POSCO Holdings - Q4 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. From now on, we're going to have POSCO Holdings 2022 earnings release conference call. During the conference call, we will have a presentation by POSCO Holdings, followed by a Q&A session with our participants. If you would like to ask questions, please press the asterisk key followed by number one on your telephone. From now on, let us begin the presentation of POSCO Holdings.

Jeong Ki-Seop (Chief Strategic Officer)

Good afternoon, ladies and gentlemen. I am Jeong Ki-Seop, Chief Strategic Officer at POSCO Holdings. First of all, I would like to extend my deepest gratitude to our investors for your continued support to POSCO Holdings. Before, I have worked at POSCO International, POSCO, and as CEO of POSCO Energy before joining POSCO Holdings as the CSO starting from this year.

Going forward, I will work hard to heed to your investors' feedback and promote balanced growth between steel and new growth businesses to enhance the real corporate value of POSCO Holdings. With that introduction, let us now begin today's earnings release call. Today, from POSCO Holdings, we are joined by nine members of the management overseeing business strategy, finance, steel and secondary battery material businesses.

From our operating companies, that is from POSCO Chemical, POSCO International, we are equally joined by key nine executives. During the past year in 2022, the biggest challenge we faced at our POSCO Group was the flood damage due to the typhoon Hinnamnor. Due to the flood impact, 17 hot rolling mill lines at Pohang were suspended, which was indeed unprecedented.

However, thanks to the efforts of not only our management, but also the private, public, county, local government partners, suppliers and clients' efforts, that is the support and encouragement from all levels, in 135 days as of January 20th, we were able to fully normalize all of our mill operations.

Other than such natural disasters, factors such as the global monetary tightening and geopolitical conflicts have led to a dampening of global demand, rising prices of raw materials, and supply chain insecurity, which have together led to a substantial decrease in the earnings of POSCO Group, centered especially on our steel business, particularly beginning in the fourth quarter of last year.

Fortunately, however, ever since our transition to a holding company in March of last year, we have transformed our business structure that had formerly depended too heavily on steel, and instead have invested and prepared variously for green new materials business so that we can see more growth in those sectors. Through this, we have established a solid foundation by which we can respond to such external uncertainties.

We expect that this year will be a year where we can see visible results from our past investments, such as the first commercial production of lithium. With the merger between POSCO International and POSCO Energy, we believe that we can be more aggressive in pursuing the group's green energy strategies. The business climate for 2023 does not appear to be rosy. They say that known risks are no longer risks.

We will continue to capture opportunities in the midst of these risks and work to prepare for the future. Lastly, allow me to discuss the dividend payout that has been decided by the board today. In consideration of our earnings, midterm dividend policy, and the payout ratio, the board has set the dividend at KRW 2,000 per share for the fourth quarter, for KRW 12,000 per share for the year 2022.

If we include the 3% of share buybacks that we conducted in August, we have thus far executed a total KRW 1.5 trillion in shareholder payout. Going forward, POSCO Holdings will work to promote a good balance between increased corporate value and stable shareholder returns.

With that, I would like to turn to Young-Ah Han, Head of the IR team, to present the 2022 earnings for POSCO Holdings, and then have the Q&A session where we can entertain your questions.

Young-Ah Han (Head of Investor Relations)

Hello, everyone. I would like to share with you the 2022 earnings. Last year, POSCO Holdings saw a consolidated revenue of KRW 84.75 trillion, up 11% YOY, with operating profit down by 47% at KRW 4.85 trillion. This is believed to be due to the flood impact at Pohang Steel Mills last September, which brought about suspended operation and associated costs having an impact of some KRW 1.3 trillion on our OP.

The steel sector's rapid downturn from second half last year resulted in KRW 425 billion deficit in OP in Q4. The green materials businesses centered on secondary battery materials showed YOY growth in annual revenue and OP of 62% and 27% respectively, driven by a good performance in the energy business.

The Green Infra business also saw a 27% increase YOY. POSCO Holdings, since transitioning to a holding company structure last March, has made strenuous efforts to promote new growth business and streamline our business portfolio. If you look on page five. You can see a graph of the CapEx in steel and non-steel business. We increased our CapEx in non-steel business, primarily secondary battery materials and energy, which amounted to KRW 3.1 trillion.

47% of total CapEx was allocated to new growth business. Driven by such investment, the non-steel business profits grew 27% YOY, reaching up to 35% of the total OP. The non-steel business has reached up to KRW 69 trillion. Moreover, there is the lithium brine plant in Argentina, SNNC nickel metal plant, and POSCO high-purity nickel refinery, which have been constructed.

The secondary battery materials business is conducted as planned. To produce black mass for recycling, we completed the construction and the permit of PLSC, and it began production. The POSCO HY Clean Metal construction has been complete with permit underway. Once POSCO HY Clean Metal begins production, this means that POSCO Holdings will commercially produce for the first time core materials, including lithium. Our investment goes beyond secondary battery.

With the merger of POSCO International and POSCO Energy, a new entity was launched in the beginning of this year, which will drive the energy business. We also have integrated logistics at the group level through restructuring and improved efficiency. Before I go into business performance by major areas, let me share with you three major business activities in 2022. Looking at page 6, first is recovery status or recovery completion of Pohang Mills.

