year, representing approximately 8% of our total annual iron ore procurement amount, for twenty-five years starting in 2003. The purchase price is determined based on the global market price at the time of purchase. We purchased 3.2 million tons of iron ore from this development project in 2005, 2.9 million tons in 2006 and 2.9 million tons in 2007.
 
Since 2004, we have made the following investments in Australia: (i) A$51 million to acquire a 20% interest in a coal mine project in Foxleigh, Australia, securing 1.5 million tons of coal per year, (ii) A$10 million to acquire a 3.6% interest in a coal mine in Glennies Creek, NSW, Australia, securing 0.5 million tons of coal per year, (iii) A$12.5 million to acquire a 5% interest in a coal mine in Carborough Downs, Queensland, Australia, securing 50 thousand tons of coal per year, (iv) A$18 million to acquire 40 million shares of Murchison Metals Ltd. to develop iron ore mines in the western region of Australia (v) A$30 million to acquire a 10% interest in a coal mine in Newpac, NSW, Australia, to secure 0.5 million tons of coal per year, (vi) A$25 million to acquire a 19.99% interest in Cockatoo Coal Ltd. to secure 1.0 million tons of coal per year, and (vii) A$7.2 million to acquire a 19.99% interest in Sandfire Resourses Ltd. to secure 30% of all productions from its mines including manganese, iron ore and zinc. In addition, we invested approximately $25 million to acquire a 2.5% stake in a coal mine project in Elkview, Canada, securing an additional 0.5 million tons of coal per year. POS-Minerals Corporation also entered into a joint venture agreement with General Moly in February 2008 to form a limited liability company to develop a molybdenum mine in Nevada, United States. POS-Minerals Corporation holds a 20.0% interest in the company. In April 2008, we also invested $200 million in a consortium with Pallinghurst Resources LLP, American Metals & Coal International, Inc. and Investec Limited to pursue various mining opportunities. As the first co-investment by the consortium, we acquired a 13% interest in a manganese project in Kalahari, South Africa to secure approximately 130 thousand tons of manganese ore per year. We continue to seek opportunities to enter into additional strategic relationships that would enhance our ability to meet our requirements for high quality raw materials.
 
Stainless Steel Production
 
The principal raw materials for the production of stainless steel are wrought nickel, ferrochrome, stainless steel scrap and carbon steel scrap. We purchase a substantial portion of our requirements for wrought nickel from leading producers in Australia, Indonesia, New Caledonia, Russia and Japan, as well as Korea. A substantial portion of the requirements for ferrochrome are purchased from producers in South Africa, India and Kazakhstan. Most of the


21


Table of Contents

requirements for stainless steel scrap are sourced from domestic and overseas suppliers in Japan, United States and Southeast Asian countries. As for the requirements for carbon steel scrap, scrap from the Pohang Steelworks is also utilized. The average price of nickel per ton (including insurance and freight costs) increased substantially in recent years from $15,230 in 2005 to $21,654 in 2006 and $40,619 in 2007 but decreased in the first half of 2008, primarily due to an increase in demand for stainless steel from China. The average price of scrap iron per ton (including insurance and freight costs) decreased from $275 in 2005 to $254 in 2006 but increased to $330 in 2007.
 
In order to secure stable sources of nickel for stainless steel production, we entered into a joint venture in June 2006 with Société Minière du Sud Pacifique S.A. to establish SNNC Co., Ltd. We hold a 49.0% interest in the company that is primarily engaged in nickel smelting, and Société Minière du Sud Pacifique S.A., a Franch major mining company, holds the remaining interest. SNNC is currently constructing a nickel smelting works with the capacity of 300 thousand tons and target operation date of September 2008.
 
Transportation
 
Since 1983, we have retained a fleet of dedicated bulk carriers to transport our raw materials through long-term contracts with shipping companies in Korea. These dedicated bulk carriers transported approximately 75% of our coal and iron ore in 2007, with the remaining 25% transported by other vessels through chartering contracts. All imported raw materials are unloaded at our port facilities in Pohang and Gwangyang. Costs of transportation of iron ore and coal represented approximately 21% and 13% of the total cost of such materials in 2007. We expect transportation costs of raw materials to increase in 2008 primarily due to the increase in oil prices in recent years.
 
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 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 materials used in steelmaking. Molten pig iron is then refined into molten steel in converters by blowing pure oxygen at high pressure to remove impurities. Different desired steel properties may also be obtained by regulating the chemical contents.
 
At this point, molten steel is made into semi-finished products such as slab, blooms or billets at the continuous casting machine. Slab, blooms and billets are produced at different standardized sizes and shapes. Slab, blooms and billets are semi-finished lower margin products that we either use to produce our further processed products or sell to other steelmakers that produce further processed steel products.
 
Slab are processed to produce hot rolled coil products at hot strip mills or to produce plates at plate mills. Hot rolled coils are an intermediate stage product that may either be sold to our customers as various finished products or be further processed by us or our customers into higher value-added products, such as cold rolled sheets and silicon steel sheets. Blooms and billets are processed into wire rods at wire rod mills.
 
Stainless Steel — Electric Arc Furnace Method
 
Stainless steel is produced from stainless steel scrap, chrome, nickel and steel scrap using an electric arc furnace. Stainless steel is then processed into higher value-added products by methods similar to those used for steel production. Stainless steel slab are produced at a continuous casting mill. The slab 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.


22


Table of Contents

Competition
 
Domestic Market
 
We are currently the only fully integrated steel producer in Korea. We generally face fragmented competition in the domestic market. In hot rolled products, where we had a market share of approximately 40% in 2007, we face competition from a Korean steel producer that operates mini-mills and produces hot-rolled coil products from slabs and from various foreign producers, primarily from China and Japan. In cold rolled products and stainless steel products, where we had a market share of approximately 45% and 60% in 2007, respectively, we compete with smaller specialized domestic manufacturers and various foreign producers, primarily from China and Japan.
 
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, an electric-furnace steel producer with annual crude steel production of 11.3 million tons in 2007.
 
The Korean Government does not impose quotas on or provide subsidies to local steel producers. As a World Trade Organization signatory, Korea has also removed all steel tariffs.
 
Export Markets
 
The competitors in our export markets include all the leading steel manufacturers of the world. In recent years, there has been a trend toward industry consolidation among our competitors, and smaller competitors in the global steel market today may become larger competitors in the future. For example, Mittal Steel’s takeover of Arcelor in 2006 created a company with approximately 10% of global steel production capacity. Competition from global steel manufacturers with expanded production capacity such as ArcelorMittal, and new market entrants, especially from China and India, could result in a significant increase in competition. Major competitive factors include range of products offered, quality, price, delivery performance and customer service. Our larger competitors may use their resources, which may be greater than ours, against us in a variety of ways, including by making additional acquisitions, investing more aggressively in product development and capacity and displacing demand for our export products.
 
Various export markets currently impose tariffs on different types of steel products. However, we do not believe that tariffs significantly affect our ability to compete in these markets.
 
Subsidiaries and Global Joint Ventures
 
Steel Production
 
In order to effectively implement our strategic initiatives and to solidify our leadership position in the global steel industry, we have established various subsidiaries and global joint ventures around the world.
 
We established POSCO Specialty Steel Co., Ltd. as a wholly-owned subsidiary in Korea in February 1997. POSCO Specialty Steel produces high-quality steel products for the automobile, machinery, nuclear power plant, shipbuilding, aeronautics and electronics industries. Production facilities operated by POSCO Specialty Steel have an aggregate annual production capacity of 859 thousand tons of wire rods, round bars, steel pipes and semi-finished products. POSCO Specialty Steel Co., Ltd. produced 862 thousand tons of such products in 2007.
 
In order to expand our sale of value-added products, we established POSCO Coated and Color Sheet Co., Ltd. by merging a coated steel manufacturer and a color sheet manufacturer in March 1999. POSCO Coated and Color Sheet produces 600 thousand tons a year of both galvanized and aluminized steel sheets widely used in the construction, automobile parts and home appliances industries. POSCO Coated and Color Sheet also produces color sheets with an annual capacity of 300 thousand tons that are mainly used for interior and exterior materials and home appliances.
 
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 of POSCO China Holding Corporation). The plant commenced production of stainless cold rolled steel products in December 1998. The joint venture also completed


23


Table of Contents

the construction of new mills in July 2006 with additional annual production capacity of 800 thousand tons of stainless hot rolled products. Zhangjiagang Pohang Stainless Steel produced 780 thousand tons of stainless steel products in 2007.
 
We currently hold an 80.0% interest in Qingdao Pohang Stainless Steel Co., Ltd. (including a 10.0% interest by POSCO China Holding Corporation), a joint venture set up to manufacture and sell stainless cold rolled steel products in China. Construction of the plant operated by Qingdao Pohang Steel began in April 2003 and became operational in December 2004, with an annual production capacity of 180 thousand tons of stainless cold rolled steel products. Qingdao Pohang Steel produced 183 thousand tons of such products in 2007.
 
In August 2003, we entered into a joint venture agreement with Benxi Iron and Steel Group in China to establish Benxi Steel POSCO Cold Rolled Sheet Co., Ltd. and build a cold rolling mill with annual production capacity of 1.8 million tons. The cold rolling mill became operational in March 2006 and produced 1.3 million tons of such products in 2007. We expect the plant to reach its full production capacity in late 2008. We currently hold a 25.0% interest in this joint venture.
 
In November 2003, we launched POSCO China Holding Corporation, a wholly-owned holding company for our investments in China. POSCO China Holding Corporation also provides support to our Chinese investment projects and affiliated companies with their marketing efforts in China and solidifies their business relationships with clients and suppliers.
 
In addition to the above investments, we are carefully seeking out additional promising investment opportunities abroad. In June 2005, we entered into a memorandum of understanding with Orissa State Government of India for the construction of an integrated steel mill and the development of iron ore mines in Orissa state. We estimate the aggregate costs of the initial round of construction and mine development to be approximately $3.7 billion and an additional cost of approximately $8.3 billion in order to increase the annual production capacity to 12 million tons of plates and hot rolled products. In 2007, we obtained environmental clearances from the Indian Government required for the construction of a steel plant and a related port. We are currently in the process of acquiring an area of approximately 4,000 acres for the construction, as well as obtaining regulatory approvals for the development of iron ore mines.
 
We also obtained an approval from the Vietnamese Government in November 2006 to construct steel mills with an annual production capacity of 1.2 million tons of cold rolled products and 3.0 million tons of hot rolled products, pursuant to which we expect to invest $211 million and finance the remainder to construct a $528 million cold rolling mill with target completion in September 2009. We also submitted a feasibility report in June 2008 to the Vietnamese Government in order to obtain the Prime Minister’s approval for the construction and operation of an integrated steel mill in Vietnam.
 
In Mexico, we are planning to build an automotive steel sheet plant to supply automobile manufacturers in Mexico and Southwestern United States. We expect to invest $143 million and finance the remainder to construct a $239 million automotive steel sheet plant with an annual capacity of 0.4 million tons with target completion in June 2009. The plant construction is currently progressing as planned, and the mechanical and electrical erection will begin in June 2008.
 
In the United States, we entered into a joint venture in March 2007 with US Steel and SeAH to establish United Spiral Pipe to produce American Petroleum Institute-compliant pipes targeting customers in the United States and Canada. We hold a 35% interest in the company. US Steel and we will each supply 50% of the hot-rolled steel required for the production of pipes. United Spiral Pipe is currently constructing a $129 million manufacturing plant with an annual production capacity of 270,000 tons with target completion in April 2009.
 
In order to secure an alternative sales source for stainless hot-rolled steel products and an export base for expanding into the Southeast Asia stainless steel markets, we acquired a 15.0% interest in Thainox Stainless Public Company Limited, a major stainless steel manufacturer in Thailand, in 2007.
 
We also established approximately thirty supply chain management centers around the world to provide processing and logistics services such as cutting flat steel products to smaller sizes to meet customers’ needs. In


24


Table of Contents

2007, our twenty-eight supply chain management centers recorded aggregate sales of 1,460 thousand tons of steel products. We plan to continue expanding our global network of supply chain management centers, and we expect to operate 35 centers by the end of 2008.
 
Steel Trading
 
Our trading activities consist of exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. To strengthen our global market presence, we are coordinating these trading activities through a global trading network comprised of overseas subsidiaries, branches and representative offices. Such subsidiaries and offices support our trading activities by locating suitable local suppliers and purchasers on behalf of ourselves as well as customers, identifying business opportunities and providing information regarding local market conditions. Our consolidated subsidiaries engaged in steel trading include POSCO Steel Service & Sales Co., Ltd. that primarily focuses in the domestic market, and POSCO Asia Company Limited located in Hong Kong, POSCO Japan Co., Ltd. located in Tokyo, Japan and POSCO America Corporation located in New Jersey, U.S.A.
 
Engineering and Construction
 
POSCO Engineering & Construction 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 Engineering & Construction has established itself as one of the premier engineering and construction companies in Korea through:
 
  •  its strong and stable customer base; and
 
  •  its cutting-edge technological expertise obtained from construction of advanced integrated steel plants, as well as participation in numerous modernization and rationalization projects at our Pohang Works and Gwangyang Works.
 
Leveraging its technical know-how and track record of building some of the leading industrial complexes in Korea, POSCO Engineering & Construction has also focused on diversifying its operations into construction of high-end apartment complexes and participating in a wider range of architectural works and civil engineering projects, as well as engaging in urban planning and development projects and expanding its operations abroad. One of its landmark urban planning and development projects includes the development of a 5.7 million-square meter area of Songdo International City in Incheon, which POSCO Engineering & Construction is co-developing with Gale International, a respected real estate developer based in the United States. We believe that overseas demand for complex industrial plants, urban planning and development projects and skyscrapers will continue to offer substantial growth opportunities, and POSCO Engineering & Construction is currently engaged in construction activities in China, Vietnam, India, Latin America and the Middle East, as well as various other locations.
 
Energy
 
We have accumulated several decades of experience and know-how in a wide range of energy-related fields, including natural gas and other forms of power generation. As part of our diversification efforts, we strive to identify appropriate opportunities for power generation, renewable energy projects, liquefied natural gas logistics and natural gas exploration.
 
In order to make inroads into the power generation business, in 2006 we completed the acquisition of the largest domestic private power generation company that operates a liquefied natural gas combined cycle power plant with total power generation capacity of 1,800 megawatts and renamed it POSCO Power Corporation. POSCO Power Corporation plans to continue to expand its power generation capacity. In order to meet the increasing demand for clean and renewable sources of energy, POSCO Power Corporation signed a strategic partnership agreement in February 2007 with FuelCell Energy, a global leader in molten carbonate fuel cell technology, pursuant to which POSCO Power Corporation will explore opportunities to expand into the stationary fuel cell market. POSCO Power Corporation also began construction of a fuel cell manufacturing plant in Pohang in 2007.


