Posco Holdings Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, we will now start the POSCO Holdings Earnings Release for the third quarter of 2022. The conference call will begin with a presentation on the earnings, followed by a question-and-answer session. Now, we will hear the presentation by POSCO Holdings.

I would like to begin by thanking all of our investors for their steadfast trust and support. The third quarter proved to be a difficult time for steel manufacturers due to the war in Ukraine, the second quarter conflict, and continued issues in the global supply chain coupled with tighter fiscal policies adopted by states around the world leading to economic slowdown across the globe. At the same time, along with the announcement of ARA policies in the U.S. in August and the highlighting of the importance of securing critical materials for lithium-ion batteries such as lithium and nickel has led to the construction of a cathode plant in the U.S. with GM. For POSCO, which has secured critical materials for electric vehicle materials such as lithium and nickel, the third quarter has indeed been a period mixed with opportunities. POSCO Holdings has retired 2.6 million shares in August to strengthen shareholder value along with making investments for future growth, including the investment decision for the second-stage project in Argentina in October for lithium carbonate to achieve 100,000 tons of lithium hydride production earlier than scheduled. However, on September 6, one of the streams in the Pohang area was flooded due to heavy rain, which put a temporary halt on the entire operation of the Pohang steel mill. In particular, the rolling line adjacent to the stream was submerged in water causing an unprecedented crisis in operation. All members of POSCO, as well as POSCO Holdings and the entire group, are pulling their energy together with dedication to normalize the steel mill operation. A damage recovery task force was organized to stabilize the steel supply and minimize any impact on our customers. The recovery is currently progressing smoothly according to our plan and by the end of this year, we plan to resume operation of major plants, including number two HR plant, so that customer demand could be met without issue by the end of this year. Following the COVID outbreak in 2020, we were impacted yet again by another Force Majeure event that presents us with challenges. However, all members of our group are coming together to widely overcome the difficulties and we continue to bolster our new growth businesses to maintain our transformation and innovation so that we can leverage this as an opportunity to take another lead forward. Now, Han Young-Ah, Head of the IR team, will present on Q3 performance. Thank you.