I'm sure that many of you were concerned. Our mills operations had been suspended, but have now fully normalized at our 17 mills as of January 20th. There is also a No. 1 plate mill with lower efficiency due to small size of 600,000 ton capacity. We decided to completely close it down. We believe that the impact from natural disasters should not occur.

That is why we're trying to improve our logistics as well. The flood impact on our earnings is about KRW 1.34 trillion. That is KRW 904.5 billion in Q4. As mentioned in Q3, there was no additional inventory impairment loss. Recovery costs are estimated to be KRW 288.4 billion. Non-OP loss, including impairment loss and tangible assets, stood at KRW 235 billion.

The insurance settlement process is still ongoing. We received partial insurance payments, so this will go on, and we can expect more additional compensations. In Q1, we believe there could be additional recovery costs and its impact on earnings, but the level will be significantly lower than Q4. Moving on to page 7. Second is about the completed construction of PLSC and POSCO HY Clean Metal.

As you may well know, our company is implementing a used battery recycling business. The construction of PLSC in Poland was completed last August. We acquired the business permit for waste disposal and treatment at the end of last year, and production has actually begun. PLSC can produce 8,000 tons of black mass per year, and this black mass will be delivered in total quantity to POSCO HY Clean Metal at Gwangyang to be used in the lines.

If you look on the right, there is POSCO HY Clean Metal image, and we have built the number one plant on a land of 50,000 square meters and is currently in the commissioning phase. The CapEx for this plant was KRW 215.2 billion, and lithium, nickel, cobalt, manganese, that is total of seven materials can be extracted. Sometime around February this year, we'll obtain the business permits, and if that becomes possible, in the 2Q, we'll be able to go for initial production. The produced goods will receive additional certification from precursor cathode and anode firms, including POSCO Chemical. As for lithium, we have to get certification from battery makers.

We really want to shorten the certification period as much as possible so that we can start producing certified goods from mid-September and reach normal capacity by the end of this year. Even before certification, the goods can be sold as general materials, and we expect that from Q3 we'll be able to recognize sales, although in small amounts.

Once we reach normal capacity, annual sales is expected to be around KRW 300 billion. Now moving on to page eight. The recycling strategy at POSCO Holdings are two track. First, with green policies promoting stronger regulations on the use of recycled materials and secondary batteries starting from Europe, there is indeed a growing need to develop partnerships for more competitive and stable recycling.

There is also a need to develop these type of partnerships. As you may well know, we can recycle cell maker scraps and OEM used batteries as raw materials and then ultimately transform them into cathode precursor materials at POSCO Chemical for resupply. This allows us to implement a closed loop, and we believe that that is indeed a competitive edge.

The second recycling strategy is that with IRA in the U.S. and battery passport system in the EU, there is a growing localization and demand for a supply chain of secondary battery materials. Building on our recent experience, we will work towards implementing localization by region in the long run with cell makers and OEM players.

On the next page, you can see a brief outline of our recycling process, and there might be some investors who have taken a trip there. If you look at our recycling plant, it consists of pipes totaling 5.7 km in length, along with over 700 tanks all installed row on row. Through this, we can ensure a continuous flow of production, meaning that we can expect to see a recovery rate of over 95% for our black mass, nickel and cobalt. The process has also been designed to ensure a recovery rate of 85% of battery-grade lithium. This is quite competitive in our opinion, and for longer term efficiency, we have also invested in process automation. The chart that you see on the right-hand side shows a process that is still under development, and it is currently in the R&D stage.

It involves an automated pretreatment process that allows for mass production without the need for dismantling and discharging. It will also have a more simplified downstream process. You can see that we will continue to invest in R&D and technological development, continue to accumulate our experiences in operating commercialized plants so that we can see visible progress in these fields. Thirdly, on page 10, you would see that we can now report that the merger of POSCO International and POSCO Energy has been completed as of January. This newly integrated corporation will consolidate the value chain for all of the energy businesses of POSCO Group, allowing us to execute our green energy strategy in earnest. As the energy business grows, we believe that this will give us more of a competitive edge as we transition our steel business to eco-friendly green steel.

The market cap of the integrated POSCO International is KRW 4.2 trillion. This means that the equity stake of POSCO Holdings has increased from 62.9% to 70.7%. Allow me to deep dive into the earnings for each sector. On page 12 for POSCO. You will see that production and sales have decreased year-on-year due to the shutdown of the Pohang plant. You will see that the impact to profit was larger than the decrease in production and sales, and the reason for this is due to the products mix. We have repaired the facilities in turn, but we were unable to produce finished products in the fourth quarter and instead had to ship semi-finished products that have a lower unit price and less added value.

If you look at the sales mix on the bottom right, you'll see that the sales of slab increased substantially in the fourth quarter, whereas the higher priced STS and plates, which are produced out of our Pohang plant, have seen a decrease in sales. Together with fixed costs, this has impacted our sales mix and therefore impacted our bottom line. Next page. Even without the impact from the flood, the overall weakness in the steel market became more pronounced in 4Q. Sales price of carbon steel peaked in the second quarter and 4Q sales price declined 13% compared to the third quarter. On a month-to-month basis, the sales volume for December was the lowest.