25


Table of Contents

In the field of liquefied natural gas logistics, we constructed the Gwangyang liquefied natural gas receiving terminal, which is equipped with two 100,000 cubic meter storage tanks, two open-rack vaporizers and other processing facilities. In July 2007, we began expanding the terminal to increase the storage capacity from 200,000 cubic meters to 365,000 cubic meters by September 2010.
 
We are also actively seeking business opportunities in upstream energy resources exploration, especially in the field of natural gas. In 2007, we participated in the Aral Sea Exploration Project in Uzbekistan, purchasing a 9.8% interest from the Korea National Oil Corporation. We expect the drilling activity to commence in early 2009.
 
Information and Technology
 
Through POSDATA, a 61.9%-owned subsidiary, we have diversified our business into information and technology consulting and system network integration and outsourcing services, as well as wireless broadband Internet access service, or WiBro, and worldwide interoperability for microwave access service, or WiMAX. POSDATA also completed the initial stages of the nationwide electronic toll collection project for Korea’s highway system, and is currently promoting accelerated adoption of WiMAX services in overseas markets. POSDATA also engages in convergent information technology equipment manufacturing businesses such as electronic toll collection systems, digital video surveillance products, Internet protocol phones and multifunction units. We expect to launch Internet protocol television services in the second half of this year.
 
Others
 
We acquired or established several subsidiaries that address specific services to support the operations of Pohang Works and Kwangyang Works. POSCON Co., Ltd., acquired in 1986, provides industrial engineering services to member companies of the POSCO Group and manufacturing services utilizing automation technology. POSCO Machinery & Engineering Co., Ltd. and POSCO Machinery Co., Ltd. were established to perform maintenance of our manufacturing equipment. POSCO Refractories and Environment Company Ltd. manufactures refractories and industrial furnaces.
 
We also entered into a joint venture with Mitsui Corporation of Japan for a 51.0% interest in POSCO Terminal Co., Ltd. that provides logistics services related to storage and transportation of raw materials used in steel production and other industries. Facilities operated by POSCO Terminal Co., Ltd. currently have an annual handling capacity of 6.3 million tons.
 
Insurance
 
As of December 31, 2007, our property, plant and equipment are insured against fire and other casualty losses up to Won 8,876 billion. In addition, we carry general insurance for vehicles and accident compensation insurance for our employees to the extent we consider appropriate.
 
Item 4.C.   Organizational Structure
 
The following table sets out the jurisdiction of incorporation and our ownership interests of our significant subsidiaries:
 
                 
    Jurisdiction of
    Percentage of
 
Name
  Incorporation     Ownership  
 
POSCO Engineering & Construction Co., Ltd. 
    Korea       90.9 %
POSCO Power Corporation
    Korea       100.0 %
Zhangjiagang Pohang Stainless Steel Co., Ltd. 
    China       82.5 %
POSCO Specialty Steel Co., Ltd. 
    Korea       100.0 %
POSCO Steel Service & Sale Co., Ltd. 
    Korea       95.3 %
POSDATA Co., Ltd. 
    Korea       61.9 %


26


Table of Contents

Item 4.D.   Property, Plants and Equipment
 
Our principal properties are Pohang Works, which is located at Youngil Bay on the southeastern coast of Korea, and Gwangyang Works, which is located in Gwangyang City in the southwestern region of Korea. We expect to increase our production capacity in the future when we increase our capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. For a discussion of major items of our capital expenditures currently in progress, see “Item 5. Operating and Financial Review and Prospects — Item 5.B. Liquidity and Capital Resources — Liquidity — Capital Expenditures and Capital Expansion.”
 
Pohang Works
 
Construction of Pohang Works began in 1970 and ended in 1983. We increased the annual crude steel and stainless steel production capacity of Pohang Works from 14.3 million tons in 2007 to 15.0 million tons at the end of 2007 through the installation of a de-phosporization facility at Pohang Works’ no. 2 steelmaking plant. Pohang Works produces a wide variety of steel products. Products produced at Pohang Works include hot rolled sheets, plates, wire rods and cold rolled sheets, as well as specialty steel products such as stainless steel sheets and silicon steel sheets. These products can also be customized to meet the specifications of our customers.
 
Situated on a site of 8.9 million square meters at Youngil Bay on the southeastern coast of Korea, Pohang Works consists of 40 plants, including iron-making, crude steelmaking and continuous casting and other rolling facilities. Pohang Works also has docking facilities capable of accommodating ships as large as 250,000 tons for unloading raw materials, storage areas for up to 45 days’ supply of raw materials and separate docking facilities for ships carrying products for export. Pohang Works is equipped with an up-to-date computerized production-management system allowing constant monitoring and control of the production process.
 
The following table sets out Pohang Works’ capacity utilization rates for the periods indicated.
 
                                         
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
 
Crude steel and stainless steel production capacity (million tons per year)
    12.67       13.30       13.30       13.30       14.30  
Actual crude steel and stainless steel output (million tons)
    12.67       13.45       13.36       12.60       13.66  
Capacity utilization rate (%)(1)
    100.0       101.1       100.4       94.7       95.5  
 
 
(1) Calculated by dividing actual crude steel and stainless steel output by the actual crude steel and stainless steel production capacity for the relevant period as determined by us.
 
Gwangyang Works
 
Construction of Gwangyang Works began in 1985 on a site of 13.7 million square meters reclaimed from the sea in Gwangyang City in the southwestern region of Korea. We increased the annual crude steel production capacity of Gwangyang Works from 16.7 million tons in 2007 to 18.0 million tons at the end of 2007 through the installation of a de-phosporization facility at Gwangyang Works’ no. 2 steelmaking plant. Gwangyang Works specializes in high volume production of a limited number of steel products. Products manufactured at Gwangyang Works include both hot and cold rolled types.
 
Gwangyang Works is comprised of 43 plants, including iron-making plants, steelmaking plants, continuous casting plants, hot strip mills and thin-slab hot rolling plants. The site also features docking and unloading facilities for raw materials capable of accommodating ships of as large as 300,000 tons for unloading raw materials, storage areas for 40 days’ supply of raw materials and separate docking facilities.
 
We believe Gwangyang Works is one of the most technologically advanced integrated steel facilities in the world. Gwangyang Works has a completely automated, linear production system that enables the whole production process, from iron-making to finished products, to take place without interruption. This advanced system reduces the production time for hot rolled products to only four hours. Like Pohang Works, Gwangyang Works is equipped


27


Table of Contents

with an up-to-date computerized production-management system allowing constant monitoring and control of the production process.
 
Capacity utilization has kept pace with increases in capacity. The following table sets out Gwangyang Works’ capacity utilization rates for the periods indicated.
 
                                         
    For the Year Ended December 31,  
    2003     2004     2005     2006     2007  
 
Crude steel production capacity (million tons per year)
    16.23       16.70       16.70       16.70       16.70  
Actual crude steel output (million tons)
    16.23       16.76       17.19       17.45       17.41  
Capacity utilization rate (%)(1)
    100.0       100.4       102.9       104.5       104.2  
 
 
(1) Calculated by dividing actual crude steel output by the actual crude steel production capacity for the relevant period as determined by us.
 
The Environment
 
We believe we are in compliance with applicable environmental laws and regulations in all material respects. Our levels of pollution control are higher than those mandated by Government standards. We established an on-line environmental monitoring system with real-time feedback on pollutant levels and a forecast system of pollutant concentration in surrounding areas. We also undergo periodic environmental inspection by both internal and external inspectors in accordance with ISO 14001 standards to monitor execution and maintenance of our environmental management plan. We recently invested in comprehensive flue gas treatment facilities at some of sinter plants, dust collector at steelmaking plants and coke wastewater treatment facilities. In addition, we recycle most of by-products from the steelmaking process. We also have been developing environmentally friendly products such as chrome-free steel sheets in an effort to compete with products from the European Union, the United States and Japan and meet strengthened environmental regulations. Anticipating the trend toward increasing regulation of chrome in various steel products, we have introduced chrome-free steel products meeting international environmental standards in 2006 that are used to manufacture automobile oil tanks.
 
We plan to continue to invest in developing more environmentally friendly steel manufacturing processes. We commenced research and development for a new steel manufacturing technology called FINEX in 1992 jointly with the Research Institute of Industrial Science and Technology and VOEST Alpine, an Australian company, and we completed the construction of our first FINEX plant with an annual production capacity of 1.5 million tons in May 2007. We will continue to refine FINEX, a low cost, environmentally friendly steel manufacturing process that we believe optimizes our production capacity by utilizing non-agglomerated iron ore fines and using non-coking coal as an energy source and a reducing agent. We believe that FINEX offers considerable environmental and economic advantages by eliminating major sources of pollution such as sinter and coke plants, as well as decreasing operating and raw material costs.
 
In response to increasingly strict regulation on greenhouse gas emissions as outlined in the Kyoto Protocol, we engage in various Clean Development Mechanism projects to strive to reduce carbon dioxide emissions during the steel manufacturing process and acquire certified emission reductions. We plan to register three projects with the United Nations, including a combined cycle power generation facility that uses waste gas and a hydropower generation facility at Gwangyang Works. We are also linking onsite and offsite investment projects to Clean Development Mechanism projects, such as strip casting and fuel cells.
 
POSCO spent Won 127 billion in 2005, Won 194 billion in 2006 and Won 494 billion in 2007 on anti-pollution facilities.
 
Item 4A.   Unresolved Staff Comments
 
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.


28


Table of Contents

Item 5.   Operating and Financial Review and Prospects
 
Item 5.A.   Operating Results
 
Our results of operations are affected by sales volume, unit prices and product mix, costs and production efficiency and exchange rate fluctuations.
 
Overview
 
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, automobile, electrical appliances and downstream steel processors, and the Korean economy in general.
 
Our sales volume decreased by 0.4% in 2006 but increased by 3.6% in 2007. Our crude steel output decreased from 31.4 million tons in 2005 to 31.2 million tons in 2006, and sales volume decreased from 31.1 million tons in 2005 to 31.0 million tons in 2006. In 2007, our crude steel output increased to 32.8 million tons and sales volume increased to 32.1 million tons primarily due to an increase in production resulting from completion of relining of no. 3 blast furnace of Pohang Works and commencement of operation of the FINEX plant. For a discussion of our sales volume and revenues by major products and markets from 2003 to 2007, see “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products” and “— Markets.”
 
In 2006, unit sales price in Won for all of our principal product lines other than silicon steel sheets and stainless steel products decreased, and the weighted average unit prices for our products decreased by 4.8%, partially due to appreciation of the Korean Won against the Dollar in 2006 that contributed to a decrease in our export prices in Won terms. The average exchange rate of the Korean Won against the Dollar appreciated from Won 1,023.2 per Dollar in 2005 to Won 954.3 per Dollar in 2006. Unit sales price of hot rolled products, which accounted for 31.0% of total sales volume, decreased by 14.9% in 2006. Unit sales price of cold rolled products, which accounted for 35.1% of total sales volume, decreased by 13.4% in 2006. Unit sales price of wire rods, which accounted for 6.9% of total sales volume, decreased by 10.6%. Unit sales price of plates, which accounted for 11.7% of total sales volume, decreased by 6.7% in 2006. These decreases were partially offset by a 7.5% increase in unit sales price of stainless steel products, which accounted for 7.3% of total sales volume in 2006 and also by a 6.2% increase in unit sales price of silicon steel sheets, which accounted for 2.2% of total sales volume in 2006.
 
In 2007, unit sales price in Won for all of our principal product lines increased, and the weighted average unit prices for our products increased by 20.4% in 2007 compared to 2006 despite an appreciation of the Korean Won against the Dollar in 2007 that contributed to a decrease in our export prices in Won terms. The average exchange rate of the Korean Won against the Dollar appreciated from Won 954.3 per Dollar in 2006 to Won 929.0 per Dollar in 2007. Unit sales price of stainless steel products, which accounted for 8.4% of total sales volume, increased by 20.6% in 2007. Unit sales price of silicon steel sheets, which accounted for 2.9% of total sales volume, increased by 19.3% in 2007. Unit sales price of wire rods, which accounted for 6.9% of total sales volume, increased by 13.6% in 2007. Unit sales price of cold rolled products, which accounted for 37.8% of total sales volume, increased by 14.7% in 2007. Unit sales price of hot rolled products, which accounted for 25.6% of total sales volume, increased by 12.9% in 2007. Unit sales price of plates, which accounted for 12.2% of total sales volume, increased by 10.2% in 2007.
 
Export prices in Dollar terms increased in the first half of 2005 primarily as a result of general recovery of the global economy and continued increase in steel consumption in China, as well as increases in transportation costs


29


Table of Contents

and prices of raw materials. However, our export prices in Dollar terms decreased in the second half of 2005 due to excessive supply of steel products from China. Our export prices in Dollar terms rebounded in the first half of 2006 due to the recovery of the global steel markets resulting primarily from an increase in demand from the United States and Europe starting in the second quarter, but decreased in the second half of 2006 as such demand slowed during this period. Our export prices in Dollar terms increased in 2007 due to strong demand from China and Japan. Our export prices in Dollar terms have increased further in the first half of 2008 driven by increases in prices of raw materials such as iron ore and coal and strong market demand. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”
 
The table below sets out the average unit sales prices for our semi-finished and finished steel products for the periods indicated.
 
                         
    For the Year Ended December 31,  
Products
  2005     2006     2007  
    (In thousands of won per ton)  
 
Hot rolled products
  W 568.9     W 484.2     W 546.8  
Plates
    705.4       658.4       725.2  
Wire rods
    645.9       577.2       656.0  
Cold rolled products
    719.0       622.7       714.0  
Silicon steel sheets
    934.0       991.8       1,182.9  
Stainless steel products
    2,366.9       2,544.3       3,069.0  
Others
    538.6       476.6       509.5  
                         
Average(1)
  W 756.8     W 720.6     W 867.3  
                         
 
 
(1) “Average” prices are based on the weighted average, by sales volume, of our sales for the listed products. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.”
 
Costs and Production Efficiency
 
Our major costs and operating expenses are raw material purchases, depreciation, labor and other purchases.
 
The table below sets out a breakdown of our total costs and operating expenses as a percentage of our net sales for the periods indicated.
 
                         
    For the Year Ended December 31,  
    2005     2006     2007  
    (Percentage of net sales)  
 
Cost of goods sold
    71.4 %     77.0 %     78.8 %
Selling and administrative expenses(1)
    5.5       6.0       5.6  
Total operating expenses
    76.9       83.0       84.4  
Gross margin
    28.6       23.0       21.2  
Operating margin
    23.1       17.0       15.6  
 
 
(1) See Note 23 of Notes to Consolidated Financial Statements.
 