Thank you very much. Let's talk about the third quarter performance. POSCO Holdings recorded consolidated revenue of KRW21.1 trillion, which is a KRW1.8 trillion decrease quarter-on-quarter. Operating profit recorded KRW920 billion, a KRW1.2 trillion decrease quarter-on-quarter, as can be seen on Page 4. The decrease is mostly due to the flood as well as slow demand. The Steel business recorded a revenue of KRW1.5 trillion and operating profit of KRW1.2 billion. POSCO did see growth in revenue and operating profit from Green Materials centered around lithium-ion battery materials. The Energy business also recorded healthy growth. Before we go into the details of each business, let us take a look at the flood impact and POSCO's recovery plan as well as some major decisions that have been made recently. Overall, the flood impact on Q3 results is estimated to be at KRW583.2 billion, KRW435.5 billion of which is reflected as operating loss and KRW147.7 billion as non-operating loss. Let's take a look at POSCO first. The loss due to production and sales volume decline stands at KRW220.1 billion, due to the flood in Pohang production has been hiked up in Gwangyang. We did try to offset the loss through slab production. However, because there has been a stop in operation, this has led to a higher fixed cost with a negative impact on profits. And we have also seen that there is a one-off loss of inventory impairment loss of KRW94.4 billion, which has been reflected in Q3 with maximum estimation. There could be some more reflection in the fourth quarter, but it will be very minor. Repair and material costs to recover production facilities stand at KRW91.6 billion. Recovery will continue until the year-end. We believe that at maximum, there could be an additional KRW300 billion more for recovery in the fourth quarter. For non-operating loss, we have had impairment loss on tangible assets standing at KRW146.9 billion. This is a maximum estimate fully reflected for Q3 where there could be additional reflection in Q4, but the amount will be minor. As I've mentioned, most of the loss in the tangible assets and recovery could be recovered with the settlement of insurance and we have had all of our tangible assets insured since 2021. We are looking to have an early settlement in the fourth quarter, but the period of the settlement has not been clarified yet. We have also seen that there are some subsidiaries that had a loss such as Steeleon that has submerged facilities for their painting and color plans, which may stand at KRW27.4 billion. Let's take a look at the recovery plan. On September 6, due to flooding from a river near Pohang, there was a blackout affecting the BF and FINEX sectors. Operations returned to normal on September 12. The recovery of the rolling line is underway. As of this morning, the third planned plate line has been restored, bringing the total number of recovered lines to six. In November and December, we have additional recovery plans outlined, including normalizing the hot rolling line and the number one wire rod line, as well as the plate line, gradually improving daily production. However, since we have limited post-processing capacity, we are experiencing an increase in semi-finished goods. While there is some recovery in finished goods, we anticipate full recovery by mid-December when the number two hot rolling line is fully operational. Considering this plan, we expect production and sales volume for the fourth quarter to be lower than in Q3, as damage occurred only in September during Q3. We project a complete recovery in the first quarter of next year. That covers the impact of the flood, and now let's proceed to discuss the lithium-ion battery materials business process. During Q3, we made two significant decisions. First, the Board of Directors approved the second-stage investment in Argentina, and second, POSCO held a ceremony in October for the construction of a nickel refinery plant. Let's begin with Argentina. Currently, we have both upstream and downstream operations producing 25,000 tons of lithium hydroxide, which is part of the first stage set to be completed in April 2024. This October, the Board decided on a second-stage investment totaling $1.1 billion, including debt. In comparison to the first stage, which focused on extracting lithium phosphate and producing lithium hydroxide, the second stage will involve constructing a plant for lithium carbonate to produce an additional 25,000 tons of lithium hydroxide at our facility in Gwangyang, Korea. It's important to note that Argentina has not signed a Free Trade Agreement with the U.S. Therefore, to align with the U.S. Inflation Reduction Act related to the second-stage investments, we will develop downstream operations in Gwangyang at the Sejong industrial complex. This month, we are starting construction on the nickel refinery. And in the past, we had the hydro nickel coming in from SNNC for the iron removal process and nickel matte production. And now, we actually have iron removal and recovery worth an investment of KRW330 billion. If we are able to complete this construction, we believe that we will be able to produce 20,000 tons of nickel per year. If we include these two investment decisions, we believe that we are now able to flexibly respond to any changes in the business environment including the IRA of the U.S. We have all the necessary lithium plants that bring the sodium from Australia, but we also have the Argentina plant as well as SNNC, and we will be able to reflect any changes in the business environment. Next, I will present on the performance of our unit. We will begin with POSCO. So crude steel production uniquely went up quarter-on-quarter by 315,000 tons, but product production went down as you see. As you know, the Pohang steel mill produces us crude mix steel and therefore, it was not impacted. However, the product production was impacted. As a result, sales volume also decreased by 334,000 tons on a