The combined losses stemming from the flood and from the overall market downturn have led to POSCO going into the red in the fourth quarter, finishing the year with an operating income of 2.295 trillion KRW. For overseas steel subsidiaries, they saw a profit of KRW 474 billion in 2022, but on a quarterly basis, the slow global steel demand edged the subsidiaries to turn to loss as of the fourth quarter. In particular, Indonesia PT Krakatau and Maharashtra in India saw a further decline in 4Q. What's interesting is that our Chinese subsidiary, Zhangjiagang STS, and the Vietnamese subsidiary, POSCO VINA, saw an improvement in the fourth quarter compared to 3Q. Moving on to POSCO International. POSCO International saw its highest revenue and profits ever recorded last year.

Its 4Q operating profit also grew 21% YOY. The Myanmar gas field performed quite well. I'm sure most of our investors are aware of this. The Senex Energy subsidiary, which we acquired in April, also returned an operating profit of 21% since our acquisition to contribute to the earnings increase. On the next page, you will see POSCO Energy, which also performed very well. Revenue and operating profit in 2022 increasing 88% and 33% respectively, benefiting from the rise in LNG prices and the expansion in its LNG sales and connecting business making use of its own tanks. Going forward, the merger will lead to consolidated earnings, and this means that we'll see KRW 41.06 trillion. This would means that we will see combined earnings together going beyond surpassing the KRW 1 trillion mark.

As for POSCO E&C, they've recorded a profit of KRW 308.6 billion. Its profits have been shrinking due to the downturn in the construction industry and hike in the price of materials, it managed to record a net positive OP for the fourth quarter as well to the tune of KRW 21.8 billion. POSCO E&C is maintaining a stable business by preemptively shoring up cash reserves and downsizing risks. For POSCO Chemical, it saw revenue of KRW 3.3 trillion and OP of KRW 165.9 billion. Last year was meaningful for POSCO Chemical as it was the first year when revenues from a new business, such as cathodes and anodes, exceeded those of the existing products, such as refractories and quicklime chemical.

Profitability declined in Q4 due to such imbalance factors such as the price of lithium inventory and changes in exchange rate, as well as the flooding of the Pohang plant, which led to slower sales of refractories and quicklime. In 2023, this year, our revenue target has been set for KRW 86 trillion. Due to our aggressive planned investments into commercialization of the plants producing materials for rechargeable cells such as cathodes, anodes, lithium and nickel, our CapEx is expected to increase to KRW 11 trillion year-on-year. However, within this budget, we will... Although we have this budget set aside, this doesn't mean that they are all slated for execution. Because our thinking is that we will quickly green light those investments that can ensure future growth while downsizing or even delaying the investments that are not as urgent.

We will be selective in pursuing these investments from the perspective of our entire business portfolio. With this, I conclude my earnings presentation. Move to Q&A.

Operator (participant)

Now we will begin the Q&A session. If you wanna ask questions, please press asterisk followed by one on your telephone. If you want to cancel your question, please press asterisk followed by two. The first question is from Hyundai Motor Securities, Park Hyuk. Please go ahead.

Park Hyuk (VP)

Hello, I am Park Hyuk. First of all, thank you for that presentation and giving me the opportunity to ask questions. I have three questions for you. First is regarding the steel market conditions. As of end of December, the global and the Chinese steel prices seem to become more stabilized and rebound. Also we believe that there will be expectations that the steel market will recover with the property market in China.

As for POSCO Holdings in the first half and the second half of this year, how do you expect the steel markets to be? Regarding the coking coal as well as iron ore prices, how do you expect the price range it would be for this year? Second question is about lithium. During the Q3 conference call, you mentioned about the lithium, and I would like to know if there have been any updates ever since regarding lithium. This October, I would like to know if the plant will be completed as planned. I think the lithium prices, especially from China, has gone down slightly recently. What is your outlook for lithium prices this year? The third question is about, you know, EU.

There is CBAM that will become effective, from October 2026, effective from 2026. How would that impact our business? Of course, the export volume is not that high, but what preparations are you making to respond to CBAM? Thank you.

Jeong Ki-Seop (Chief Strategic Officer)

Yes. First is regarding the steel market. Eom Ki-cheon is going to give the answer.

Eom Ki-cheon (Head of Marketing Strategy)

Hello, I am Head of Marketing Strategy at POSCO, Eom Ki-cheon. You mentioned about the steel market in the first half and the second half of this year. Last October, as it was projected by the steel association, the demand for this year will increase about 1% to hover about 1.8 billion tons. By quarter, in the first half, there will be additional interest hikes in the EU as well as U.S. and the global recessions or the downturn may continue this year. In terms of steel demand, there is the Ukrainian War, and there is also the supply issues for the automaking. We believe that that will serve as a limitation for the demand recovery.

Because of the inflammation, there are increasing costs and also the raw material prices surge, and that will put actually a burden on the cost. Despite the global downturn, this will actually lead to increased prices for the steel makers. In the latter half, there are stimulus packages prepared by different governments. There's also recovery expected coming from China. We believe that the steel market is expected to recover in the second half. Especially with the herd immunity achieved in China, the coronavirus risk may be mitigated and addressed. If the stimulus packages become effective in China, we believe that the recovery will take place from end of Q1 to Q2 to see a growing upturn for the steel market. You also asked a question about the property market in China.