Our production efficiency in recent years has continued to benefit from operation near or in excess of stated capacity levels. Production capacity represents our maximum production capacity that can be achieved with an optimal level of operations of our facilities. We expect to increase our production capacity in the future when we increase our production capacity as part of our facilities expansion or as a result of continued modernization and rationalization of our existing facilities. See “Item 4. Information on the Company — Item 4.D. Property, Plants and Equipment.”


30


Table of Contents

The table below sets out certain information regarding our efficiency in the production of steel products for the periods indicated.
 
                         
    For the Year Ended December 31,  
    2005     2006     2007  
 
Crude steel and stainless steel production capacity (million tons per year)(1)
    30.9       31.2       32.8  
Actual crude steel and stainless steel output (million tons)
    31.4       31.2       32.8  
Capacity utilization rate (%)
    101.6       99.9       99.9  
Steel product sales (million tons)(2)
    31.12       30.98       32.11  
Man-hours per ton of crude steel produced(3)
    1.16       1.06       0.91  
 
 
(1) Includes production capacity of POSCO Specialty Steel Co., Ltd. and Zhangjiagang Pohang Stainless Steel Co., Ltd.
 
(2) Includes sales by our consolidated sales subsidiaries of steel products purchased by them from third parties, including trading companies to which we sell steel products. These sales amounted to approximately 1.4 million tons in 2003, 1.0 million tons in 2004, 1.0 million tons in 2005, 0.8 million tons in 2006 and 1.0 million tons in 2007.
 
(3) Does not include in the calculation employees of our subsidiaries or subcontractors.
 
Exchange Rate Fluctuations
 
Exchange rate fluctuations also have affected our results of operations and liquidity in recent years. Foreign exchange translation gains and losses arise as a result of fluctuations in the rates of exchange of Won to the foreign currencies in which some of our assets and liabilities are denominated (primarily Dollars and Yen). Depreciation of the Won may materially affect the results of our operations because, among other things, it causes:
 
  •  an increase in the amount of Won required for us to make interest and principal payments on our foreign currency-denominated debt, which accounted for approximately 45.2% of our total long-term debt (excluding discounts on debentures issued and including current portion) as of December 31, 2007;
 
  •  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 in Dollars; and
 
  •  foreign exchange translation losses on liabilities, which lower our earnings for accounting purposes.
 
Appreciation of the Won, on the other hand, (i) causes our export products to be less competitive by raising our prices in Dollar terms and (ii) reduces net sales and accounts receivables in Won from export sales, which are primarily denominated in Dollars. However, because of the larger positive effects of the appreciation of the Won (i.e., the reverse of the negative effects caused by the depreciation of the Won, as discussed above), appreciation of the Won generally has a positive impact on our results of operations. See “Item 3. Key Information — Exchange Rate Information.”
 
We attempt to minimize our exposure to currency fluctuations by attempting to maintain export sales, which result in foreign currency receipts, at a level that covers foreign currency obligations to the extent feasible. As a result, a decrease in our export sales could increase our foreign exchange risks. From time to time we also enter into cross currency swap agreements in the management of our interest rate and currency risks and currency forward contracts with financial institutions to reduce the fluctuation risk of future cash flows. As of December 31, 2007, we had entered into swap contracts, currency forward contracts and currency future contracts. The net valuation gain of our derivatives contracts was approximately Won 9.1 billion and the net transaction gain was Won 11.4 billion in 2007. We may incur losses under our existing contracts or any swap or other derivative product transactions entered into in the future. See Note 22 of Notes to Consolidated Financial Statements.


31


Table of Contents

Impairment Loss on the No. 2 Mini-mill at Gwangyang Works
 
We started the construction of the no. 2 mini-mill at Gwangyang Works in 1997. Our board of directors decided in May 1998 to temporarily suspend the construction of the mini-mill due to the unstable economic condition in Korea and the Asia Pacific Region. Due to the continuing unstable economic condition and related decrease in the selling price of products, which in turn resulted in the deterioration in profitability, the management’s operations committee decided in April 2002 to cease the construction of the no. 2 mini-mill. We recognized impairment losses on the construction-in-progress in Gwangyang no. 2 mini-mill amounting to Won 469.6 billion in 2003 and 2004 and reclassified related machinery held to be disposed of in the future as other investment assets as of December 31, 2004. We entered into a contract with Al-Tuwairqi Trading and Contracting Establishment of Saudi Arabia in June 2006 to sell the no. 2 mini-mill equipment for $96 million. Dismantling and transportation of the equipment is expected to be completed in the second half of 2008. The book values of property, plant and equipment held for sale amounted to Won 70 billion and are classified as other investment assets as of December 31, 2007.
 
Reportable Operating Segments
 
We have three reportable operating segments — a steel segment, an engineering and construction segment and a trading segment. The steel segment includes production of steel products and sale of such products. The engineering and construction segment includes planning, designing and construction of industrial plants, civil engineering projects and commercial and residential buildings, both in Korea and overseas. The trading segment consists of exporting and importing a wide range of steel products that are both obtained from and supplied to POSCO, as well as between other suppliers and purchasers in Korea and overseas. The operations of all other entities which fall below the reporting thresholds are included in the “others” segment, and include power generation, liquefied natural gas production, network and system integration, logistics and magnesium coil and sheet production. See Note 30 of Notes to Consolidated Financial Statements.
 
Inflation
 
Inflation in Korea, which was 2.8% in 2005, 2.2% in 2006 and 2.5% in 2007, has not had a material impact on our results of operations in recent years.
 
Critical Accounting Estimates
 
Our financial statements are prepared in accordance with Korean GAAP and reconciled to U.S. GAAP. The preparation of these financial statements under Korean GAAP as well as the U.S. GAAP reconciliation requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have identified the following areas where we believe assumptions and estimates are particularly critical to the financial statements:
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for exposures in our receivable balances that represent our estimate of probable losses in our short-term and long-term receivable balances. 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 customers’ ability to pay. 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.
 
Valuation of Investment 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.


32


Table of Contents

If available, quoted market prices provide the best indication of fair value. We determine the fair value of our securities 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. The fair value of unlisted equity securities held for investment (excluding those of affiliates and subsidiaries) is based on the latest obtainable net asset value of the investees, which often reflects cost or other reference events. These fair values based on pricing and valuation models, discounted cash flow analysis, or net asset values are subject to various assumptions used which, if changed, could significantly affect the fair value of the investments.
 
When the fair value of a listed equity security or the net equity value of an unlisted equity security declines compared to acquisition cost and is not expected to recover (impaired investment security), the value of the equity security is adjusted to its fair value or net asset value, with the valuation loss charged to current operations. When the fair value of a held-to-maturity or an available-for-sale investment debt security declines compared to the acquisition cost and is not expected to recover (impaired investment security), the carrying value of the debt security is adjusted to its fair value with the resulting valuation loss charged to current operations.
 
As part of this impairment review, the investee’s operating results, net asset value and future performance forecasts as well as general market conditions are taken into consideration. If we believe, based on this review, that the market value of an equity security or a debt security may realistically be expected to recover, the loss will continue to be classified as temporary. If economic or specific industry trends worsen beyond our estimates, valuation losses previously determined to be recoverable may need to be charged as a valuation loss in current operations.
 
Significant management judgment is involved in the evaluation of declines in value of individual investments. The estimates and assumptions used by our management to evaluate declines in value can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, the length of time and the extent to which fair value has been less than cost, and our intent and ability to hold the related security for a period of time sufficient to allow for any recovery in market value. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets. Any changes in these assumptions could significantly affect the valuation and timing of recognition of valuation losses classified as other than temporary.
 
Impairment of Long-lived Assets
 
The depreciable lives of long-lived assets are estimated and the assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The recoverable amount is measured at the greater of net selling price or value in use. When the book value of long-lived asset exceeds the recoverable value of the asset due to obsolescence, physical damage or a sharp decline in market value and the amount is material, the impairment of assets is recognized and the asset’s carrying value is reduced to its recoverable value and the resulting impairment loss is charged to current operations. Such recoverable value is based on our estimates of the future use of assets that is subject to changes in market conditions.
 
Our estimates of the useful lives and recoverable values of long-lived assets are based on historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated from continuing use of the assets that we review for impairment and cash outflows to prepare the assets for use that can be directly attributed or allocated on a reasonable and consistent basis. If applicable, estimates also include net cash flows to be received or paid for the disposal of the assets at the end of their useful lives. As a result of the impairment review, when the sum of the discounted future cash flows expected to be generated by the assets is less than the book value of the assets, we recognize impairment losses based on the recoverable value of those assets. We made 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. Further impairment charges may be required if triggering events occur, such as adverse market conditions, suggesting deterioration in an asset’s recoverability or fair value. Assessment of the timing of when such declines become other than temporary and/or the amount of such impairment is a matter of significant judgment. Results in


33


Table of Contents

actual transactions could differ from those estimates used to evaluate the impairment of such long-lived assets. A percentage difference in cash flow projections or discount rate used would not likely result in an impairment write-down.
 
Operating Results
 
2007 Compared to 2006
 
Our sales in 2007 increased by 22.3% to Won 31,608 billion from Won 25,842 billion in 2006, reflecting an increase of 20.4% in the average unit sales price per ton of our steel products, as discussed in “— Overview — Sales Volume, Prices and Product Mix” above, and a 3.6% increase in the sales volume of our steel products.
 
Sales volume of silicon steel sheets, which accounted for 2.9% of total sales volume, showed the greatest increase among our major steel product categories in 2007 with an increase of 36.1%. Sales volume of stainless steel products, which accounted for 8.4% of total sales volume, increased by 19.2%. Sales volume of cold rolled products, which accounted for 37.8% of total sales volume, increased by 11.8%. Sales volume of plates, which accounted for 12.2% of total sales volume, increased by 8.6%. Sales volume of wire rods, which accounted for 6.9% of total sales volume, increased by 3.2%. On the other hand, sales volume of hot rolled products, which accounted for 25.6% of total sales volume, decreased by 14.4%. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.”
 
Our sales to domestic customers in 2007 increased by 15.8% in terms of sales revenues (including sales of non-steel products and services) and increased by 1.3% in terms of sales volume of steel products compared to 2006. In 2007, our sales to domestic customers accounted for approximately 66.2% of our total sales volume of steel products, compared to 67.7% in 2006. The increase in domestic sales revenues in 2007 compared to 2006 was attributable primarily to an increase in the price of steel products sold in Korea and, to a lesser extent, an increase in sales volume to domestic customers.
 
Our export sales and overseas sales to customers abroad in 2007 increased by 35.5% in terms of sales revenues (including sales of non-steel products and services) and by 8.6% in terms of sales volume of steel products compared to 2006. Export sales and overseas sales to customers abroad as a percentage of total sales volume increased to 33.8% of our total sales volume of steel products in 2007 compared to 32.3% in 2006. The increase in export sales and overseas sales to customers abroad in terms of sales revenues in 2007 compared to 2006 was primarily attributable to an increase in the price of steel products sold abroad and, to a lesser extent, an increase in sales volume to customers abroad, which more than offset the reduction in net sales in Won from sales to customers abroad caused by appreciation of the Won against the Dollar.
 
Gross profit in 2007 increased by 12.8% to Won 6,705 billion from Won 5,946 billion in 2006. Gross margin in 2007 decreased to 21.2% from 23.0% in 2006 due to a 25.2% increase in cost of goods sold in 2007 to Won 24,903 billion from Won 19,897 billion in 2006, which outpaced the 22.3% increase in sales discussed above. The increase in cost of goods sold was attributable primarily to an increase in raw materials costs, which more than offset the impact from our cost savings programs, including implementation of the Mega Y project to reduce raw material costs and steel production costs related to sintering and coking processes. Raw materials costs in 2007 increased primarily as a result of a general increase in unit costs of iron ore and nickel, as well as an increase in our production of crude steel to 32.8 million tons in 2007 from 31.2 million tons in 2006. The average price of iron ore per ton (including all associated costs such as insurance, freight costs and customs duties) increased by 16.4% to $64 in 2007 from $55 in 2006, and the average price of nickel per ton (including insurance and freight costs) increased by 87.6% to $40,619 in 2007 from $21,654 in 2006. In 2007, our crude steel output increased to 32.8 million tons primarily due to an increase in production resulting from completion of relining of no. 3 blast furnace of Pohang Works and commencement of operation of the FINEX plant. Depreciation and amortization increased by 19.3% to Won 2,127 billion in 2007 from Won 1,783 billion in 2006, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Operating income in 2007 increased by 12.1% to Won 4,920 billion from Won 4,389 billion in 2006. Operating margin decreased to 15.6% in 2007 from 17.0% in 2006, as selling and administrative expenses increased by 14.7% in 2007 to Won 1,785 billion from Won 1,556 billion in 2006. The increase in selling and administrative expenses


34


Table of Contents

resulted principally from increases in transportation and storage expenses, labor-related expenses, selling and administrative expenses — others and fees and charges, the aggregate impact of which were partially offset by a decrease in provision for doubtful accounts. Transportation and storage expenses increased by 14.8% to Won 619 billion in 2007 from Won 540 billion in 2006 primarily due to an increase in our sales volume to customers abroad, as well as an increase in transportation costs, which in turn was primarily due to an increase in oil prices. Our labor-related expenses included in selling and administrative expenses, which consist of salaries, welfare expenses and provisions for severance benefits, increased by 20.2% to Won 387 billion in 2007 from Won 322 billion in 2006, primarily as a result of an increase in our salaries, as well as an increase in the number of employees of our subsidiaries. Selling and administrative expenses — others increased by 41.5% to Won 165 billion in 2007 from Won 117 billion in 2006 primarily as a result of an increase in stock compensation expenses. Fees and charges increased by 55.1% to Won 97 billion in 2007 from Won 63 billion in 2006, primarily as a result of a reclassification of new order commissions as fees and charges starting in 2007, as well as increases in management and tax consulting expenses in 2007. Our provision for doubtful accounts decreased by 47.1% to Won 62 billion in 2007 from Won 117 billion in 2006, primarily as a result of a decrease in estimated losses that may arise from our doubtful accounts.
 