quarter-on-quarter basis. Mostly, the plate and also downstream products are produced in this process and that's why it has been impacted by the flood damage. What was unique is that during the poor market conditions, WTP sales ratio tends to fare well, and the WPT sales increased to automakers, so it remained at a relatively similar level on a quarter-on-quarter basis. And onto Page 10, income and financial structure of POSCO. If you look at the sales price in Q2, it was KRW1.2 million. As you can see, there has been about a 4% decrease in sales price quarter-on-quarter. Due to the worsening market conditions and the change in sales price as well as the flood damage, we have suffered some one-off losses and this impacted both our revenue and operating profit, which plunged as a result. However, if you look at our net debt, in Q3, we have turned into net cash and this is because our working capital decreased and especially the product inventory decreased and that has led to our transition into net cash. If you look at the raw material cost, as you can see in Q3, we are seeing a steady decrease in our input material cost; however, in Q4, we do expect to see a decreasing burden of material input cost on our financial structure. And next is our performance of overseas steel subsidiaries. We have noticed some noticeable poor performance of the overseas steel subsidiaries. So if you look at this in general, most of the overseas subsidiaries had a decrease in sales volume as well as lower sales price. Let's look at PTKP Indonesia first. As you can see, there has been a 29% quarter-on-quarter decrease in revenue and that is because both the sales volume and the sales price dropped. And we have started to defend our profitability by selling highly priced products to Europe; however, despite such efforts, we have seen a significant decrease in our earnings. If you look at Chinese Zhangjiagang STS, on a quarter-on-quarter basis, we had a 15% decrease in revenue due to China's zero COVID policy as well as the weak construction market, and also local competitors have initiated a low pricing competition, which has led to the dampening of profitability. However, in September, we have seen a slight rebound in the sales price, so we'll have to see what happens going forward. And as for Indian Maharashtra, as you can see, the revenue decreased by about 6.8 percentage points and this is largely attributable to the decrease in sales price and an export tax that was imposed by the Indian government in May, causing domestic distribution and construction prices to drop. PY VINA, the Vietnamese subsidiaries, also saw a significant decrease in revenue by about 15% quarter-on-quarter due to the weakened construction market as well as low price imports entering the market. And so, we saw a steep decrease in the product price as well. And onto POSCO International, on a quarter-on-quarter basis, revenue fell by 18% and operating profit decreased as you can see. On a year-on-year basis, there has been an increase in revenue by 32%. The reason for the following revenue is due to the weakening trading market. As you know, trading business is basically about selling the raw materials of steel as well as scraps. We have seen a decrease in sales volume for all of these categories and that's why we saw poor revenue for trading. As for agriculture, we have been impacted by the Ukraine situation, crop sales halted in Ukraine, and also domestic and overseas demand for feeds declined. And so this impacted another poor performance of the trading earnings. As for energy, Myanmar gas sales improved from 45.5 billion cubic feet to 49.7 billion cubic feet. Senex energy sales volume increased from 5.3 billion cubic feet to 6.1 billion cubic feet quarter-on-quarter, and so the revenue went up overall in energy. However, the operating profit dropped as the cost recovery rate was reduced in Myanmar. However, if you look at the sales volume, we are witnessing strong growth. Senex, which we newly acquired, started to generate profit in the second quarter, and in the third quarter, we had KRW1.37 billion of operating profit. On to POSCO Energy, on a quarter-on-quarter basis, or year-on-year basis, we have seen strong growth. We had the seasonal impact, which was that the third quarter was the electricity peak season and also SMP increase. We also saw the revamping of number three and number seven generators, which has been normalized now. Therefore, as a result, we were able to see an increase in both revenue and operating profit. And Gwangyang number six LNG tank is currently under construction, slated to be completed by May 2024. Once it becomes complete, the current LNG tank capacity at 730k KL will see an addition of 200K KL. On to POSCO E&C. If you look at POSCO E&C, we saw decreasing revenue and operating profit quarter-on-quarter. So the operating profit margin fell to 1.9% and this is due to the material cost rise, which has placed a burden on our cost, placing downward pressure on our profitability. However, if you look at the orders that we won, you see that we have continued to win steady orders for 1.5 trillion implant, 0.2 trillion infrastructure, and 0.9 trillion in construction. We see a steady growth in the number of orders that we win. On to POSCO Chemicals, both revenue and operating profit continued to show significant growth. In our cathode business, the price of N65 increased along with sales volume, positively impacting both revenue and operating profit. It’s important to note that both the price and sales volume grew. We saw an increase in sales volume for European EVs and began supplying to domestic ESS, which positively influenced our sales volume. Regarding anodes, both the sales price and its portion rose. Notably, our sales portion to EVs increased from 40% to 56%. We are consistently seeing an upward trend in our sales portion to EVs. With that, I conclude our brief presentation of the earnings for Q3. Now, we will take your questions.