In 2023, the property market in China will be impacted by the regulation that began in 2021. Following 2022, people expected that there will be a continued downturn in the property market. The liquidity has been improved or in China recently. There's also the ease of COVID-19 and also stimulus packages becoming effective and valid in China. We can expect some sort of recovery coming from China. As you may well know, the Chinese government last October actually announced 16 stimulus packages. Bloomberg said that that is one of the strongest, actually, stimulus package for the property market of China. We could actually see the renewed commitment or the strong commitment coming from the Chinese government.

If the property market actually goes into recovery as the government expects, we believe that the steel demand in the property market will also increase as well. Thank you.

Jeong Ki-Seop (Chief Strategic Officer)

Next, questions about raw materials. I would like to ask Seo Ji-won, who is the head of raw materials office at POSCO, to answer the question.

Seo Ji-won (Head of Raw Materials Office)

Hello, I'm Seo Ji-won, Head of Raw Materials Office at POSCO. You mentioned, I would like to talk about the iron ore market. Actually at Q3, it was about $80. Recently because of the expectations of reopening in China and stimulus packages in China, there is also the extreme weather conditions in the Southern Hemisphere. The price went up until $120. We believe that in terms of supply and demand, the iron ore demand will not increase very much this year. There are not many drivers. On the other hand, as for supply of iron ore, there is the recovery of Vale mine in Brazil, we believe that it will increase about more than 14 million tons.

If you look at the comparison of the first half and the second half, in the first half, there is the weather issue in Brazil and Australia and also the expectations of reopening in China. The prices will remain strong. In the second half, but thereafter, it's going to slightly go down. In the second half, the global supply will go up. We believe that the price will be further stabilized. As for coking coal, there is the price for generation. Because of weather conditions in Australia, it has gone up to $320. Just like iron ore, we believe that the demand for coking coal will not increase drastically. As for supply, because of extreme weather conditions, it will be very difficult to be normalized in the first half.

The first half, as for the coking coal, we believe that the current situation will last until February and March, and after the Q2, the supply will go up and the price will stabilize. In the latter half, centering on Australia, the supply will stabilize, so we believe that the price will be also stabilized around $200. As you may well know, China actually started reimporting coking coal from Australia, so we believe that going forward, the price might slightly go up. Thank you.

Jeong Ki-Seop (Chief Strategic Officer)

Next on lithium, we would like to ask, Lee Kyeong-seob, who is the Chief of the Lithium-Ion Batteries Materials Business.

Lee Kyung-seob (Chief of the Lithium-Ion Batteries Materials Business)

Hello, my name is Lee Kyeong-seob. As for the lithium business, I don't think that there have been any drastic changes to report. However, the plans that we have reported to our investors in the past have become more concretized. If we take a look at Gwangyang, our plans are going forward as planned, we are going to see operations in October. That's the first stage. We believe that the second stage is going to also proceed as planned up to February of next year. As for Argentina, we are moving on with the first stage production process of 25,000 tons, and civil engineering projects are also seamlessly underway. Until the end of this year, we believe that once the CapEx are all up and running, that in 2024, we will be able to see completion.

For brine, second stage, we have received a green light at the board. In Gwangyang, for our plans, we have completed incorporation of a new subsidiary, of a new entity. This means that we are going to continue on as planned with upstream in Argentina and downstream in Gwangyang, and we will break ground. For the lithium market, some people say that lithium prices have gone down in the past, but last year in November, lithium demand and lithium securing of inventory went up to about 1,000 and was reported to about 72,700 around the Korean Lunar New Year holidays. We believe that there's going to be insufficient supply of lithium.

As what McKinsey has reported last year, at the end of last year in October or so, the forecast is to be about $68,800 and around $60,000-$70,000 range for 2024 as well. In June, there was a lithium conference held in the U.S., and the industry outlook was that in the mid to long term, the prices will fluctuate around the range of $50,000 to about $60,000, give or take $70,000 or so. Last year, EV sales went up to about 15 million globally. The reported, so expectations were about 9.3 million, but as you can see that although people say that the EV market outlook is going to go to the downturn, we've seen continued increased sales.

Tesla has said that sales have gone down, and they're actually slashing the prices of their cars, but this means that other OEMs are selling more EVs, so the total overall EV market is continuing to see growth. This means that for secondary cell CapEx investment for POSCO, we will continue to accelerate these investment plans. That is all.

Jeong Ki-Seop (Chief Strategic Officer)

Regarding the CBAM, Kim Kyoung-han, Head of International Trade Affairs Office will give the answer.

Kim Kyoung-han (Head of International Trade Affairs Office)

Hello, I'm Kim Kyoung-han from International Trade Affairs Office. December 13th, according to a tripartite agreement, the EU actually agreed on the final version of CBAM. From October this year, there is going to be a requirement that kicks in for a transitional period. A transitional period actually does not impose the players to buy the credits, but the exporters actually need to report the emissions to EU governments. This obligation actually will remain valid until 2025. From 2023 to 2025, there is no mandatory obligation or requirement for the companies.

