UBS expects South Korea''s POSCO to lower steel prices again in the third quarter following its earlier-than-expected price reduction announced on Thursday to further reflect falling raw material costs.

UBS in a note said that "We expect another price cut of 8% to 10% in the third quarter with hot-rolled coil prices at KRW 640,000 as falling input costs put pressure on steel prices. However, we expect a modest rise in product prices from the fourth quarter as demand recovers.

POSCO, which had refused to cut prices until negotiations over raw material imports were settled due to the impact of its move on earnings, unexpectedly cut its domestic steel prices by up to 20 percent, its biggest ever reduction, to narrow a widening price gap with cheaper imports. Prior to the cut, POSCO products cost over USD 100 a tonne more than imported steel, and they are still quoted higher than Chinese and Japanese imports even after Thursday''s reductions.

Some analysts have downgraded their earnings forecasts for POSCO following the price adjustments, as POSCO forecast the move would reduce annual sales by 2.7 trillion won and as uncertainty mounts over the depth of price cuts in already protracted iron ore talks.

Mr Brian Cho Citi analyst in a note said that "We expect such changes to impose further pricing impact on raw material price negotiations. We believe the degree of price fall will likely exceed our original expectations of 61% in coking coal and 36% in iron ore.”