We will now move into the Q&A session. The first question is from Hyundai, Mr. Pat Canon. Please go ahead with your question.

Good afternoon. I am Pat Canon of Hyundai. Thank you very much for this opportunity. In your IR materials, you talked about recovery plans for a rolling line. This gives me a lot of thoughts. I do have three questions. The first question is, for the next year plan, I'm sure that you are designing the next year plan. There are many uncertainties in the macroeconomics. If we take a look at the steel business for next year, what are your forecasts at POSCO? For example, the demand as well as some material costs, what would be the direction next year? The second question is, at POSCO, I'm sure that you have abundant cash, but if we take a look at POSCO Chemical or subsidiaries related to nickel, you will need more investments for new growth engines. How are you going to support the investments for these new businesses? For example, are you going to be selling off your shares or will you be issuing additional shares? Are there any plans in the pipeline? Under POSCO Holding, there are overseas subsidiaries, but will you actually be moving those subsidiaries under POSCO rather than POSCO Holdings? The third question is related to lithium. Well, next year, what are your prospects for the lithium prices? The Gwangyang lithium plant is to be completed next October, when do you believe will be the breakeven point for the Gwangyang factory? For Argentina, I can see that I want to know if everything is going according to plan. It seems you will be increasing your capacity until 2030. Will there be any plans to make that happen faster than planned? Last week, we have seen in the news that in Argentina, Bolivia, or Chile or South America, they may actually create a lithium organization on par with OPEC. If that happens, what will be the impact on POSCO's lithium business? Will there be any restrictions in bringing lithium to Korea? Will this also have a positive impact in bringing the lithium prices up? So what are your opinions concerning this point? Thank you very much.

Thank you for your questions. The first question was about next year's plan as well as our prospects for next year's steel demands. We will go to Mr. Ankit, who is in charge of marketing strategies at POSCO. We also had a question concerning the investments for lithium and nickel. I will answer that. We also had a question related to the impact of a possible organization in South America. We will go to Mr. for that answer.

Good afternoon. I am the MSO of POSCO. First of all, let's talk about next year's prospects for demand. In ‘23, we believe that centered around the U.S., there will be tighter fiscal policies around the world, and therefore the demand will be impacted by these fiscal policies. According to WCS, next year there will be a 1% growth. In Korea, we believe that it will be on par with this year. If we take a look at the automotive market, overall, we believe there will be an increase in production of 5.3%, which is 86 million. If we take a look at shipbuilding, we believe that the supply chain still needs to be recovered and there will be a shortage of manpower in the shipbuilding industry. This will impact the demand from the shipbuilding industry. If we take a look at the supply side, we can see that steelmakers, due to the zero admission policies, will concentrate on quantitative growth rather than qualitative growth. The increase in the supply may not be as large as we have seen in the future. This may be a long-term trend. We have also seen a spike in energy and material costs, and so there is a burden, and major mills may actually reduce production rather than try to overcome the material costs. Overall, due to tighter fiscal policies and other economic factors, this will lead to slow growth in demand, and at the same time, the expansion of supply will be limited, and so we will look forward to try and bring up the prices in the first half of next year. If we see that the tighter fiscal policies are relaxed in the second half, we may possibly look forward to an increase in demand.

Well, concerning the second question for chemical and also new businesses in lithium and nickel, we will need additional investments. How will we procure these investments? Well, POSCO Holdings has divided the cash, and so at the end of this year, we will have KRW4 trillion at hand, and next year's investments can be financed by the cash held by holdings. If we do need additional financing, then there could be debt taken by the holdings or actually bonds issued. I don't think we have any plans to sell off our shares or possibly issue additional shares. That is not in the plans currently. As for the possible plans of moving the subsidiaries from holdings to POSCO, we believe that all of the companies related to steel should be under POSCO; that would be an efficient way of management. There are various plans that are being evaluated such as legal limitations and strategic considerations. As soon as the considerations are completed, we will make the related decisions through our Board of Directors.