Our net income in 2007 increased by 9.7% to Won 3,678 billion from Won 3,353 billion in 2006 primarily due to an increase in operating income discussed above, a decrease in loss from disposition of investment assets and an increase in interest and dividend income and a decrease in other bad debt expense, the aggregate impact of which were partially offset by a net loss of Won 46 billion on foreign currency translation in 2007 compared to a net gain of Won 79 billion on foreign currency translation in 2006 and an increase in interest expense. We recognized no loss from disposition of investment assets in 2007 compared to such loss of Won 66 billion in 2006 resulting from our disposition of SK Telecom shares. Our interest and dividend income increased by 28.4% to Won 235 billion in 2007 from Won 183 billion in 2006 primarily due to an increase in cash equivalents, short-term financial instruments and available for sale debt-securities in 2007 compared to 2006. Our other bad debt expense decreased by 76.8% to Won 16 billion in 2007 from Won 70 billion in 2006 primarily due to a decrease in bad debt expenses of POSCO Engineering & Construction relating to unsold residential units in 2007 compared to 2006. We recorded a net loss of Won 46 billion on foreign currency translation in 2007 compared to a net gain of Won 79 billion on foreign currency translation in 2006 primarily due to a depreciation of the Korean Won against the Yen in 2007 compared to appreciation of the Korean Won against the Yen in 2006. In addition, our interest expense increased by 30.9% to Won 240 billion in 2007 from Won 183 billion in 2006 primarily due to an increase in long-term borrowings, as well as a general increase in market interest rates in Korea.
 
Our effective tax rate in 2007 was 26.0% compared to 21.5% in 2006. The statutory income tax rate applicable to us, including resident tax surcharges, remain the same at 27.5% in 2007 compared to 2006. See Note 25 of Notes to Consolidated Financial Statements
 
Segment Results — Steel
 
Our sales to external customers increased by 17.6% to Won 27,911 billion in 2007 from Won 23,728 billion in 2006, primarily as a result of the reasons discussed above. After adjusting for inter-segment transactions, our net sales increased by 17.4% to Won 23,172 billion in 2007 from Won 19,743 billion in 2006.
 
Operating profit increased by 10.9% to Won 4,524 billion in 2007 from Won 4,079 billion in 2006, primarily as a result of the reasons discussed above. Depreciation and amortization increased by 12.1% to Won 1,920 billion in 2007 from Won 1,713 billion in 2006, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Segment Results — Engineering and Construction
 
Our sales to external customers increased by 1.3% to Won 3,802 billion in 2007 from Won 3,752 billion in 2006, primarily due to an increase in our plant construction activities. After adjusting for inter-segment transactions, our net sales increased by 27.8% to Won 2,710 billion in 2007 from Won 2,121 billion in 2006.
 
Operating profit increased by 0.8% to Won 285 billion in 2007 from Won 282 billion in 2006, primarily due to an increase in profit margins of our construction projects.


35


Table of Contents

Segment Results — Trading
 
Our sales to external customers increased by 31.9% to Won 4,018 billion in 2007 from Won 3,046 billion in 2006, primarily due to an increase in the average unit sales price per ton of steel products sold and, to a lesser extent, an increase in the sales volume. After adjusting for inter-segment transactions, our net sales increased by 30.3% to Won 3,143 billion in 2007 from Won 2,413 billion in 2006.
 
Operating profit increased by 28.4% to Won 31 billion in 2007 from Won 24 billion in 2006, primarily due to an increase in the sales volume and sales prices of steel products.
 
2006 Compared to 2005
 
Our sales in 2006 decreased by 1.7% to Won 25,842 billion from Won 26,302 billion in 2005, primarily due to a decrease of 4.8% in the average unit sales price per ton of our steel products, as discussed in “— Overview — Sales Volume, Prices and Product Mix” above, and a 0.4% decrease in the sales volume of our steel products, which were offset in part by recognition of sales of Won 413 billion from POSCO Power Corporation and Won 198 billion from POSCO-Foshan Steel Processing Center Co., Ltd., our newly consolidated subsidiaries in 2006.
 
Sales volume of wire rods, which accounted for 6.9% of total sales volume, showed the greatest decrease among our major steel product categories in 2006 with a decrease of 9.0%. Sales volume of hot rolled products, which accounted for 31.0% of total sales volume, decreased by 7.0%. In addition, sales volume of silicon steel sheets, which accounted for 2.2% of total sales volume, decreased by 6.9%. These decreases in sales volume were partially offset by increases in sales volume of stainless steel products and plates. Sales volume of stainless steel products, which accounted for 7.3% of total sales volume, showed the greatest increase among our major steel product categories in 2006 with an increase of 17.8%. Sales volume of plates, which accounted for 11.7% of total sales volume, increased by 13.2%. See “Item 4. Information on the Company — Item 4.B. Business Overview — Major Products.”
 
Our sales to domestic customers in 2006 decreased by 7.1% in terms of sales revenues (including sales of non-steel products and services) and decreased by 8.3% in terms of sales volume of steel products compared to 2005. In 2006, our sales to domestic customers accounted for approximately 67.7% of our total sales volume of steel products, compared to 73.5% in 2005. The decrease in domestic sales revenues in 2006 compared to 2005 was attributable primarily to a decrease in sales volume to domestic customers, as well as a decrease in the price of steel products sold in Korea.
 
Our export sales and overseas sales to customers abroad in 2006 increased by 11.1% in terms of sales revenues (including sales of non-steel products and services) and by 21.4% in terms of sales volume compared to 2005. Export sales and overseas sales to customers abroad as a percentage of total sales volume increased to 32.3% of our total sales volume of steel products in 2006 compared to 26.5% in 2005. The increase in export sales and overseas sales to customers abroad in terms of sales revenues in 2006 compared to 2005 was primarily attributable to an increase in sales volume to customers abroad, which more than offset a decrease in the price of steel products sold abroad and the reduction in net sales in Won from sales to customers abroad caused by appreciation of the Won against the Dollar.
 
Gross profit in 2006 decreased by 21.1% to Won 5,946 billion from Won 7,535 billion in 2005. Gross margin in 2006 decreased to 23.0% from 28.6% in 2005 due to a 6.0% increase in cost of goods sold in 2006 to Won 19,897 billion from Won 18,767 billion in 2005, as well as a 1.7% decrease in sales discussed above. The increase in cost of goods sold was attributable primarily to an increase in raw materials costs, which more than offset the impact from our cost savings programs, including implementation of the Mega Y project to reduce raw material costs and steel production costs related to sintering and coking processes. Raw materials costs in 2006 increased primarily as a result of a general increase in unit costs of iron ore and nickel, the impact of which was offset in part by a decrease in our production of crude steel to 31.2 million tons in 2006 compared to 31.4 million tons in 2005, as well as recognition of gain from disposition of scrap metal as a partial offset to raw material costs starting in 2006. The average price of iron ore per ton (including all associated costs such as insurance, freight costs and customs duties) increased by 22.2% to $55 in 2006 from $45 in 2005, and the average price of nickel per ton (including insurance and freight costs) increased by 42.2% to $21,654 in 2006 from $15,230 in 2005. Depreciation and amortization


36


Table of Contents

increased by 10.5% to Won 1,783 billion in 2006 from Won 1,613 billion in 2005, primarily due to an increase in capital investment in our facilities for production of higher value-added products.
 
Operating income in 2006 decreased by 27.8% to Won 4,389 billion compared to Won 6,083 billion in 2005. Operating margin decreased to 17.0% in 2006 from 23.1% in 2005, as selling and administrative expenses increased by 7.2% in 2006 to Won 1,556 billion compared to Won 1,451 billion in 2005. The increase in selling and administrative expenses resulted principally from increases in transportation and storage expenses and sales commissions, the impact of which were offset in part by a significant decrease in fees and charges. Transportation and storage expenses increased by 9.5% to Won 540 billion in 2006 compared to Won 493 billion in 2005 primarily due to an increase in our sales volume to customers abroad. Our sales commission expenses increased by 82.2% to Won 43 billion in 2006 compared to Won 23 billion in 2005 primarily due to reclassification of claim-related expenses as sales commissions starting in 2006. Our fees and charges in 2006 decreased by 48.8% to Won 63 billion compared to Won 122 billion in 2005, primarily as a result of a decrease in charges related to construction projects of POSCO Engineering & Construction. Our labor-related expenses included in selling and administrative expenses, which consist of salaries, welfare expenses and provisions for severance benefits, increased by 2.2% to Won 322 billion in 2006 from Won 315 billion in 2005, primarily as a result of a Won 15 billion increase in salaries resulting from the addition of POSCO Power Corporation and POSCO-Foshan Steel Processing Center Co., Ltd. as consolidated subsidiaries.
 
Our net income in 2006 decreased by 16.3% to Won 3,353 billion compared to Won 4,007 billion in 2005 primarily due to decreases in operating income, non-operating income — others and net gain on foreign currency translation, as well as increases in other bad debt expense and interest expense, the aggregate impact of which were partially offset by a decrease in non-operating expenses — others. Our non-operating income — others decreased by 33.9% to Won 141 billion in 2006 from Won 214 billion in 2005 primarily due to recognition of gain from disposition of scrap metal as a partial offset to raw material costs instead of non-operating income starting in 2006. Our net gain on foreign currency translation decreased by 43.2% to Won 79 billion in 2006 from Won 140 billion in 2005 primarily due to a decrease in the magnitude of appreciation of the Korean Won against the Dollar in 2006 compared to such appreciation in 2005. Other bad debt expense increased by 133.4% to Won 70 billion in 2006 from Won 30 billion in 2005 primarily due to allocation of Won 31 billion in bad debt expenses relating to accounts receivable for the construction expenses of POSCO Engineering & Construction. Interest expense increased by 22.7% to Won 183 billion in 2006 from Won 149 billion in 2005 primarily due to an increase in long-term borrowings, as well as a general increase in market interest rates in Korea. Our non-operating expenses — others decreased by 76.0% to Won 205 billion in 2006 from Won 854 billion in 2005 due to a significant decrease in special subsidies granted to 1,672 employees who were transferred to outsourcing companies in 2006 compared to such subsidies paid out to 23 employees who were transferred to outsourcing companies in 2005, as well as payment of additional income taxes of Won 179 billion in 2005 assessed following a regular audit conducted by the National Tax Service of our corporate income tax returns for 2000 to 2004; we have commenced an administrative action to challenge such assessment.
 
Our effective tax rate in 2006 was 21.5% compared to 26.9% in 2005. The statutory income tax rate applicable to us, including resident tax surcharges, remain the same at 27.5% in 2006 compared to 2005. See Note 25 of Notes to Consolidated Financial Statements.
 
Segment Results — Steel
 
Our sales to external customers decreased by 4.7% to Won 23,728 billion in 2006 from Won 24,887 billion in 2005, primarily as a result of the reasons discussed above. After adjusting for inter-segment transactions, our net sales decreased by 5.6% to Won 19,743 billion in 2006 from Won 20,912 billion in 2005.
 
Operating profit decreased by 30.6% to Won 4,079 billion in 2006 from Won 5,880 billion in 2005, primarily as a result of the reasons discussed above. Depreciation and amortization increased by 6.8% to Won 1,713 billion in 2006 from Won 1,604 billion in 2005, primarily due to an increase in capital investment in our facilities for production of higher value-added products.


37


Table of Contents

Segment Results — Engineering and Construction
 
Our sales to external customers decreased by 6.1% to Won 3,752 billion in 2006 from Won 3,994 billion in 2005, primarily due to a decrease in our plant construction activities. After adjusting for inter-segment transactions, our net sales decreased by 1.3% to Won 2,121 billion in 2006 from Won 2,148 billion in 2005.
 
Operating profit increased by 15.3% to Won 282 billion in 2006 from Won 245 billion in 2005, primarily due to an increase in profit margins of our construction projects.
 
Segment Results — Trading
 
Our sales to external customers decreased by 9.7% to Won 3,046 billion in 2006 from Won 3,374 billion in 2005, primarily due to reduction in the use of POSCO Steel Service & Sale and POSCO Asia by POSCO in our exporting activities. After adjusting for inter-segment transactions, our net sales increased by 1.3% to Won 2,413 billion in 2006 from Won 2,383 billion in 2005.
 
Operating profit remained relatively unchanged, decreasing by 1.0% to Won 24.2 billion in 2006 from Won 24.5 billion in 2005.
 
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,  
    2005     2006     2007  
    (In billions of won)  
 
Net cash provided by operating activities
  W 5,472     W 3,926     W 5,553  
Net cash used in investing activities
    3,444       3,363       4,264  
Net cash used in financing activities
    1,887       269       1,001  
Cash and cash equivalents at beginning of period
    482       654       936  
Cash and cash equivalents at end of period
    654       936       1,293  
Net increase in cash and cash equivalents
    172       283       356  
 
Capital Requirements
 
Historically, uses of cash consisted principally of purchases of property, plant and equipment and other assets and payments of long-term debt. Net cash used in investing activities was Won 3,444 billion in 2005, Won 3,363 billion in 2006 and Won 4,264 billion in 2007. These amounts included purchases of property, plant and equipment of Won 3,361 billion in 2005, Won 3,709 billion in 2006 and Won 2,892 billion in 2007. We recorded net disposal of available-for-sale securities of Won 28 billion in 2005, but recorded net acquisition of available-for-sale securities of Won 507 billion in 2006 and Won 1,171 billion in 2007. We also recorded net acquisition of short-term financial instruments of Won 113 billion in 2005, Won 94 billion in 2006 and Won 973 billion in 2007. In our financing activities, we used cash of Won 1,368 billion in 2005, Won 1,353 billion in 2006 and Won 527 billion in 2007 for principal repayments of outstanding long-term debt. We used Won 1,295 billion in 2005, Won 851 billion in 2006 and Won 1,291 billion in 2007 for the repurchase of our shares from the market as treasury stock. We raised cash of Won 932 billion in 2005, Won 70 billion in 2006 and Won 407 billion in 2007 from disposal of treasury shares.
 
We paid dividends on common stock in the amount of Won 681 billion in 2005, Won 636 billion in 2006 and Won 655 billion in 2007.
 
We anticipate that capital expenditures and repayments of outstanding debt will represent the most significant uses of funds for the next several years. From time to time, we may also require capital for investments involving acquisitions and strategic relationships and repurchase of our shares from the market as treasury stock. Our total capital expenditures (acquisition of property, plant and equipment) were Won 2,892 billion in 2007 and, under current plans, are estimated to increase to approximately Won 3,906 billion in 2008. We retain the ability to reduce or suspend our planned capital expenditures. However, our failure to undertake planned expenditures on steel-


38


Table of Contents

producing facilities could adversely affect the modernization of our production facilities and our ability to produce higher value-added products.
 
Principal repayment obligations with respect to long-term debt outstanding as of December 31, 2007 are Won 484 billion in 2008, Won 691 billion in 2009, Won 315 billion in 2010, Won 1,013 billion in 2011 and Won 1,301 billion in 2012 and beyond. As of December 31, 2007, we had short-term borrowings of Won 1,572 billion and current portion of long term debt of Won 484 billion (excluding discount). We expect to repay these obligations primarily through cash provided by operations and additional borrowings.
 
The following table sets forth the amount of long-term debt, capital lease and operating lease obligations as of December 31, 2007.
 