This type of reporting mechanism could have an impact on our exports, the government and the businesses need to collaborate together to actually reduce the burden of reporting. That is the ongoing efforts. From 2026, regarding the emissions of our exports, we have to buy the credits, emissions credits, trading credits. This is not a requirement only for the exporters, but also there is the same requirement that actually applies to EU EC. For the, if we fail to actually reduce the emissions, we have to buy the credit rights. This actually applies to EU players as well as the exporters. This will take kick in phase by phase until 2034. The mills as well as steel makers and their efforts to reduce emissions will be the key.

As for POSCO, comparing to our competitors, we have a competitive edge in terms of reducing CO2 emissions. Given all that, we believe that we'll be able to actually take, reduce or mitigate those burden of having to reduce emissions in the European markets going forward. Thank you.

Operator (participant)

Moving on to the next question. It's from HI Investment Securities, Mr. Eugene Lee.

Kim Yoon Sang (Analyst)

Hello, I'm Kim Yoon Sang from HI Investment Securities. I have a few questions. First is about... There is POSCO International and POSCO E&C as well. I would like to know about your business plan for this year. The second is regarding CapEx. It was also mentioned in the presentation. We sometimes could see that the CapEx is going up.

Can you actually also share about the details of CapEx plans for this year? Based on the profits outlook and CapEx outlook, what is your dividend outlook for this year as well? That would be the additional question. Last but not least, the last question, can you repeat the last question? There is also, our company is being actually mentioned as a candidate for the HMM acquisition. What's your view on that?

Jeong Ki-Seop (Chief Strategic Officer)

First is regarding the Green Infra group and also the POSCO E&C business plans. Regarding that, Jeong-Bin Park, who is the Head of Green Infra Business Team, will give you the answer.

Jeong-Bin Park (Head of Green Infra Business Team)

Hello, I'm heading the Green Infra business team. As for POSCO Inter on a consolidated basis compared to last year, we expect, given the consolidated synergy, we have actually seen an upward outlook. It was about KRW 38 trillion in revenue, and OP is about KRW 900 billion. Compared to that, we see an upward trend of about 10%. The company with a revenue of KRW 40 trillion. As for the direction, we're going to make active investments in the green areas. There is the LNG number two investment taking place in Gwangyang, and we want to actually drive our business in terms of LNG. If that actually is realized, we'll be able to leverage the consolidated synergy so that we can expand our business portfolio.

As for POSCO E&C for construction, you can see that the pre-sales market is not doing very well, and there is an increase of labor cost and materials cost. There is also a risk of apartments not being sold. Compared to last year, we actually downwarded or down-revisited our business plan in terms of revenue as well as OP. About 10% downward outlook or estimation. The issue is that in terms of risk management, especially liquidity risk management is very important. Instead of expanding our business, we want to actually better manage our risks. We will develop a contingency plan so that we can actively respond to business-related risk this year. Thank you.

Jeong Ki-Seop (Chief Strategic Officer)

As for CapEx, we would like to turn to Jung Dae-hyung, Head of Corporate Strategy.

Jung Dae-hyung (Head of Corporate Strategy)

Yes, I'd like to respond to your question. Our CapEx investment trend for this year, as has been mentioned by the Head of IR, is that we are going to substantially increase CapEx budget year-on-year, but we are going to be mindful in adjusting the size of the investments that we actually execute. For the major businesses, we will be very aggressive in pursuing these investments, and we will also execute the investments to make sure that they are done in a timely manner. In fact, if you look at these different sectors within our group, the CapEx will be focused primarily on those areas that will ensure high growth for the group. If we look at POSCO, first of all, we're going to look at steel plate investment.

The coke plant revamping is also something that we are planning. It's in the works. As for chemical, we are going to aggressively pursue investment in cathodes and other different battery grade materials. For green infrastructure, this is considered a key business. LNG terminals is something that is key for us, so we're going to invest in expanding LNG terminals. Above all, for holdings, we've been talking about the lithium business, but investments into our lithium business is going to be very much a focus for our group. It's going to be a priority area for our group this year. That is all.

Jeong Ki-Seop (Chief Strategic Officer)

Next on dividend, we'd like to turn to our Head of IR.

Young-Ah Han (Head of Investor Relations)

This year, our adjusted dividend payout is about 26%, so almost close to 30%.

We believe that the three-year midterm dividend payout policy that we began in the early 2000s has been come to fruition. At the next board meeting, we will continue to have these celebrations, and then we can report it to you at a later date. We can say that growth will lead to a push up share price, and we will continue to provide stable return to our shareholders. When we transition to a holding company, we believe that we can maintain a dividend payout of about KRW 10,000. I believe that this is something that we reported to our shareholders, and we believe that we can maintain that current trend. This means that with increased investments, even with our increased CapEx, we will continue to maintain that payouts policy. Our net debt is still below 10%.

As you know, it's quite low. This means that our created EBITDA flow can be more than enough to cover our CapEx needs and also the dividend payout. That is all. Thank you.

Jeong Ki-Seop (Chief Strategic Officer)

Yes, lastly, the question on the HMM acquisition. I would like to turn to Park Young-joo, Head of Strategic Investment.

Park Young-joo (Head of Strategic Investment)

Hello. My name is Park Young-joo, Head of Strategic Investment. This has been reported in the media about the possible acquisition of HMM, and there's been some news reports made of this. Considering our midterm business outlook, we don't believe acquisition of HMM would be a good fit for us. That is why currently, POSCO Holdings is not considering acquisition of HMM.