Good afternoon. I am involved in lithium ion batteries. Related to lithium, I think you have four questions overall. Let's talk about these questions. Next year's lithium prices, well, recently we have seen that the lithium prices fell below 70,000. But today, we see that it's actually recovered to 73,000, 74,000 in some markets. It has increased recently. After the U.S. announcement of IRA, we have seen that in the market, EV companies are looking to procure lithium, leading to an increase in prices. There are forecasts that it will surpass the 80,000 mark this year. For next year, we believe that it will be about 64,000. Overall, if we take a look at this year's trends, it will be maintained at least in the 60,000 range. I don't think there are any variables that will lead to a sharp drop. As for the breakeven point for Gwangyang, that was a question that was asked. In Gwangyang, we believe that we will open two plants in the end of ‘23 and beginning at ‘24. After we build the plant and complete it, the ramp-up and certification take about 12 to 18 months, which means that it will be in ‘25 or ‘26 for us. We already have a demo plant that has been in operation for two years, so we have been able to shorten the ramp-up period through our technology. For certification, we have already been working with battery companies through strategic partnerships, and we are working on shortening the period for certification. The ramp-up and certification together will happen within 12 months, we believe which means that we will be able to reach the breakeven point by 2025. As for Argentina, the trends in Argentina shows that in April ‘24, we will have the first stage completed and late 2025, we will complete stage two. Stage one is ongoing as planned, and we don't see any variables for that. For the second stage, we are looking forward to early completion, possibly in the first half of ’25. The three major lithium producers of South America are considering creating an organization on par with OPEC, as you mentioned. Currently, the government of Argentina is not showing trends of intervening in the lithium market. The nationalization of lithium companies was discussed in Mexico concerning clear lithium. They announced that this would be the case in Mexico. For Chile, they did not nationalize their lithium company, but the lithium companies that exist remain as private companies. However, for any additional production, they will require government approval and the payment of royalties. For Bolivia, all of their lithium companies are government-owned, but they don't have lithium production yet. The country that has the most active production of lithium is Chile and Argentina. Recently, the President of Argentina and the government of Argentina have been very active in attracting foreign investments into Argentina's lithium business. I don't think there will be any decisions to intervene in the lithium market, especially in terms of pricing because pricing needs to align with international trends. So I don't think there will be any restrictions related to lithium businesses in South America, particularly in Argentina. We don't see any clear risks at this point in time.

Next question comes from Hai Investment Securities, Mr. Kim.

Hello. I am Mr. Kim from Hai Investment Securities. First of all, thank you so much for doing your utmost in this challenging situation. I have about three different questions. Number one, regarding construction. Recently, CP and project financing have been criticized for lacking performance. I would like to know what POSCO is doing in response to this. The second question is, as you have covered, I would like to ask about lithium. For example, Chinese local competitors are jumping into the competition, which is lowering the price of lithium. I would like to know about your forecast. Next regarding IRA, it could be about minerals; it could be about smelting or refining. I would like to know what you think the subject of IRA would be in the future. Lastly, regarding the upstream steel industry, I have a question. Regarding the Chinese demand, I would like to know how POSCO proceeds, for example, the demand in the property market in China. Do you think it could pick up in the future? And today, Tesla launched its price. After the pent-up demand breaks out, there are concerns that this could actually impact the market situation negatively. I would like to know your forecast in this respect. Also, for the steel industry and the operating profit for next year, do you expect it to go up or down? I would like to know your forecast. Thank you.

Thank you for the questions. Many people are discussing the disappointing performance of construction projects, and you raised concerns about how POSCO is addressing this. To provide insights, we can hear from Mr. [indiscernible] of the finance team at POSCO E&C. The next question pertains to lithium and the situation in the Chinese power market. Who can address this? Regarding the processing considerations and detailed criteria for IRA, how do we expect this to develop in the future? I believe Mr. Lee Kyung-Seop from the LIB Materials business can provide answers. Lastly, about the state of the Chinese property market and the demand for steel in China, as well as the automotive demand for steel products—will this improve? I think our marketing strategy team could provide insights on this.