                                         
    Payments Due by Period  
          Less Than
                After
 
Contractual Obligations
  Total     1 Year     1 to 3 Years     4 to 5 Years     5 Years  
    (In billions of won)  
 
Long-term debt obligations
    3,802.6       484.0       2,018.0       568.6       732.0  
Capital lease obligations
                             
Operating lease obligations
    20.0       7.0       9.1       2.0       1.9  
Purchase obligations
    (a)     (a)     (a)     (a)     (a)
Other long-term liabilities
    (b)     (b)     (b)     (b)     (b)
                                         
Total
    3,822.6       491.0       2,027.1       570.6       733.9  
                                         
 
 
(a) Our purchase obligations include long-term contracts to purchase iron ore, coal, nickel, chrome, stainless steel scrap and liquefied natural gas. These contracts generally have terms of three to ten years and provide for periodic price adjustments to then-market prices. As of December 31, 2007, 414 million tons of iron ore and 83 million tons of coal remained to be purchased under long-term contracts.
 
(b) See Note 14 of Notes to Consolidated Financial Statements for our accrued severance benefits. Other long-term liabilities do not have maturity or due dates. Accordingly, payment due information of other long-term liabilities has not been presented in the above table.
 
In addition, as of December 31, 2007, contingent liabilities for outstanding guarantees provided for the repayment of loans of affiliated companies and non-affiliated companies totaled Won 577 billion and Won 526 billion, respectively. See Note 16 of Notes to Consolidated Financial Statements for our commitments and contingent liabilities.
 
Capital Resources
 
We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through long-term and short-term debt.
 
Our major sources of cash have been net earnings before depreciation and amortization and proceeds of long-term debt and other long-term liabilities, and we expect that these sources will continue to be our principal sources of cash in the future. Net income before depreciation and amortization were Won 5,620 billion in 2005, Won 5,136 billion in 2006 and Won 5,805 billion in 2007, and cash proceeds from long-term debt were Won 594 billion in 2005, Won 2,160 billion in 2006 and Won 1,054 billion in 2007. Total long-term debt, including current portion but excluding discount on debentures issued, was Won 2,190 billion as of December 31, 2005, Won 3,143 billion as of December 31, 2006 and Won 3,803 billion as of December 31, 2007.
 
We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial 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 other financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings.


39


Table of Contents

Our total shareholders’ equity increased from Won 19,874 billion as of December 31, 2005 to Won 25,118 billion as of December 31, 2007. This growth is attributable primarily to growth in retained earnings.
 
Liquidity
 
Our liquidity is affected by exchange rate fluctuations. See “— Overview — Exchange Rate Fluctuations.” Approximately 29.4% of our sales in 2005, 33.2% of our sales in 2006 and 36.8% of our sales in 2007 were denominated in foreign currencies, of which approximately 85% were denominated in Dollars and around 15% in Yen and which were derived almost entirely from export sales. As of December 31, 2007, approximately 45.2% of our long-term debt (excluding discounts on debentures issued and including current portion) was denominated in foreign currencies, principally in Dollars and Yen. We have incurred foreign currency debt in the past principally due to the cost of Won-denominated financing in Korea, which had historically been higher than for Dollar or Yen-denominated financings.
 
Our liquidity is also affected by our construction expenditures and raw materials purchases. Cash used for purchases of property, plant and equipment was Won 3,361 billion in 2005, Won 3,709 billion in 2006 and Won 2,892 billion in 2007. We have entered into several long-term contracts to purchase iron ore, coal and other raw materials. The long-term contracts generally have terms of three to ten years and provide for periodic price adjustments to then-market prices. As of December 31, 2007, 414 million tons of iron ore and 83 million tons of coal remained to be purchased under long-term contracts. We may face unanticipated increases in capital expenditures and raw materials purchases. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources which are sufficient for our unanticipated needs.
 
We had a working capital (current assets minus current liabilities) surplus of Won 5,759 billion as of December 31, 2005, Won 7,155 billion as of December 31, 2006 and Won 7,769 billion as of December 31, 2007. As of December 31, 2007, POSCO had unused credit lines of Won 814 billion out of total available credit lines of Won 1,162 billion. See Note 16 of Notes to Consolidated Financial Statements for a discussion of unused credit lines and total available credit lines of our consolidated subsidiaries. We have not had, and do not believe that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.
 
The following table sets forth the summary of our significant current assets for the periods indicated:
 
                         
    As of December 31,  
    2005     2006     2007  
    (In billions of won)  
 
Cash and cash equivalents, net of government grants
  W 654     W 936     W 1,293  
Short-term financial instruments
    760       867       1,743  
Trading securities
    2,611       2,001       1,287  
Trade accounts and notes receivable, net of allowance for doubtful accounts and present value discount
    3,045       3,492       4,036  
Inventories, net
    3,793       4,018       4,902  
 
Under Korean GAAP, bank deposits and all highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Short-term financial instruments primarily consist of time and trust deposits with maturities between three to twelve months.
 
The following table sets forth the summary of our significant current liabilities for the periods indicated:
 
                         
    As of December 31,  
    2005     2006     2007  
    (In billions of won)  
 
Trade accounts and notes payable
  W 1,146     W 1,507     W 2,247  
Short-term borrowings
    860       1,239       1,572  
Income tax payable
    1,367       701       931  
Current portion of long-term debt, net of discount on debentures issued
    1,057       404       483  


40


Table of Contents

In January 2000, we reduced our credit terms of accounts receivable for all customers from a range of 70 days to 80 days to a range of 30 days to 60 days. We do not believe that these changes in the credit terms for our customers have had or will have a material effect on our cash flows.
 
Capital Expenditures and Capacity Expansion
 
Our capital expenditures for 2005, 2006 and 2007 amounted to Won 3,361 billion, Won 3,709 billion and Won 2,892 billion, respectively.
 
Our current capital investment in production facilities emphasizes capacity rationalization, increased production of higher value-added products and improvements in the efficiency of older facilities in order to reduce operating costs. Our total capital expenditures are estimated to be approximately Won 3,906 billion in 2008. The following table sets out the major items of POSCO’s capital expenditures as of December 31, 2007:
 
                         
                Estimated
 
                Remaining
 
                Cost of
 
                Completion
 
    Expected
    Total
    as of
 
    Completion
    Cost of
    December 31,
 
Project
  Date     Project     2007  
    (In billions of won)  
 
Pohang Works:
                       
Installation of stainless steel continuous tandem rolling mill
    May 2009       297       261  
Capacity expansion of silicon steel production facility
    August 2009       282       255  
Installation of no. 2 thick heavy plate production facility
    January 2008       115       2  
Installation of electrolytic galvanizing line
    December 2008       99       85  
Installation of a bloom caster for the no. 1 continuous casting line
    February 2008       89       8  
Expansion of plate production facility
    December 2008       86       62  
Rationalization of billet mill. 
    March 2008       61       11  
Gwangyang Works:
                       
Capacity expansion of no. 2 pickling and tandem cold rolling mill
    April 2009       226       219  
 
Significant Changes in Korean GAAP
 
The Korean Accounting Standards Board has published a series of Statements of Korean Financial Accounting Standards (“SKFAS”), which will gradually replace the existing financial accounting standards, established by the Korean Financial and Supervisory Commission. We have adopted SKFAS No. 1 through No. 25, except No. 14 and No. 24, in our financial statements as of and for the year ended December 31, 2007. Significant accounting policies adopted by us for our annual financial statement for the year ended December 31, 2007 are identical to the accounting policies followed by us for the annual financial statements for the year ended December 31, 2006, except for SKFAS Nos. 11, 21, 22, 23, 24 and 25, which became effective for us on January 1, 2007. The following new SKFAS have become effective for accounting periods beginning on or after January 1, 2007:
 
  •  SKFAS No. 11, “Discontinued Operations”
 
  •  SKFAS No. 21, “Preparation and Presentation of Financial Statements I”
 
  •  SKFAS No. 22, “Share-based Payments”
 
  •  SKFAS No. 23, “Earnings Per Share”
 
  •  SKFAS No. 25, “Consolidated Financial Statements”
 
In accordance with SKFAS No. 21, “Preparation and Presentation of Financial Statements I,” our financial statements include the statements of changes in shareholders’ equity. We classified our capital adjustments account


41


Table of Contents

into capital adjustments and accumulated other comprehensive income and expense, and also disclosed the details of our comprehensive income in the notes to the financial statements. In addition, we disclosed our earnings per share on the face of our statements of income.
 
Certain prior year accounts, presented in the annual report for comparative purposes, have been reclassified to conform to current year’s financial statement presentation. Such reclassification does not impact the net income or net assets reported in the prior year.
 
U.S. GAAP Reconciliation
 
Our consolidated financial statements are prepared in accordance with Korean GAAP, which differ in significant respects from U.S. GAAP. For a discussion of the significant differences between Korean GAAP and U.S. GAAP, see Note 35 of Notes to Consolidated Financial Statements.
 
We recorded net income under U.S. GAAP of Won 3,565 billion in 2007 compared to net income of Won 3,408 billion in 2006 and Won 4,102 billion in 2005 primarily due to the factors discussed in “— Operating Results.” Our net income under U.S. GAAP of Won 3,565 billion in 2007 is 0.2% higher than our net income attributable to controlling interest under Korean GAAP of Won 3,559 billion. See Note 35(a) of Notes to Consolidated Financial Statements.
 
Recent Accounting Pronouncements in U.S. GAAP
 
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, except as amended by FASB position (“FSP”) SFAS 157-1 and FSP SFAS 157-2 as described further below. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied except for certain cases where it should be applied retrospectively. We are currently evaluating the impact that SFAS 157 may have on the consolidated financial position, results of operations or cash flows. This statement will be effective for us for the fiscal year beginning on January 1, 2008. In February 2008, the FASB issued FSP SFAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions” and FSP SFAS 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP SFAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
 
In February 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the impact that SFAS 159 may have on our consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). Under SFAS No. 141(R), companies are required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. This statement further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. We are in the process of evaluating the impact that SFAS 141 (revised 2007) may have on our consolidated financial statements. This statement will be effective for us


42


Table of Contents

for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period that begins on or after December 15, 2008.
 
In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“FAS 160”). FAS 160 requires all entities to report noncontrolling interests in subsidiaries (also known as minority interests) as a separate component of equity in the consolidated statement of financial position, to clearly identify consolidated net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income and to provide sufficient disclosure that clearly identifies and distinguishes between the interest of the parent and the interests of noncontrolling owners. FAS 160 also establishes accounting and reporting standards for changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. FAS 160 is effective as of January 1, 2009. We are in the process of evaluating the impact that FAS 160 may have on our consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are in the process of evaluating the impact that SFAS 161 may have on our consolidated financial statements. This statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.
 
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. Our technology development department works closely with the Pohang University of Science & Technology, Korea’s first research-oriented college founded by us in 1986, and the Research Institute of Industrial Science and Technology, Korea’s first private comprehensive research institute founded by us in 1987. As of December 31, 2007, Pohang University of Science & Technology and the Research Institute of Industrial Science and Technology employed a total of 566 researchers.
 
In 1994, we founded the POSCO Technical Research Laboratory to carry out applied research and technology development activities. As of December 31, 2007, the Technical Research Laboratory employed a total of 346 researchers.
 
We recorded research and development expenses of Won 173 billion as cost of goods sold in 2005, Won 271 billion in 2006 and Won 290 billion in 2007, as well as research and development expenses of Won 53 billion as selling and administrative expenses in 2005, Won 54 billion in 2006 and Won 53 billion in 2007. In addition, we made donations to educational foundations supporting basic science and technology research, amounting to Won 33 billion in 2005, Won 33 billion in 2006 and Won 47 billion in 2007. We also donated Won 17 billion in 2005, Won 22 billion in 2006 and Won 25 billion in 2007 to Pohang University of Science & Technology, a university founded by us.
 
Our research and development program has filed over twenty thousand industrial rights applications relating to steel-making technology, approximately one-fourth of which were registered as of December 31, 2007, and has successfully applied many of these to the improvement of our manufacturing process.
 
Item 5.D.   Trend Information
 
These matters are discussed under Item 5.A. and Item 5.B. above where relevant.


43


Table of Contents

Item 5.E.   Off-balance Sheet Arrangements
 
As of December 31, 2005, 2006 and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Item 5.F.   Tabular Disclosure of Contractual Obligations
 
These matters are discussed under Item 5.B. above where relevant.
 
Item 5.G.   Safe Harbor
 
See “Item 3. Key Information — Item 3.D. Risk Factors — This annual report contains “forward-looking statements” that are subject to various risks and uncertainties.
 
Item 6.   Directors, Senior Management and Employees
 
Item 6.A.   Directors and Senior Management
 
Board of Directors
 
Our board of directors has the ultimate responsibility for the management of our business affairs. Under our articles of incorporation, our board is to consist of six directors who are to also act as our executive officers (“Standing Directors”) and nine directors who are to be outside directors (“Outside Directors”). Our shareholders elect both the Standing Directors and Outside Directors at a general meeting of shareholders. Candidates for Standing Director are recommended to shareholders by the board of directors after the board reviews such candidates’ qualifications and candidates for Outside Director are recommended to the shareholders by a separate board committee consisting of three Outside Directors and one Standing Director (the “Director Candidate Recommendation Committee”) after the committee reviews such candidates’ qualifications. Any shareholder holding an aggregate of 0.5% or more of our outstanding shares with voting rights for at least six months may suggest candidates for Outside Directors to the Director Candidate Recommendation Committee.
 
Our board of directors maintains the following six sub-committees:
 
  •  the Director Candidate Recommendation Committee;
 
  •  the Evaluation and Compensation Committee;
 
  •  the Finance and Operation Committee;
 
  •  the Executive Management Committee;
 
  •  the Audit Committee; and
 
  •  the Insider Trading 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 Standing Directors by our board of directors’ resolution.


44


Table of Contents

Standing Directors
 
Our current Standing Directors are:
 
                                     
                  Years
           
            Years as
    with
           
Name
 
Position
 
Responsibilities and Division
  Director     POSCO     Age    
Expiration of Term of Office
 
Lee, Ku-Taek
  Chief Executive Officer and Representative Director       18       39       62     February 2010
Yoon, Seok-Man
  President and Representative Director   Chief Marketing Officer     4       31       59     February 2010
Chung, Joon-Yang
  President and Representative Director   Chief Operating Officer and Technology Officer     4       33       60     February 2010
Cho, Soung-Sik
  Senior Executive Vice President   Managing Director, POSCO-India Pvt. Ltd.     2       33       57     February 2009
Lee, Dong-Hee
  Senior Executive Vice President   Chief Finance Officer     2       31       58     February 2009
Choi, Jong-Tae
  Senior Executive Vice President   Chief Staff Officer     0       34       58     February 2011
 
All Standing Directors are engaged in our business on a full-time basis.
 