Operator (participant)

Next question is, Kiwoom Securities and Mr. Lee.

Young-Ah Han (Head of Investor Relations)

Hello. I am from Kiwoom Securities. I have a few questions. First of all, China from this year, they said that they want to increase their bargaining power for the steel market, iron ore. The iron ore purchasing volume in China is very large. If the channels are all integrated, then China, I believe that we can also get more discounts than other countries. If that becomes the case, then we may have more cost competitiveness compared to like Japan. I would like to know what's your take on this. Do you have any prepared measures or responses that you have in mind?

Speaker 18

Regarding the lithium business, we bought the salt lake in Argentina. We also bought shares in Pilbara, and we're also making investments in lithium plant in Gwangyang. From 2020 to until now, I would like to know the amount of investments that was made and also how much CapEx or how much money that you're going to spend this year. If you have any specific figures, please share those statistics with us. Last but not least, if you look at the presentation, you mentioned about the business activities as well as CapEx highlights. You mentioned about investments in secondary materials business in detail. When you announced transitioning to holding a company, you said that the crude production will be about 23 million by 2030. That was your plan for the crude production, steel production. I would like to know if the plan is going well as planned.

Jeong Ki-Seop (Chief Strategic Officer)

First is regarding the iron ore purchasing channel integration. That will be by Mr. Seo Ji-won.

Seo Ji-won (Head of Raw Materials Office)

Hello, I'm Seo Ji-won, Head of Raw Materials Office. China Mineral Resources Group, once it was launched, on behalf of the 20 steelmakers, when they actually bargain or negotiate for the iron ore, would that actually not be more competitive compared to the Korean steelmakers and Japanese steelmakers? There are major suppliers that we discussed with. As for the suppliers, they will abide by the current terms and agreements. The market share of the four majors is over 70%. We believe that the CMRG's bargaining power will not be very effective. What they are arguing is that regarding the index price, China wants to actually trade in yuan, and they want to also have the volume-based discounts.

We believe that these conditions cannot be accepted by the four majors. The Chinese steelmakers, whether they get their discounts, we can actually check that because we actually are involved with the management and operations of the mines that we invest in, so we can actually read the trends. If we actually identify the fact that the Chinese steelmakers are getting discounts, we can also get similar discounts. I don't think that will be disadvantage compared to them. As for the CMRG's emergence, we believe that this will be like a power struggle between the raw material supplier and steelmakers, but it can also serve as an advantage for steelmakers because the Chinese steelmakers actually can raise the spot prices individually, but that kind of risk can be reduced and addressed.

Overall, for the steelmakers, that could serve as a positive advantage. As for our short-term response and mid to long-term response, we are continuing to get discounts, and we are also expanding our capacity and volume in the mines that we invest in. We can say that we're not very much disadvantaged compared to Chinese steelmakers.

Jeong Ki-Seop (Chief Strategic Officer)

On the second question on lithium, I'd like to ask Lee Kyung-sub to respond to that question as well.

Lee Kyung-seob (Chief of the Lithium-Ion Batteries Materials Business)

For the secondary cells, our investment into rechargeable batteries was, as of the end of last year, $1.3 trillion for lithium. Recycling, $240 billion. This has been executed at the holding company level for lithium. We have acquired the plant in Argentina and the development of about combined $400 billion. The second stage at Gwangyang PLS also saw executed budget. Gwangyang TPS also saw executed budget totaling $1.3 trillion, as I mentioned. In 2023, for PTLS completion and Argentina first stage and second stage, we expect to see a total $1.7 trillion additionally. As for nickel, thus far, SNNC, EV CapEx, and the Australia RNO Ravensthorpe for nickel investment, saw a combined investment of $620 billion so far this year. We are going to invest in refinement for nickel.

With this acquired investment, we expect to see about KRW 1.3 trillion for nickel alone. This means that this year we're going to begin heavily investing in nickel in earnest.

Jeong Ki-Seop (Chief Strategic Officer)

Next, on overseas steel investment. Perhaps I could turn to Head of Corporate Strategy, Jung Dae-hyung, to respond to this question.

Jung Dae-hyung (Head of Corporate Strategy)

Yes. Hello. I am Jung Dae-hyung, Head of Corporate Strategy. For overseas steel investments, I think that we can see this as a two-track kind of instrument. There is Indonesia investment, where we already have captured upstream, and investment into possible green steel, future sites. For the first investment, we have seen growth in Indonesia, and we have investment together with PTT. We have actually invested in new plants for the first stage, about KRW 300 billion last year, an additional KRW 300 billion this year.

For the second stage, these possible green sites, such as India, the U.S., or Australia, for these sites, we are going to explore opportunities for investment and also engage in possible partnerships with investment partners which are currently underway. Depending on the outcome of these negotiations, we can or might not execute these investments. This is why we have reserves on hand to possibly green light any investments that we feel is necessary.

Operator (participant)

Next question is from NH Investment Securities, Lee Jae-kyung.