Okay. Recently, we had the Legoland incident where many people are now concerned about the APCP of construction companies. It’s for POSCO E&C. Until now, we've taken a rather conservative approach to our projects; therefore, compared to other large construction companies, we have been less impacted. As of October this year, APCP fees or short-term bonds that we issued are about KRW520 billion. Many of them have already been purchased and secured by the securities companies. So they will be acquiring these by the expiration date. So we can be assured about that. As for APCP, based on our credit, it amounts to about KRW270 billion. We had about KRW46 billion worth of APCP, which has reached its expiry date and been covered and paid for. If we have an aggravated situation, we will acquire the bonds with our cash in hand. Even if the KRW270 billion worth of the fees become a problem, we have no liquidity impact.

And as for the next question about China's demand, we haven't seen changes regarding EV demand in China. We have no concerns so far. There is a national holiday until early October in China, and we have heard reports of a short-term decrease in lithium supply. Regarding IRA, it will apply to minerals, including lithium, specifically those with a purity of more than 99%. We satisfy the criteria for the IRA, meaning if we have lithium carbonate, we can achieve 95% sourced from Argentina.

We anticipate shifts in the Chinese property market due to accumulating local government debts, which is aggravating the construction demand. The recent party meeting concluded yesterday; Xi Jinping secured his next term and will likely focus on uplifting and bolstering the economy. We'll continue to monitor how the market unfolds. As for Tesla and Chinese EVs, we're witnessing an increase this year. Tesla and BYD are producing around 6 million cars; the government is promoting EVs, so we expect a positive outlook for next year regarding EV demand.

The next question is from NHN, Mr. Yi Jiang Wang. Your question please.

Good afternoon. I am Yi Jiang Wang, as have been introduced. Starting with Green Steel, I have a question. Recently, we have seen that in Europe, especially in Sweden, we have new startup businesses in this industry, and a lot of investments are being made. What is your view on these companies, and how will they impact your plans?

Thank you for your question. We would like to check in with Mr. [indiscernible]. Mr. [indiscernible], are you on the line? If he is not, we will move on to Mr. [indiscernible] and will gather insights from other team members on this matter later.

Well, first of all, for Green Steel and Net Zero, POSCO is working with a 2050 net zero roadmap and by 2025, we will have one line using electricity. We will also have another line by 2027 using all electricity. That is the plan for Gwangyang. We had the Board decision this year, and we will sign the contract for relevant facilities next year. If we take a look at Europe, there are startup companies that you asked about; at POSCO, we have high risks and high racks as well as hydroxide. We also have the collaboration Forum in Europe and are working with SSAB for joint development. For these smaller companies, we believe that their technology development is very positive. We are currently preparing for the net zero master plan and we hope to launch this master plan by this year.

Mister from Pohang is connected. Could you discuss our low carbon technology?

Mr. indiscernible has highlighted the key points regarding Gwangyang and Pohang. We have two initiatives for Pohang, focusing on developing technologies for low-carbon products. For Gwangyang, we are set to complete two major electric lines by 2025, utilizing electricity to minimize carbon emissions. This is our strategy leading up to 2023. Post-2030, we plan to explore hydroxide to enable commercialization through our roadmap.

Thank you. Next is from Samsung Securities, Mr. indiscernible.

Hello, I am from Samsung Securities. I have two questions. First, thank you for the Q3 earnings presentation. Up until Q4, we will continue to see the impact on Pohang steel mill, which will have a negative impact on our performance. I think in terms of EBITDA, cash flow will decrease or cash input will decrease. Could it impact the investment plan of POSCO for next year? Could it change or revise the investment plan for next year? The second question is basically in the same context. POSCO Holdings is increasing its investment in new growth businesses, and also POSCO has to increase investment in green technology. As for POSCO E&C and POSCO Energy, they will have to continue to invest more in the Green Energy business area. Therefore, for the next five to seven years, we will continue to see growing investment across all units in these new growth businesses. I would like to know about a future investment plan, how you plan to allocate the capital in different investment projects? Also, I would like to know how it will be financed. Thank you.