Outside Directors
 
Our current Outside Directors are set out in the table below. Each of our Outside Directors meets the applicable independence standards set forth under the rules of the Korean Securities and Exchange Act of 1962 (the “Korean Securities and Exchange Act”).
 
                             
            Years as
           
Name
 
Position
 
Principal Occupation
  Director     Age    
Expiration of Term of Office
 
Suh, Yoon-Suk
  Chairman of the Board   Professor, Ewha Woman’s University     4       53     February 2009
Park, Young-Ju
  Director   CEO, Eagon Industrial Co., Ltd.     4       67     February 2009
Jones, Jeffrey D. 
  Director   Attorney, Kim & Chang     4       56     February 2010
Park, Won-Soon
  Director   Executive Director, The Beautiful Foundation     4       52     February 2010
Sun, Wook
  Director   CEO, Nongshim Co., Ltd.     3       63     February 2011
Ahn, Charles
  Director   Chairman of the Board, AhnLab, Inc.     3       46     February 2011
Huh, Sung-Kwan
  Director   Former President, Gwangju Institute of Science and Technology     2       60     February 2009
Park, Sang-Yong
  Director   Professor, Yonsei University     0       57     February 2011
 
Jun, Kwang-Woo, one of our outside directors as of December 31, 2007, resigned on March 6, 2008 due to his appointment as the chairman of the Financial Services Commission.
 
The term of office of the Directors is up to three (3) years. Each Director’s term expires at the close of the ordinary general meeting of shareholders convened in respect of the fiscal year that is the last one to end during such Director’s tenure.
 
Senior Management
 
In addition to the Standing Directors who are also our executive officers, we have the following executive officers:
 
                         
            Years with
       
Name
 
Position
 
Responsibility and Division
  POSCO     Age  
 
Hur, Nam-Suk
  Senior Executive Vice President   General Superintendent, Gwangyang Works     33       58  
Chung, Keel-Sou
  Senior Executive Vice President   Chief of Stainless Steel Division     33       58  


45


Table of Contents

                         
            Years with
       
Name
 
Position
 
Responsibility and Division
  POSCO     Age  
 
Kim, Sang-Ho
  Executive Vice President   Legal Affairs Dept.     7       54  
Oh, Chang-Kwan
  Executive Vice President   General Superintendent, Pohang Works     30       55  
Kwon, Young-Tae
  Executive Vice President   Raw Materials Procurement Dept.     33       57  
Chang, Hyun-Shik
  Executive Vice President   Energy Business Dept.     6       57  
Kim, Jin-Il
  Executive Vice President   Vietnam Project Dept.     33       55  
Kwon, Oh-Joon
  Executive Vice President   General Superintendent, Technical Research Laboratories     21       57  
Park, Han-Yong
  Executive Vice President   Human Resources Dept.     30       57  
Kim, Sang-Young
  Executive Vice President   Corporate Communication Dept.     21       56  
Kim, Soo-Kwan
  Executive Vice President   General Superintendent, Human Resources Development Center, Corporate Contribution Dept.     31       56  
Cho, Jun-Gil
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Hot and Cold Rolling)     31       56  
Yoo, Kwang-Jae
  Senior Vice President   Stainless Steel Production and Technology     30       56  
Yoon, Yong-Chul
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Iron and Steel Making)     30       55  
Cho, Noi-Ha
  Senior Vice President   Production Order and Process Dept., Technical Service Dept., Market Development Group, Automotive Flat Products Service Group     30       55  
Yoon, Yong-Won
  Senior Vice President   Facilities Investment Planning Dept., Pohang New Steel Making Plant Project Dept., Gwangyang Plate Mill Project Dept., Raw Materials Handling Buildup Project Dept.     30       56  
Park, Ki-Hong
  Senior Vice President   Finance Dept.     2       50  
Choo, Wung-Yong
  Senior Vice President   European Union Office     25       55  
Kim, Sung-Kwan
  Senior Vice President   India Project Dept.     31       57  
Jang, Byung-Hyo
  Senior Vice President   POSCO-Japan Co., Ltd     31       54  
Kim, Joon-Sik
  Senior Vice President   Technology Development Dept., Magnesium Business Dept.     27       54  
Jang, Young-Ik
  Senior Vice President   Stainless Steel Raw Materials Procurement Dept.     29       54  
Kim, Moon-Seok
  Senior Vice President   Seoul Office     29       54  
Yun, Tai-Han
  Senior Vice President   Hot Rolled Steel Sales Dept., API Steel Sales Group, Plate Sales Dept., Wire Rod Sales Dept.     28       55  
Cho, Bong-Rae
  Senior Vice President   Deputy General Superintendent, Pohang Works (Iron and Steel Making)     28       55  
Chang, In-Hwan
  Senior Vice President   Cold Rolled Steel Sales Dept., Automotive Flat Products Sales Dept., Automotive Flat Products Exports Dept., Flat Products Sales SCM Dept., Coated Steel Sales Dept., Electrical Steel Sales Group     27       53  
Kong, Yoon-Chan
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Administration)     28       55  
Lee, In-Bong
  Senior Vice President   Information Planning Dept.     27       53  
Shin, Jung-Suk
  Senior Vice President   Zhangjiagang Pohang Stainless Steel Co. Ltd.     29       55  

46


Table of Contents

                         
            Years with
       
Name
 
Position
 
Responsibility and Division
  POSCO     Age  
 
An, Byung-Sik
  Senior Vice President   Deputy General Superintendent, Pohang Works (Maintenance)     30       52  
Baek, Sung-Kwan
  Senior Vice President   Investment Management Dept.     27       52  
Cho, Chang-Hwan
  Senior Vice President   Deputy General Superintendent, Gwangyang Works (Maintenance)     28       53  
Yoon, Dong-Jun
  Senior Vice President   Business Innovation Dept.     24       49  
Lee, Kyung-Hoon
  Senior Vice President   Environment & Energy Dept.     29       54  
Chang, Song-Hwan
  Senior Vice President   Deputy General Superintendent, Pohang Works (Administration)     27       53  
Lee, Hoo-Geun
  Senior Vice President   FINEX Research & Development Project Dept.     25       50  
Woo, Jong-Soo
  Senior Vice President   Deputy General Superintendent, Technical Research Laboratories     28       52  
Kang, Chang-Gyun
  Senior Vice President   Auditing Dept.     28       52  
Lee, Jung-Sik
  Senior Vice President   Deputy General Superintendent, Pohang Works (Hot and Cold Rolling)     28       53  
Suh, Young-Sea
  Senior Vice President   Stainless Steel Strategy Group, Stainless Steel Hot Rolled Product Sales Dept., Stainless Steel Cold Rolled Product Sales Dept.     24       52  
Park, Myung-Kil
  Senior Vice President   Materials Purchasing and Supply Management Dept.     22       49  
Lee, Young-Hoon
  Senior Vice President   Corporate Strategic Planning Dept.     22       48  
Hwang, Eun-Yeon
  Senior Vice President   Marketing Strategy Dept., Sales & Production Planning Group, Sales Logistics Group     21       49  
 
Item 6.B.   Compensation
 
Compensation of Directors and Officers
 
Salaries and bonuses for Standing Directors and salaries for Directors are paid in accordance with standards decided by the board of directors within the limitation of directors remuneration approved by the annual general meeting of shareholders. In addition, executive officers’ compensation is paid in accordance with standards decided by the board of directors. The aggregate compensation paid and accrued to all Directors and executive officers was approximately Won 16.7 billion in 2007 and the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was Won 6.4 billion in 2007.
 
We have also granted stock options to some of our Directors and executive officers. See “— Item 6.E. Share Ownership” for a list of stock options granted to our Directors and executive officers. At the annual shareholders’ meeting held in February 2006 our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.
 
Item 6.C.   Board Practices
 
Director Candidate Recommendation Committee
 
The Director Candidate Recommendation Committee comprises three Outside Directors, Park, Won-Soon (committee chair), Ahn, Charles and Sun, Wook and one Standing Director, Choi, Jong-Tae. The Director Candidate Recommendation Committee reviews the qualifications of potential candidates and proposes nominees to serve on our board of directors as an Outside Director. Any shareholder holding an aggregate of 0.5% or more of our outstanding shares with voting rights for at least six months may suggest candidates for Outside Directors to the committee.

47


Table of Contents

Evaluation and Compensation Committee
 
The Evaluation and Compensation Committee comprises four Outside Directors, Park, Young-Ju (committee chair), Suh, Yoon-Suk, Ahn, Charles and Huh, Sung-Kwan. The Evaluation and Compensation Committee’s primary responsibilities include establishing evaluation procedures and compensation plans for executive officers and taking necessary measures to execute such plans.
 
Finance and Operation Committee
 
The Finance and Operation Committee is comprised of three Outside Directors, Huh, Sung-Kwan (committee chair), Park, Young-Ju and Park, Won-Soon and two Standing Directors, Yoon, Seok-Man and Lee, Dong-Hee. This committee is an operational committee that oversees decisions with respect to finance and operational matters, including making assessments with respect to potential capital investments and evaluating prospective capital-raising activities.
 
Executive Management Committee
 
The Executive Management Committee comprises six Standing Directors: Lee, Ku-Taek (committee chair), Yoon, Seok-Man, Chung, Joon-Yang, Cho, Soung-Sik, Lee, Dong-Hee and Choi, Jong-Tae. This committee oversees decisions with respect to our operational and management matters, including review of management’s proposals of new strategic initiatives, as well as deliberation over critical internal matters related to organization structure and development of personnel.
 
Audit Committee
 
Under Korean law and our articles of incorporation, we are required to have an Audit Committee. The Audit Committee may be composed of three or more directors; all members of the Audit Committee must be Outside Directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. Members of the Audit Committee are elected by the shareholders at the ordinary general meeting of shareholders. We currently have an Audit Committee composed of four Outside Directors. Members of our Audit Committee are Suh, Yoon-Suk (committee chair), Jones, Jeffrey D., Sun, Wook and Park, Sang-Yong.
 
The duties of the Audit Committee include:
 
  •  engaging independent auditors;
 
  •  approving independent audit fees;
 
  •  approving audit and non-audit services;
 
  •  reviewing annual financial statements;
 
  •  reviewing audit results and reports, including management comments and recommendations;
 
  •  reviewing our system of controls and policies, including those covering conflicts of interest and business ethics; and
 
  •  examining improprieties or suspected improprieties.
 
In addition, in connection with general meetings of stockholders, the committee examines the agenda for, and financial statements and other reports to be submitted by, the board of directors at each general meeting of stockholders. Our internal and external auditors report directly to the Audit Committee. The committee holds regular meetings at least once each quarter, and more frequently as needed.
 
Insider Trading Committee
 
The Insider Trading Committee is comprised of four Outside Directors, Suh, Yoon-Suk (committee chair), Jones, Jeffrey D., Sun, Wook and Park, Sang-Yong. This committee reviews related party and other internal transactions and ensures compliance with the Monopoly Regulation and Fair Trade Act.


48


Table of Contents

Differences in Corporate Governance Practices
 
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
   
Independent directors must comprise a majority of the board
  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 8 out of 14 directors are Outside Directors. Under the our articles of incorporation, we may have up to six Standing Directors and nine Outside Directors.
Nomination/Corporate Governance Committee
   
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors
  We have not established a separate nomination/ corporate governance committee. However, we maintain a Director Candidate Recommendation Committee composed of three Outside Directors and one Standing Director.
Compensation Committee
   
Listed companies must have a compensation committee composed entirely of independent directors
  We maintain an Evaluation and Compensation Committee composed of four Outside Directors.
Executive Session
   
Listed companies must hold meetings solely attended by non-management directors to more effectively check and balance management directors
  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 is composed of more than three directors and satisfy the requirements of Rule 10A-3 under the Exchange Act
  We maintain an Audit Committee comprised of four Outside Directors who meet the applicable independence criteria set forth under Rule 10A-3 under the Exchange Act.
Shareholder Approval of Equity Compensation Plan
   
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan
 
We currently have an Employee Stock Ownership Program.

We previously provided a stock options program for officers and directors, as another equity compensation plan. However, during our annual shareholders’ meeting in February 2006, our shareholders resolved to terminate the stock option program and amended our articles of incorporations to delete the provision allowing grant of stock options to officers and directors.

Consequently, we may not grant stock options to officers and directors starting February 24, 2006. Matters related to the Employee Stock Ownership Program are not subject to shareholders’ approval under Korean law.
Corporate Governance Guidelines
   
Listed companies must adopt and disclose corporate governance guidelines
  We have adopted a Corporate Governance Charter setting forth our practices with respect to relevant corporate governance matters. Our Corporate Governance Charter is in compliance with Korean law but does not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Charter is available on our website at www.posco.com.
Code of Business Conduct and Ethics
   
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers
  We have adopted a Code of Conduct for all directors, officers and employees. A copy of our Code of Conduct is available on our website at www.posco.com.


49


Table of Contents

Item 6.D.   Employees
 
As of December 31, 2007, we had 28,543 employees, including 11,236 persons employed by our subsidiaries, almost all of whom were employed within Korea. Of the total number of employees, approximately 80% are technicians and skilled laborers and 20% are administrative staff. We use subcontractors for maintenance, cleaning and transport activities. We had 28,297 employees, including 10,774 persons employed by our subsidiaries, as of December 31, 2006, and 28,853 employees, including 9,849 persons employed by our subsidiaries, as of December 31, 2005. To improve operational efficiency and increase labor productivity, we plan to reduce the number of our employees in future years through natural attrition. However, we expect the number of persons employed by our subsidiaries in growth industries to increase in the future.
 
We consider our relations with our work force to be excellent. We have never experienced a work stoppage or strike. Wages of our employees are among the highest of manufacturing companies in Korea. In addition to a base monthly wage, employees receive periodic bonuses and allowances. Base wages are determined annually following consultation between the management and employee representatives, who are currently elected outside the framework of the POSCO labor union. A labor union was formed by our employees in June 1988. Union membership peaked at 19,026 employees at the beginning of 1991, but has steadily declined since then. As of December 31, 2007, only 18 of our employees were members of the POSCO labor union.
 
We maintain a retirement plan, as required by Korean labor law, pursuant to which employees terminating their employment after one year or more of service are entitled to receive a lump-sum payment based on the length of their service and their total compensation at the time of termination. We are required to transfer a portion of retirement and severance benefit amounts accrued by our employees to the National Pension Fund. The amounts so transferred reduce the retirement and severance benefit amounts payable to retiring employees by us at the time of their retirement. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company- provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, and cultural and athletic facilities.
 