Lee Jae-kyung (VP)

Hello, I'm Lee Jae-kyung from NH Investment & Securities. I have three questions. First is, you also mentioned about this before, but recently, as for India, the steel production and demand recovery is quite noteworthy, and the government also said that they're going to increase about 300 million tons. I would like to know what kind of strategy we have for the Indian market. Can you be more specific about that? The second question is, with the increasing production in India, just like China, you know, there are also some concerns that are coming regarding the Indian market. How do you view that? Also the HyREX actually import or is actually going up. If we actually increase the GRI, how much carbon emissions can we reduce? If you look at POSCO

POSCO in the future wants to use actually renewable energy to produce HYREX. That's what I read in the newspaper, so I would like to know the ongoing progress. Last but not least, if you look at our holding spaces, the dividend is not very... the debt is very low, do you have any additional plans for getting debts, for borrowing, additional borrowing?

Chun Sung-rae (Head of the Business Synergy Division)

I am Chun Sung-rae from the Holding Steel Business Team. As for India, we have the largest downstream in India, about 1.8 million tons. Across India, we have four processing plants. Downstreaming is 1.8 million tons. The processing center volume is about 1 million tons. When we actually make investments, we look at, you know, places where they have supply chains and downstreaming process, and also we look at the market potential. We picked and selected India as a promising market. As you may well know, in January 2022, we actually signed an MOU with Adani. To give you more specifics, in order to do this JV business, there are lots of pending issues, but we're in the process of addressing these issues one by one.

As for India, the Indian government, by 2030 wants to increase its actually crude steel production capacity to 300 million under the banner NSP two dot NSP. They have the strategy. We at POSCO has the core capacity or core ability, so we are selecting potential businesses in India to make relevant investments.

Jeong Ki-Seop (Chief Strategic Officer)

Regarding the CO2 emissions, Cheon Si-yeol, who is the Head of Production Technology Strategy Office, will give the answer.

Cheon Si-yeol (Head of Production Technology Strategy Office)

What you asked was about the CO2 reduction plan and the BS-based process. We also have the CO2 reduction plan. To delve deeper into our plan, as for finance and blast furnace, we are conducting relevant experience, we are working with the pellet tests. We have this plan on from March until October this year to do different types of experiments and tests. We are trying to extend the application of smart technologies to blast furnace so that we can actually reduce the share of carbon in the existing BF. We're trying to optimize the relevant technologies. Another question was about the HyREX production capacity using new technologies. In order to transition to low carbon, we are accelerating relevant projects. As for last year in July, we actually did pre-engineering.

Signed a pre-engineering MOU. The relevant project will be completed by the end of March this year. Once the results come out, we will also combine that with the design of the HyREX and use it as the preliminary data. We also have, like, a 1 million demonstrating plants plan. We want to apply this technology to these demonstration plants. To finalize this technology, we are working with the institute, with technology institutes to accelerate our R&D. To accelerate our efforts, we are also considering setting up a team exclusive for HyREX.

Jeong Ki-Seop (Chief Strategic Officer)

If on HBI, perhaps, I can turn to Seo Ji-won for the response.

Seo Ji-won (Head of Raw Materials Office)

Hello, I am Seo Ji-won, Head of Raw Material Officer, POSCO, for possible overseas investment for HBI Steel. Just briefly, following the big picture carbon neutrality goals, we are moving as planned on HBI project in Western Australia beginning in February. We are going to complete our feasibility study by February, which is next month. Before that, in October, we have worked together with the Western Australian government, and they have given us permit on a possible site location where we can engage in the investment. For the size and the actual scope of the investment, we can share these numbers with you after the FS is conducted. In the first quarter, we will continue to look at possible investments.

Other than the Western Australia project, for the HBI project, we have to have a stable supply of iron ore and the other relevant materials that we need for HBI. For Middle East and North America and other different regions, we are continuing to engage in pre-feasibility studies with other partners. Moving on, future borrowings of holdings company.

Operator (participant)

Perhaps we can hear from, Jeong Ki-seop, Head of Corporate Strategy.

Jeong Ki-Seop (Chief Strategic Officer)

Yes. For our debt, interest-bearing debt, we have no plans to borrow more money because although our CapEx budget has gone up, we have cash balances that we have on hold, so we do not intend to borrow. We believe that our funding is sufficient. Our debts might increase to about KRW 1 trillion more, but with the equity stake share adjustment with the merger, this is responsible for the slight increase. That is all.

Operator (participant)

Our next question comes from KB Securities, Lee Eun-jung. I'd like to hear your question now.

Lee Eun-jung (Manager)

Yes, thank you very much. I want to ask about the steel markets, your earnings outlook, because last year the typhoon and the flooding has led to unexpected decrease in earnings, and the 4Q earnings were quite bad. In the 3Q earnings, you said that there's not going to be additional costs, but in any case, there was a quite significant deficit, quite significant loss in 4Q, much worse than I anticipated. Overall, because of this unexpected loss in the second half of last year, perhaps this year we can expect to see better performance. What is your view? Right now the market outlook is poor, so how do you see the steel market for 2023, particularly for POSCO? Not just POSCO Holdings, but actually POSCO. What is the earnings outlook for POSCO as you see?