Who could answer this question on investment? Maybe from POSCO Holdings, can we hear from POSCO Holdings?

Basically speaking, we continue to see the beginning of an economic recession. We are really at the entryway of an upcoming economic recession and therefore we are taking a rather cautious approach toward new investments. Regarding secondary battery material, lithium, and nickel businesses, we do not wish to delay our investment plan or investment roadmap. That is our fundamental policy. Regarding green and low carbon businesses, this is a long-term investment that we must undertake, and this is not something that could happen overnight. It's not as if a large amount of capital can suddenly be invested into these businesses. We could see a poor EBITDA in the steel industry due to market conditions. However, we will continue pursuing green steel and low carbon green technologies going forward. Yes, I am from the investment team at POSCO Holdings. As you have asked, our investment is being done within our EBITDA. However, for our new growth businesses, we do hope to stay with our investment roadmaps. On a consolidated basis, we have been investing about KRW1 trillion across these different businesses, and for the next three years, we hope to have an annual investment amount of KRW9 trillion on a consolidated basis. About half of that would go into POSCO steel, and some of that would be funded internally. For the new growth businesses, POSCO Holdings will have to input some capital. For POSCO Chemical, they do have battery projects that are internally financing. So that is how we finance. For any future financing needs, we will make decisions accordingly. Until next year, at least our investment will be covered by our EBITDA. After that, we will continue to secure additional financing through raising the efficiency of our assets.

Regarding capital allocation, I would like to add a little bit. Until Q3, our consolidated investment volume was about KRW4.4 trillion, and about half or 50% went into the steel industry, while about the remaining 50% went into next-generation material businesses including battery. Then about 25% went into green materials and 25% into green energy. We will continue with this ratio. For secondary battery material, the next three years will be the peak of our CapEx investment. After that, we will cover CapEx with our EBITDA. Therefore, the next three years will see investment expenditures funded through, for example, internal capital allocations in the context of POSCO Holdings.

Next question, please proceed with your question.

Thank you very much for this opportunity. Related to net zero for steel, I have a detailed question. We have just heard that from 2030 onwards, there will be low carbon steel developed in POSCO. Could you share with us some details? For example, will you be using other energy sources for BFs or will there be carbon saturation and carbon capture technologies? So could you share with us some details? Concerning the electric line in Gwangyang, what will be the capacity of the electrical furnace, and will you be using all of the scraps, or will you be using DTRI? Do you have any plans for investments related to DRI? You mentioned that half of your investment goes to steel, and the remaining half is for new growth businesses. For the 50% that goes into steel, what is the portion of this 50% for net zero? At POSCO, you mentioned that by 2030, you will be reducing carbon emissions by 25% and reach carbon neutrality by 2050. What is the investment cycle for this? When will you make major parts of your investments, and when will the peak of your investments be? If you have any plans in place, could you share them with us? Thank you.

Thank you for your questions. Regarding net zero, you raised very detailed inquiries. In this context, we are developing technologies for building a plant after 2030. As for the furnaces, are we moving towards carbon capture and storage or considering other energy sources instead of coal? Additionally, you mentioned the electric furnace. We are assessing capacity and examining whether we will consider direct reduced iron for the electric furnace and if we will invest in DRI. For those questions, I think we should turn to Mr. and then we will address the question related to DRI.