As of December 31, 2007, our employees owned, through our employee stock ownership association, approximately 0.7% of our common stock in their association accounts and 3.43% of our common stock in their employee accounts.


50


Table of Contents

Item 6.E.   Share Ownership
 
Common Stock
 
The persons who are currently our Directors or executive officers held, as a group, 6,484 common shares as of December 31, 2007, the most recent practicable date for which this information is available. The table below shows the ownership of our common shares by Directors and executive officers.
 
         
    Number of Common
 
Shareholders
  Shares Owned  
 
Yoon, Yong-Won
    1,879  
Choi, Jong-Tae
    1,573  
Hur, Nam-Suk
    1,002  
Yoo, Kwang-Jae
    500  
Kim, Jin-Il
    200  
Yoon, Dong-Jun
    177  
Lee, In-Bong
    145  
Jang, Young-Ik
    138  
Yun, Tai-Han
    130  
Chang, In-Hwan
    130  
Kim, Joon-Sik
    128  
Baek, Sung-Kwan
    100  
Shin, Jung-Suk
    98  
Yoon, Yong-Chul
    81  
Lee, Jung-Sik
    69  
Kim, Soo-Kwan
    42  
Lee, Young-Hoon
    29  
Lee, Kyung-Hoon
    18  
Chang, Hyun-Shik
    15  
Park, Han-Yong
    12  
Woo, Jong-Soo
    10  
Kwon, Oh-Joon
    2  
Cho, Jun-Gil
    2  
Lee, Hoo-Geun
    2  
Cho, Chang-Hwan
    1  
Chang, Song-Hwan
    1  
         
Total
    6,484  
         


51


Table of Contents

Stock Options
 
The following table sets forth information regarding the stock options we have granted to our current Directors and executive officers as of March 31, 2008. With respect to the options granted, we may elect either to issue shares of common stock, distribute treasury stock or pay in cash the difference between the exercise and the market price at the date of exercise. The options may be exercised by a person who has continued employment with POSCO for two or more years from the date on which the options are granted. Expiration date of options is seven years from the date on which the options are granted. All of the stock options below relate to our common stock.
 
At the annual shareholders’ meeting held in February 2006, our shareholders elected to terminate the stock option program. Stock options granted prior to this meeting remain valid and outstanding pursuant to the articles of incorporation in effect at the time of the issuance of the stock option.
 
                                             
        Exercise Period   Exercise
    Granted
    Exercised
    Exercisable
 
Directors
 
Grant Date
  From   To   Price     Options     Options     Options  
 
Lee, Ku-Taek
  July 23, 2001   7/24/2003   7/23/2008     98,900       45,184       34,518       10,666  
    July 23, 2004   7/24/2006   7/23/2011     151,700       49,000       0       49,000  
Yoon, Seok-Man
  September 18, 2002   9/19/2004   9/18/2009     116,100       11,179       6,000       5,179  
    July 23, 2004   7/24/2006   7/23/2011     151,700       7,840       0       7,840  
Chung, Joon-Yang
  April 27, 2002   4/28/2004   4/27/2009     136,400       9,316       9,316       0  
    July 23, 2004   7/24/2006   7/23/2011     151,700       4,900       0       4,900  
Cho, Soung-Sik
  July 23, 2001   7/24/2003   7/23/2008     98,900       9,037       9,037       0  
    April 26, 2003   4/27/2005   4/26/2010     102,900       1,921       192       1,729  
Lee, Dong-Hee
  April 26, 2003   4/27/2005   4/26/2010     102,900       9,604       5,960       3,644  
Choi, Jong-Tae
  July 23, 2001   7/24/2003   7/23/2008     98,900       9,037       7,903       1,134  
    April 26, 2003   4/27/2005   4/26/2010     102,900       1,921       192       1,729  
Park,Young-Ju
  July 23, 2004   7/24/2006   7/23/2011     151,700       1,862       0       1,862  
Jones, Jeffrey D
  July 23, 2004   7/24/2006   7/23/2011     151,700       1,862       1,862       0  
Suh, Yoon-Suk
  July 23, 2004   7/24/2006   7/23/2011     151,700       1,862       500       1,362  
Sun, Wook
  April 28, 2005   4/29/2007   4/28/2012     194,900       2,000       0       2,000  
Ahn, Charles
  April 28, 2005   4/29/2007   4/28/2012     194,900       2,000       0       2,000  
 
                                             
                Options
                   
        Exercise Period   Exercise
    Granted
    Exercised
       
Executive Officers
 
Grant Date
  From   To   Price     Options     Options     Exercisable  
 
Hur, Nam-Suk
  April 27, 2002   4/28/2004   4/27/2009     136,400       9,316       9,316       0  
    April 28, 2005   4/29/2007   4/28/2012     194,900       2,000       0       2,000  
Chung, Keel-Sou
  July 23, 2004   7/24/2006   7/23/2011     151,700       9,800       0       9,800  
Kim, Sang-Ho
  April 28, 2005   4/29/2007   4/28/2012     194,900       12,000       12,000       0  
Oh, Chang-Kwan
  April 27, 2002   4/28/2004   4/27/2009     136,400       9,316       3,931       5,385  
Kwon, Young-Tae
  September 18, 2002   9/19/2004   9/18/2009     116,100       9,316       931       8,385  
Chang, Hyun-Shik
  April 26, 2003   4/27/2005   4/26/2010     102,900       9,604       9,604       0  
Kim, Jin-Il
  April 26, 2003   4/27/2005   4/26/2010     102,900       9,604       9,492       112  
Kwon, Oh-Joon
  April 26, 2003   4/27/2005   4/26/2010     102,900       9,604       8,604       1,000  
Park, Han-Yong
  April 26, 2003   4/27/2005   4/26/2010     102,900       9,604       9,604       0  
Kim, Sang-Young
  July 23, 2004   7/24/2006   7/23/2011     151,700       9,800       0       9,800  
Cho, Jun-Gil
  April 28, 2005   4/29/2007   4/28/2012     194,900       10,000       0       10,000  
Yoo, Kwang-Jae
  April 28, 2005   4/29/2007   4/28/2012     194,900       10,000       10,000       0  
Yoon, Yong-Chul
  April 28, 2005   4/29/2007   4/28/2012     194,900       10,000       0       10,000  
Cho, Noi-Ha
  April 28, 2005   4/29/2007   4/28/2012     194,900       10,000       0       10,000  
Yoon, Yong-Won
  April 28, 2005   4/29/2007   4/28/2012     194,900       10,000       10,000       0  


52


Table of Contents

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, 2007.
 
                 
    Number of
       
Shareholders
  Shares Owned     Percentage  
 
Nippon Steel Corporation(1)
    4,394,712       5.04  
Mirae Asset Investments Co., Ltd. 
    3,660,603       4.20  
National Pension Service
    3,404,897       3.91  
SK Telecom
    2,481,310       2.85  
Pohang University of Science and Technology
    2,000,000       2.29  
Directors and executive officers as a group
    6,484       0.01  
Public(2)
    59,592,195       68.35  
POSCO (held in the form of treasury stock)
    9,430,749       10.81  
POSCO (held through treasury stock fund)
    2,215,885       2.54  
                 
Total issued shares of common stock
    87,186,835       100.00 %
                 
 
 
(1) Held in the form of ADRs.
 
(2) Includes ADRs.
 
As of December 31, 2007, there were 15,748,592 shares of common stock outstanding in the form of ADRs, representing 18.06% of the total issued and outstanding shares of common stock.
 
Item 7.B.   Related Party Transactions
 
We have issued guarantees of Won 561 billion as of December 31, 2005, Won 598 billion as of December 31, 2006 and Won 577 billion as of December 31, 2007, in favor of affiliated and related companies. We have also engaged in various transactions with our subsidiaries and affiliated companies. Please see Note 16 of Notes to Consolidated Financial Statements.
 
As of December 31, 2005, 2006 and 2007, 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-94.
 
Legal Proceedings
 
We have been subject to a number of anti-dumping and countervailing proceedings in the United States and China. In addition, the European Union initiated an anti-dumping investigation in October 2007 into our sales of stainless steel cold-rolled coils in European countries. We expect the European Union to announce its decision in early 2009. The anti-dumping and countervailing proceedings have not had a material adverse effect on our business and operations. However, there can be no assurance that further increases in or new imposition of countervailing duties, dumping duties, quotas or tariffs on our sales in the United States, China or Europe may not have a material adverse effect on our exports to these regions in the future. See “Item 4. Information on the Company — Item 4.B. Business Overview — Markets — Exports.”


53


Table of Contents

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 interim dividends once a year under our articles of incorporation. If we decide to pay interim dividends, our articles of incorporation authorize us to pay them in cash and to the shareholders of record as of June 30 of the relevant fiscal year. We may pay cash dividends out of retained earnings that have not been appropriated to statutory reserves.
 
The table below sets out the annual dividends declared on the outstanding common stock to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding common stock to shareholders of record on June 30 of the years indicated. A total of 87,186,835 shares of common stock were issued at the end of 2007. Of these shares, 75,540,201 shares were outstanding and 9,430,749 shares were held by us in treasury and 2,215,885 shares were held through our treasury stock fund. The annual dividends set out for each of the years below were paid in the immediately following year.
 
                         
    Annual
          Average Total
 
    Dividend per
    Interim
    Dividend
 
    Common Stock
    Dividend per
    per Common
 
Year
  to Public     Common Stock     Stock  
    (In won)  
 
2003
    5,000       1,000       6,000  
2004
    6,500       1,500       8,000  
2005
    6,000       2,000       8,000  
2006
    6,000       2,000       8,000  
2007
    7,500       2,500       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
 
Not applicable
 
Item 9.   The Offer and Listing
 
Item 9.A.   Offer and Listing Details
 
Market Price Information
 
Notes
 
Not applicable


54


Table of Contents

 
Common Stock
 
The principal trading market for our common stock is the Stock Market Division of the Korea Exchange. Our common stock, which is in registered form and has a par value of Won 5,000 per share, has been listed on the first section of the Stock Market Division of the Korea Exchange since June 1988 under the identifying code 005490. The table below shows the high and low trading prices and the average daily volume of trading activity on the Stock Market Division of the Korea Exchange for our common stock since January 1, 2003.
 
                         
    Price     Average Daily
 
    High     Low     Trading Volume  
    (In won)     (Number of shares)  
 
2003
                       
First Quarter
    133,000       92,400       336,187  
Second Quarter
    127,000       97,500       300,224  
Third Quarter
    152,500       123,500       310,936  
Fourth Quarter
    163,000       131,500       345,272  
2004
                       
First Quarter
    181,000       156,500       312,764  
Second Quarter
    177,000       131,000       413,523  
Third Quarter
    184,000       145,000       241,698  
Fourth Quarter
    203,000       163,000       287,632  
2005
                       
First Quarter
    225,500       176,500       293,360  
Second Quarter
    203,000       174,500       298,650  
Third Quarter
    240,500       182,000       295,458  
Fourth Quarter
    236,500       199,500       334,140  
2006
                       
First Quarter
    251,500       196,500       391,776  
Second Quarter
    287,000       217,500       381,220  
Third Quarter
    254,000       225,500       269,202  
Fourth Quarter
    318,500       239,000       243,547  
2007
                       
First Quarter
    395,000       286,500       282,570  
Second Quarter
    481,000       366,000       251,054  
Third Quarter
    673,000       445,000       290,037  
Fourth Quarter
    765,000       557,000       336,932  
2008
                       
First Quarter
    582,000       417,000       333,766  
January
    582,000       465,000       355,143  
February
    555,000       487,500       278,397  
March
    530,000       417,000       367,758  
Second Quarter (through June 23)
    607,000       445,000       378,173  
April
    522,000       445,000       431,208  
May
    607,000       491,000       413,782  
June (through June 23)
    596,000       529,000       289,529  


55


Table of Contents

ADSs
 
Our common stock is also listed on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange in the form of ADSs. The ADSs have been issued by The Bank of New York Mellon as ADR depositary and are listed on the New York Stock Exchange under the symbol “PKX.” One ADS represents one-fourth of one share of common stock. As of December 31, 2007, 15,748,592 ADSs were outstanding, representing 18.06% shares of common stock.
 
The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 1, 2003.
 
                         
    Price     Average Daily
 
    High     Low     Trading Volume  
    (In US$)     (Number of ADSs)  
 
2003
                       
First Quarter
    28.66       18.46       324,595  
Second Quarter
    26.55       19.26       333,511  
Third Quarter
    32.49       26.08       262,191  
Fourth Quarter
    33.97       28.98       477,580  
2004
                       
First Quarter
    38.43       33.55       578,963  
Second Quarter
    39.01       27.97       1,013,306  
Third Quarter
    40.14       32.47       729,723  
Fourth Quarter
    47.50       36.49       765,003  
2005
                       
First Quarter
    54.85       41.22       866,811  
Second Quarter
    49.70       43.75       790,208  
Third Quarter
    57.08       44.12       606,928  
Fourth Quarter
    56.01       47.85       671,024  
2006
                       
First Quarter
    63.80       48.97       812,089  
Second Quarter
    74.41       56.07       922,906  
Third Quarter
    66.88       58.59       760,752  
Fourth Quarter
    84.88       63.00       748,789  
2007
                       
First Quarter
    106.88       76.49       770,003  
Second Quarter
    129.60       99.34       712,996  
Third Quarter
    184.54       124.50       809,315  
Fourth Quarter
    195.89       147.17       721,160  
2008
                       
First Quarter
    147.74       108.41       418,434  
January
    147.74       129.06       454,638  
February
    146.13       125.50       362,235  
March
    135.40       108.41       436,620  
Second Quarter (through June 23)
    147.05       112.80       259,072  
April
    134.07       112.80       315,663  
May
    144.38       123.09       243,528  
June (through June 23)
    147.05       128.08       218,025  


56


Table of Contents

Item 9.B.   Plan of Distribution
 
Not applicable
 
Item 9.C.   Markets
 
The Korean Securities Market
 
On January 27, 2005, the Korea Exchange was established pursuant to the Korea Securities and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are three different markets operated by the Korea Exchange: the Stock Market, the KOSDAQ Market and the Futures Market. The Korea Exchange has two trading floors located in Seoul, one for the Stock Market and one for the KOSDAQ Market, and one trading floor in Busan for the Futures Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Securities Dealers Association. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.
 
The Korea Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security pursuant to the Regulation on Listing on the Korea Exchange. The Korea Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semi-annually and quarterly and to release immediately all information that may affect trading in a security.
 
The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to publicly offer their securities.
 
The Korea Exchange publishes the Korea Composite Stock Price Index (“KOSPI”) every ten seconds, which is an index of all equity securities listed on the Korea Exchange. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.


57


Table of Contents

Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios.
 