Operator (participant)

I know that somebody else asked this question, but for overseas investment in steel business, we are particularly interested in whether or not you're going to build another BF in Indonesia, I personally. If you're going to build additional blast furnace in Indonesia, because you're moving into carbon neutrality, perhaps this additional new build in Indonesia might go against your carbon neutrality plans. This means that carbon emissions will increase if you do decide to build a blast furnace in Indonesia. What are some possible plans on how you're going to invest, or if you're going to invest in a possible new blast furnace in Indonesia? If so, how are you going to dampen the impact of carbon emissions? I think I had another question, but I forgot. That is all.

Jeong Ki-Seop (Chief Strategic Officer)

The first question on steel market outlook for POSCO, I'd like to turn to Lee Sang-gil of POSCO Finance.

Lee Sang-gil (Head of Finance Team or Office)

2023, our steel business for POSCO, you were asking about profitability. I'll respond as such. In 2020, when we came up with their business plan, our goal was KRW 4 trillion. With the flooding, right up until August, our OP was about KRW 3.2 trillion, so we were performing quite well. However, we have only seen KRW 800 billion. If we had seen KRW 800 billion operating profit from the months of September to December, we would have met the target, but that was quite unfortunate. With the presentation materials that you've seen, the flooding has led to repair costs, recovery costs and inventory losses, realized losses leading to about KRW 1.3 trillion in losses that were unexpected. In 4Q, with the market downturn, slow demand, this has led to falling prices.

This meant that we have seen losses of about KRW 400 billion, we were under KRW 1.7 trillion of our target. This year, we understand that the market conditions are still not rosy, but our business plan is set for KRW 3 trillion OP. That is our current target. As of 1st quarter, the steel market has not completely recovered, so I think that we are still finding the bottom. The things were much better than the 4th quarter. In the 1st quarter of this year, the stainless steel plant 1 and the plated steel plant, the repair costs continue on from January is still going to be reflected in our finances. This means that in the 1st quarter we don't think that we might be able to meet fully your expectations in terms of the recovery process.

Beginning in 2Q, we will turn around and we are going to work to the best of our ability to meet our target. To that end, our company has announced an emergency business operations plan. All the executives and all of our employees are working very hard to meet our goal.

Jeong Ki-Seop (Chief Strategic Officer)

Next question was about Indonesia and investment there. Eom Ki-cheon, Head of Marketing Strategy Office, please go ahead. The carbon reduction efforts about Indonesia. That will be by Cho Kyung-suk, Head of Environmental Planning Office. We're going to give the answer together.

Eom Ki-cheon (Head of Marketing Strategy)

Hello. I'm Head of Marketing Strategy Office. I think, analyst Union is very much interested in Indonesia. As you may well know, actually, last year, our partner is a state-owned company, so there was slight delay in terms of decision-making. Our 10 million ton project, actually adding about 3 million is actually doing well. We are also thinking about, you know, CR, and we believe that. You also mentioned about carbon neutrality. As for Indonesia, still it's excluded from the net zero initiative. About adding 3 million-4 million, we are actually working with RFBF partners. As we are also looking at other options, like green options, including electric arc furnace.

Cho Kyung-suk, Head of Environmental Planning Office, going to answer about carbon neutrality.

Cho Kyung-suk (Head of Environmental Planning Office)

I think that everybody said it all about the net zero. I don't think I have anything to add. If you have additional questions, please let me know. Actually, I have a better understanding. I think that your investment in Indonesia is in the existing blast furnace. What I'm concerned about is that if you make actually additional investments in Indonesia, that will drive up carbon emissions. That would have an impact on the overall roadmap to net zero. That was one of the concerns I wanted to raise. I wanted to know if you have any plans to address or mitigate these risks. If you have some, please share with us. The last question I just remembered is that all of these facilities are insured.

You mentioned about, you know, receiving about KRW 30 billion of insurance before. How is this accounted for in the books? How much additional compensation from insurance are you expecting in the future?

Lee Sang-gil (Head of Finance Team or Office)

Regarding insurance payments, I think that Lee Sang-gil, Head of Finance Team or Office is going to answer.

In December 2022, regarding the flood damage, we received about KRW 234 billion in insurance payments. To give you the background or the rationale, actually we have personnel who is dispatched from the insurance company. The team actually assesses the level of damage. We believe that the insurance payment that we could get is up to KRW 460 billion. We will receive 50% of that was reported.

In 2022, it was actually recognized as a non-operating profit. Based on our estimates, out of the recovery cost, we believe that the 70% of that will be covered by the insurance. That's how we look and estimate. According to our estimation, during this year, we believe that we'll be able to get more compensation compared to last year. How we'll calculate the insurance payment and the level of payment, level of compensation, and all of how we do that at the insurance company and our company are different. We believe that we'll be able to get back to you with more details in the latter half of this year. One thing that we can say is that we'll be able to get more compensation this year compared to last year.

Jeong Ki-Seop (Chief Strategic Officer)

Regarding the net zero roadmap, we'll get back to you, Ms. Lee, for more details. Because of limited time, we cannot share with you everything today. We ask for your understanding. For the interest of time, we're going to entertain one last question. There is no one requesting to take the floor. If you want to ask questions, please press asterisk followed by one on your phone. Thank you everyone for joining us for today's conference call. We will reflect all of your feedback and questions to better our company. This wraps up the POSCO Holdings 2022 earnings release conference call. Thank you very much.