I am in charge of Production Technologies. For the two blast furnaces in Pohang focusing on low emission technologies, we are increasing the pellet ratio, which is currently being tested. Additionally, we are working on using new gases to reduce emissions across all of the furnaces. We are also developing low emission furnaces for the upstream. For Gwangyang, as mentioned, the electric furnace is large-scale and will utilize high heat, enabling us to connect our downstream and upstream furnaces. We are considering DRI, but we may also mix in other energy sources, and this outlines our technology development direction. Two years ago, we announced our net zero goal, and we mentioned that by 2030, we plan to reduce 78.8 million tons, aiming for a standard reduction of 25%. Within our bills by 2030, it will equate to a 20% reduction. When we look at overall investment related to net zero amongst the steel investments, we need to consider this long term. As was mentioned earlier, we invest about KRW600 million per year, though this figure will likely increase as we proceed. Next year, it will be about KRW1.2 trillion, and the year after around KRW1 trillion. We believe we will need over KRW20 trillion to achieve these goals. At POSCO alone, we believe that the portion of investment for net zero will be larger than this, around KRW1.2 trillion to KRW1 trillion in ‘23 and ‘24. So added together, it will be more than KRW2 trillion. Beyond ‘24, we need to assess this again. For the next 10 years, we estimate this will surpass KRW20 trillion.

Today, we had many questions regarding low carbon emissions and green steel. Many of the investors and analysts are interested in this topic, and we expected such interest. Last year, we had the lithium-ion battery value day event. So I think we need to have an eco-friendly green steel value day. We will open this in November, and that will be an opportunity for us to present more information on this topic and also to have extended Q&A.

Concerning DRI investments, perhaps Mr. could add to this. I am unable to determine the specific details. Regarding our net zero project, we plan to utilize our scrap and HPA. If we decide to import DRI from abroad, we will encounter logistics challenges. It's important for us to secure affordable gas and consider iron ore procurement along with regions that offer low renewable energy costs. Currently, we are conducting a conceptual study, so we will need to collaborate with companies that can provide these resources. Once this research is concluded, we can evaluate potential investments. At this time, we are assessing about five to six candidate regions.

Next, we have Hyundai Securities, Mr. Park.

Hello. I'm from Hyundai Securities and I have a question regarding Q4 earnings. First of all, how are you negotiating prices with different customers, including shipbuilding companies? Will our sales price increase in the next quarter? My second question is about the impairment recovery cost; I may have misheard that it could reach KRW300 billion. What does that cost include?

Regarding our price negotiation with shipbuilding companies and the average price in the fourth quarter, we will hear from Mr.

Yes, I'm Head of Marketing Strategy. With the shipbuilding companies, our price negotiation for Q4 is underway. For Korean Company H or Company D, we have completed price negotiations with them and have finalized the supply for Q3. We're currently negotiating for Q4 with company DH. Our pricing rotation for the second half of the year is not concluded yet. By the end of this month or maybe until mid-next month, we will complete our price negotiations. Our projection is that we will maintain a similar price or slightly lower compared to Q3. As for the sales price in Q4, on a quarter-on-quarter basis, we will have a slight decrease of about KRW50,000. We have only concluded about 50% of our contracts for Q4, and we still have supply and contracts for December. Thus, we will likely see a slight decrease in sales price. Regarding the recovery cost of the Pohang steel mill in Q3, we incurred an impairment cost of around KRW95 billion. We have disclosed the total cost of recovery. In Q4, we anticipate recovery costs to be approximately KRW300 billion. Mr. indiscernible can provide you with additional details on recovery costs. Yes. As covered during the presentation, in Q4, we expect to see recovery costs of about KRW300 billion. To give you some details, we have recovery material costs and other miscellaneous expenditures. In Q3, we only had KRW90 billion because we carried out the recovery in September for Q3. However, in Q4, we will see increased recovery costs because we will be in recovery for three months. We have 18 plants that need recovery, four have been recovered, and 14 are still under recovery, which is why we see an increase in recovery costs for Q4.

Thank you. That was the earnings release for Q3 2022 for POSCO Holdings. I would like to extend my gratitude to all the analysts and investors for joining us today, and this concludes our earnings release. Thank you.