POSCO (PKX) and Chinese Steel

Overnight, there was an interesting news item on Reuters regarding steel stocks and POSCO (PKX) in particular.

“POSCO, the world's fifth-largest steel maker, posted a worse-than-expected 68 percent slump in its quarterly profits on Thursday, hit by sinking steel prices and high raw materials costs”. ”The South Korean steel maker forecast its 2006 sales would fall between 8-12 percent from a year ago alongside reduced output, as steel prices crumbled on a supply glut from China. Steel stocks have been running at high levels in Asia with prices dipping, although Beijing has been trying to slim down its over-crowded steel industry, which has cranked up output to feed China's hot economic growth and booming steel demand since 2004.” "I am worried about a slump in the steel market condition," POSCO Chairman Lee Ku-taek said at a news conference. "Steel market condition deteriorated sharply starting from the second half (of 2005) because of the impact from China's supply glut... and that impact has been realized faster than our expectations." ”Analysts said POSCO might have to slash prices again this year, even after several cuts in key product prices in 2005.” "POSCO is facing deep problems. The steel industry is facing a serious oversupply situation, with China's steel capacity continuing to grow," said Kim Hyun-tae, fund manager at Landmark Investment Management. "It's hard to think of POSCO as any kind of long-term growth stock." ”POSCO earned a net profit of 382 billion won ($388 million) in the three months to December, missing a consensus forecast of 575.5 billion won, according to seven analysts surveyed by Reuters. The result compared with 1.18 trillion won a year ago.”

Operating profits were actually somewhat better than most analyst expectations but net was hurt by several one-time charges. The accelerated development of China’s steel industry has already created a steel surplus.

This has been one of the most profitable steel companies in the world, great technology, modern plant, high returns as it is a very low cost producer. Though there has been some attempt at product differentiation in the steel industry in terms of quality, this is still primarily a commodity business. Remember, in a commodity business you are as good as your worst competitor. The key is to find the low cost competitor at the right price. This could well be the right competitor, my guess is the right price is the low $40's.

See also Shai's link on Korean stocks