                                                 
                            Period Average  
                            Dividend
    Price
 
                            Yield(1)(2)
    Earnings
 
Year
  Opening     High     Low     Closing     (Percent)     Ratio(2)(3)  
 
1979
    131.28       131.28       104.38       118.97       17.8       3.8  
1980
    100.00       119.36       100.00       106.87       20.9       2.6  
1981
    97.95       165.95       93.14       131.37       13.2       3.1  
1982
    123.60       134.48       106.00       128.99       10.5       3.4  
1983
    122.52       134.46       115.59       121.21       6.9       3.8  
1984
    115.25       142.46       115.25       142.46       5.1       4.5  
1985
    139.53       163.37       131.40       163.37       5.3       5.2  
1986
    161.40       279.67       153.85       272.61       4.3       7.6  
1987
    264.82       525.11       264.82       525.11       2.6       10.9  
1988
    532.04       922.56       527.89       907.20       2.4       11.2  
1989
    919.61       1,007.77       844.75       909.72       2.0       13.9  
1990
    908.59       928.82       566.27       696.11       2.2       12.8  
1991
    679.75       763.10       586.51       610.92       2.6       11.2  
1992
    624.23       691.48       459.07       678.44       2.2       10.9  
1993
    697.41       874.10       605.93       866.18       1.6       12.7  
1994
    879.32       1,138.75       855.37       1,027.37       1.2       16.2  
1995
    1,027.45       1,016.77       847.09       882.94       1.2       16.4  
1996
    882.29       986.84       651.22       651.22       1.3       17.8  
1997
    647.67       792.29       350.68       376.31       1.5       17.0  
1998
    374.41       579.86       280.00       562.46       1.9       10.8  
1999
    565.10       1,028.07       498.42       1,028.07       1.1       13.5  
2000
    1,028.33       1,059.04       500.60       504.62       1.6       18.6  
2001
    503.31       704.50       468.76       693.70       2.0       14.2  
2002
    698.00       937.61       584.04       627.55       1.4       17.8  
2003
    633.03       822.16       515.24       810.71       2.2       10.9  
2004
    821.26       936.06       719.59       895.92       2.1       15.8  
2005
    896.00       1,379.37       870.84       1,379.37       1.7       11.0  
2006
    1,383.32       1,464.70       1,203.86       1,434.46       1.7       11.4  
2007
    1,438.89       2,015.48       1,345.08       1,897.13       1.4       16.8  
2008 (through June 23)
    1,891.45       1,901.13       1,537.53       1,715.59       1.6       14.7  
 
 
Source: The Stock Market Division of the Korea Exchange
 
(1) Dividend yields are based on daily figures. Before 1983, dividend yields were calculated at the end of each month. Dividend yields after January 3, 1984 include cash dividends only.
 
(2) Starting in April 2000, dividend yield and price earnings ratio are calculated based on KOSPI 200, an index of 200 equity securities listed on the Stock Market Division of the Korea Exchange. Starting in April 2000, excludes classified companies, companies which did not submit annual reports to the Stock Market Division of the Korea Exchange, and companies which received qualified opinion from external auditors.
 
(3) The price earnings ratio is based on figures for companies that record a profit in the preceding year.


58


Table of Contents

 
Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period. Since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
 
With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights,” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below:
 
         
    Rounded Down
 
Previous Day’s Closing Price (Won)
  to (Won)  
 
Less than 5,000
    5  
5,000 to less than 10,000
    10  
10,000 to less than 50,000
    50  
50,000 to less than 100,000
    100  
100,000 to less than 500,000
    500  
500,000 or more
    1,000  
 
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
 
Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Exchange by the securities companies. In addition, a securities transaction tax of 0.15% of the sales price will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. An agricultural and fishery special surtax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Exchange. See “Item 10. Additional Information — Item 10.E. Taxation — Korean Taxation.”


59


Table of Contents

The number of companies listed on the Stock Market Division of the Korea Exchange, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:
 
                                                 
    Market Capitalization on the Last Day of Each Period                    
    Number of
                Average Daily Trading Volume, Value  
    Listed
    (Billions of
    (Millions of
    Thousands of
    (Millions of
    (Thousands of
 
Year
  Companies     Won)     US$)(1)     Shares     Won)     US$) (1)  
 
1979
    355     W 2,609     US$ 5,391       5,382     W 4,579     US$ 4,641  
1980
    352       2,527       3,829       5,654       3,897       5,905  
1981
    343       2,959       4,224       10,565       8,708       12,432  
1982
    334       3,000       4,408       9,704       6,667       8,904  
1983
    328       3,490       4,387       9,325       5,941       7,468  
1984
    336       5,149       6,223       14,847       10,642       12,862  
1985
    342       6,570       7,381       18,925       12,315       13,834  
1986
    355       11,994       13,924       31,755       32,870       38,159  
1987
    389       26,172       33,033       20,353       70,185       88,583  
1988
    502       64,544       94,348       10,367       198,364       289,963  
1989
    626       95,477       140,490       11,757       280,967       414,430  
1990
    669       79,020       110,301       10,866       183,692       256,411  
1991
    686       73,118       96,107       14,022       214,263       281,629  
1992
    688       84,712       107,448       24,028       308,246       390,977  
1993
    693       112,665       139,420       35,130       574,048       710,367  
1994
    699       151,217       191,730       36,862       776,257       984,223  
1995
    721       141,151       182,201       26,130       487,762       629,613  
1996
    760       117,370       139,031       26,571       486,834       576,680  
1997
    776       70,989       50,162       41,525       555,759       392,707  
1998
    748       137,799       114,091       97,716       660,429       546,803  
1999
    725       349,504       305,137       278,551       3,481,620       3,039,655  
2000
    704       188,042       149,275       306,163       2,602,211       2,065,739  
2001
    689       255,850       192,934       473,241       1,997,420       1,506,237  
2002
    683       258,681       215,496       857,245       3,041,598       2,533,815  
2003
    684       355,363       296,679       542,010       2,216,636       1,850,589  
2004
    683       412,588       395,275       372,895       2,232,109       2,138,445  
2005
    702       655,075       646,158       467,629       3,157,662       3,114,679  
2006
    731       704,588       757,948       279,096       3,435,180       3,695,331  
2007
    745       951,900       1,016,770       363,741       5,539,653       5,917,168  
2008 (through June 23)
    756       940,190       904,900       311,798       5,965,681       5,741,753  
 
 
Source: The Korea Exchange
 
(1) Converted at the Concentration Base Rate of The Bank of Korea or the Market Average Exchange Rate, as the case may be, at the end of the periods indicated.
 
The Korean securities markets are principally regulated by the FSC , the Korean Securities and Exchange Act and the Korean Securities and Futures Exchange Act. The Korean Securities and Exchange Act was amended fundamentally numerous times in recent years to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the Korean Securities and Exchange Act imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to


60


Table of Contents

investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests. The Korean Securities and Futures Exchange Act regulates the operation and monitoring of the securities and futures markets.
 
Further Opening of the Korean Securities Market
 
A stock index futures market was opened on May 3, 1996, a stock index option market was opened on July 7, 1997, an equity option market was opened on January 28, 2002 and an equity futures market was opened on May 6, 2008, in each case at the Korea Exchange. Remittance and repatriation of funds in connection with foreign investment in stock index and equity futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.
 
Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.
 
As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The FSC sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.
 
Currently, foreigners are permitted to invest in certain other securities including shares of Korean companies which are not listed on the Korea Exchange and in bonds which are not listed.
 
Protection of Customer’s Interest in Case of Insolvency of Securities Companies
 
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be a consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
 
When a customer places a sell order with a securities company which is not a member of the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange and this securities company places a sell order with another securities company which is a member of the Stock Market Division or the KOSDAQ Market Division of the Korea Exchange, the customer is still entitled to the proceeds of the securities sold and received by the non-member company from the member company regardless of the bankruptcy or reorganization of the non-member company. Likewise, when a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.
 
Under the Korean Securities and Exchange Act, the Korea Exchange is obliged to indemnify any loss or damage incurred by a counter party as a result of a breach by its members of the Stock Market Division or the KOSDAQ Market Division. If a securities company which is a member of the Stock Market Division or the KOSDAQ Market Division breaches its obligation in connection with a buy order, the Korea Exchange is obliged to pay the purchase price on behalf of the breaching member. Accordingly, the customer can acquire the securities that have been ordered to be purchased by the breaching member.


61


Table of Contents

As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that the Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to Won 50 million of cash deposited with a securities company in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the Korean Securities and Exchange Act, as amended, securities companies are required to deposit the cash received from its customers to the extent the amount is not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Korean Securities and Exchange Act. Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
 
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 of non-voting stock, par value Won 5,000 per share (“Non-Voting Shares”). Common Shares and Non-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issue Non-Voting Shares up to the limit prescribed by applicable law, the aggregate of which currently is one-half of our total issued and outstanding capital stock. As of December 31, 2007, 87,186,835 Common Shares were issued, of which 9,430,749 shares were held by us in treasury and an additional 2,215,885 shares were held by our treasury stock fund. We have never issued any Non-Voting Shares. All of the issued and outstanding Common Shares are fully-paid and non-assessable and are in registered form. We issue share certificates in denominations of 1, 3, 4, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.
 
Item 10.B.   Memorandum and Articles of Association
 
This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the Korean Securities and Exchange Act, the Commercial Code and related laws of Korea, 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 Korean Securities and Exchange Act and the Commercial Code. We have filed copies of our articles of incorporation and these laws as exhibits to registration statements under the Securities Act or the Securities Exchange Act previously filed by us.
 
Dividends
 
We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. The Common Shares represented by the ADSs have the same dividend rights as other outstanding Common Shares.
 
Holders of Non-Voting Shares are entitled to receive dividends in priority to the holders of Common Shares in an amount not less than 9% of the par value of the Non-Voting Shares as determined by the board of directors at the time of their issuance. If the amount available for dividends is less than the aggregate amount of such minimum dividend, we do not have to declare dividends on the Non-Voting Shares.


62


Table of Contents

We may declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceed one-half of the annual dividend. In addition, we may declare, and distribute in cash, interim dividends pursuant to a board resolution once a fiscal year. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
 
Under the Korean Commercial Code, we may pay an annual dividend only to the extent the net asset amount in our balance sheets exceeds the sum of the following: (i) our stated capital, (ii) the total amount of our capital surplus reserve and legal reserve accumulated up to the end of the relevant dividend period, and (iii) the legal reserve to be set aside for annual dividend. We may not pay an annual dividend unless we have set aside as earned surplus reserve an amount equal to at least 10% of the cash portion of the annual dividend or unless we have accumulated earned surplus reserve of not less than one-half of our stated capital. We may not use legal reserve to pay cash dividends but may transfer amounts from legal reserve to capital stock or use legal reserve to reduce an accumulated deficit.
 
Distribution of Free Shares
 
In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.
 
Preemptive Rights and Issuance of Additional Shares
 
We may issue authorized but unissued shares at the times and, unless otherwise provided in the Commercial Code, on the terms our board of directors may determine. All our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give public notice of the preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.
 
Under our articles of incorporation, we may issue new Shares pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:
 
  •  offered publicly or to underwriters for underwriting pursuant to the Korean Securities and Exchange Act;
 
  •  issued to members of our employee stock ownership association pursuant to the Korean Securities and Exchange Act;
 
  •  represented by depositary receipts pursuant to the Korean Securities and Exchange Act;
 
  •  issued in a general public offering pursuant to a board resolution in accordance with the Korean Securities and Exchange Act, the amount of which is no more than 10% of the outstanding Shares;
 
  •  issued to our creditors pursuant to a debt-equity swap;
 
  •  issued to domestic or foreign corporations pursuant to a joint venture agreement, strategic coalition or technology inducement agreement when deemed necessary for management purposes; or
 
  •  issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
 
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 2,000 billion, 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 Korean Securities and Exchange Act. This right is exercisable only to the extent that the total number of Shares so acquired and held by


63


Table of Contents

members of our employee stock ownership association does not exceed 20% of the total number of Shares then issued. As of December 31, 2007, our employees owned, through our employee stock ownership association, approximately 0.7% of our common stock in their association accounts and 3.43% 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. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
 
  •  as necessary;
 
  •  at the request of holders of an aggregate of 3% or more of our outstanding Shares;
 
  •  at the request of shareholders holding an aggregate of 1.5% or more of our outstanding Shares for at least six months; or
 
  •  at the request of our audit committee.
 
Holders of Non-Voting Shares may request a general meeting of shareholders only after the Non-Voting Shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.
 
We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of 1% or less of the total number of issued and outstanding voting Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use The Seoul Shinmun published in Seoul, The Maeil Shinmun published in Taegu and The Kwangju Ilbo published in Kwangju for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders of Non-Voting Shares, unless enfranchised, are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.
 
Our general meetings of shareholders are held either in Pohang or Seoul.
 
Voting Rights
 
Holders of our Common Shares are entitled to one vote for each Common Share, except that voting rights of Common Shares held by us, or by a corporate shareholder that is more than 10% owned by us either directly or indirectly, may not be exercised. The Commercial Code and the Korean Securities and Exchange Act permitted cumulative voting, under which voting method each shareholder would have multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director.
 
Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting Shares present or represented at the meeting, where the affirmative votes also represent at least one-fourth of our total voting Shares then issued and outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at least two-thirds of the voting Shares present or represented at a meeting, where the affirmative votes also represent at least one-third of our total voting Shares then issued and outstanding:
 
  •  amending our articles of incorporation;
 
  •  removing a director;
 
  •  effecting any dissolution, merger or consolidation of us;
 
  •  transferring the whole or any significant part of our business;
 
  •  effecting our acquisition of all of the business of any other company;
 
  •  issuing any new Shares at a price lower than their par value;


64


Table of Contents

 
  •  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; or
 
  •  reducing capital.
 
In general, holders of Non-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases that affect the rights or interests of the Non-Voting Shares, approval of the holders of Non-Voting Shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the Non-Voting Shares present or represented at a class meeting of the holders of Non-Voting Shares, where the affirmative votes also represent at least one-third of our total issued and outstanding Non-Voting Shares. In addition, the holders of Non-Voting Shares may be entitled to vote during the period between the general meeting of shareholders in which required preferred dividends are not paid to such holders until the next general meeting of shareholders at which the payment of such preferred dividends to such holders is declared. The holders of enfranchised Non-Voting Shares have the same rights as holders of Common Shares to request, receive notice of, attend and vote at a general meeting of shareholders.
 
Shareholders may exercise their voting rights by proxy. A shareholder may give proxies only to another shareholder, except that the Government may give proxies to a designated public official and a corporate shareholder may give proxies to its officers or employees.
 
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. To exercise this right, shareholders, including holders of Non-Voting S