PKX - POSCO

[Liberty]

I'm surprised that this South-Korean steel maker isn't mentioned more on this forum.

 

They seem to be the low-cost producer, selling fairly cheaply (not deep value, but pretty low historically, with a P/E of 9.14 -- seems like quality at a fair price), and well positioned for future growth (opening new mills in India). They also have the WEB stamp of approval.

 

I haven't researched them fully yet, mostly because I prefer jockey stocks, but they seem like a solid buy & hold business. I figured I'd put them on the radar here and see if anybody else found them interesting.

[schin]

I've heard amazing things about Posco and also, Mohnish Pabrai established an position. He's really good at valuing steel companies.

 

I don't know much about the steel industry and can not confirm their low cost producer status. I heard it, but I don't know how to measure it.

 

They are trying to get into India, but I heard CMunger mention how even Posco, a good company in his eyes, is running into problems with the beaucracy and zoning there.  But, at least, they are trying.

 

I would love to hear more from people familiar with the steel industry. How does it compare to Acelor Mittal, Japan Steel, etc. TEX?

[rmitz]

I've heard amazing things about Posco and also, Mohnish Pabrai established an position. He's really good at valuing steel companies.

 

I don't know much about the steel industry and can not confirm their low cost producer status. I heard it, but I don't know how to measure it.

 

They are trying to get into India, but I heard CMunger mention how even Posco, a good company in his eyes, is running into problems with the beaucracy and zoning there.  But, at least, they are trying.

 

I would love to hear more from people familiar with the steel industry. How does it compare to Acelor Mittal, Japan Steel, etc. TEX?

 

It's been quite a while since I looked at it in detail, but the basic theory was that they have easy access to China and are a low-cost steel producer based on some particular technologies.  Don't know if that's still true.  Also, they were extremely cheap on an earnings basis.  Less so now, but still not terrible.

[alpha231616967560]

I have also been looking at PKX recently.

 

The cost of iron ore has tripled in the last two years and is 20x what it was 10 years ago. POSCO raw material cost is about 40% of sales, so this is something to consider. Opportunities in India and China are immense, but competition is also increasing. POSCO process to utilize lower-grade ore than their competitors continues to give them cost advantages for now.

 

Still looking at PKX... 

 

[username]

Bought some shares recently, with the proceeds from LZ. To my mind, the market price isn't expensive, though not cheap enough to make a killing.

Don't know if Japan need for rebuilding infrastructure would be any help, if it does, and the market would use this short term improvement in the projections, and I would sell. If not, I'll just hold while trying to find a better use for that money.

[rohitc99]

POSCO is currently the no.3 steel maker in the world if i am not mistaken. They currently use the FINEX technology which they have developed over the last 8-10 years. this technology allows for lower operating cost and low capital costs too...i dont have the exact no.s - think it is around 20-25% in terms of capex.

If you compare the company with the other major steel producers such as arcelor mittal or bao steel  - china , the company has better net margins and Return on capital. The only other major steel producer with much higher margins is tata steel (mainly to their own mines and other factors). So POSCO compares well with all the other major steel producers.

Major part of the sales is in Skorea ..dont have the exact numbers on it. Company also has several JVs in china ..though impact on it will be high if china slows down

The company also has E&C, energy and IT ..but these divisions are small.

In india, the company has trying to setup a plant in the state of orissa for the last 5 years and is fighting the local politicians/ people whose land is being taken up. they recently recieved clearance from the central government. In addition, the company is setting up a JV and a greenfield plant in other states which should hopefully happen soon. this should be a +ve for the company as india is short on steel (importing it) and there are very few greenfield project coming up

[Shane]

Posco is my largest position.  I bought in before the earthquakes in japan but that certainly will help my investment thesis (I believe they already have had orders from japan).  My original thesis was, as mentioned, China will need steel and posco is a large low cost producer who will gain access to india.  Other than buying and emerging markets ETF i didn't know how else to get into those economies, knowing buffet owned some helped me gain the confidence to pull the trigger.

 

Energy and Iron Ore hurt Posco, but only in the short run.  In the long run prices will adjust and posco will likely stay a low cost producer and reap the reward.  My price was around $99, and I plan to hold for more than 5 years.  If they stay a low cost producer much longer.

 

 

[Shane]

Mohnish Pabrai recently sold ~70% of his position, the company is having continued issues with it's india plant.  I am still confident in the company in the long-term.

[Myth465]

Arent you worried about a slow down in China?

 

http://www.gurufocus.com/news/134039/is-the-yuan-overvalued-jim-chanos-thinks-so

 

Chanos also has a recent interview online as well which is 10 minutes and is about China. This plus all those empty buildings has to make one think about the prospects for Iron Ore over the short term.....

[goldfinger]

Arent you worried about a slow down in China?

 

http://www.gurufocus.com/news/134039/is-the-yuan-overvalued-jim-chanos-thinks-so

 

Chanos also has a recent interview online as well which is 10 minutes and is about China. This plus all those empty buildings has to make one think about the prospects for Iron Ore over the short term.....

 

Not to say that Chanos is wrong (there is a housing bubble) but for information China always built first and then people relocated.

[Liberty]

Arent you worried about a slow down in China?

 

http://www.gurufocus.com/news/134039/is-the-yuan-overvalued-jim-chanos-thinks-so

 

"Very few people realize that China’s exports make up only 5% of the country’s overall economy. "

 

Anyone can verify that number?

[Shane]

Yes, that is a concern, but I hear too many conflicting things about what is happening in china.  Posco is a low cost producer in asia and will benefit from the area's growth as a whole.  Posco's major customers are automobile and Shipbuilding industries, not real-estate.  Chano's says there a slowdown in the economy and Jim Roger's says the government has the control to handle it and Asia is the best market to be in.

 

Also - My largest investment is not very large, I'm a student, when I have a salary I hope to be able to make much larger investments than right now.  That makes it easier for me to wait through tough times.

 

Myth - Since the majority of posco's revenues come from South Korea wouldn't they benefit from a lower Iron Ore price?  It would give their margins some relief.  China's massive commodity consumption increases the prices of commodities which is putting pressure on companies using Iron ore and other metals in production, if china were to consume less they would lower their capex.

 

My investments are more of a learning experience than anything - I'd love to discuss this more with whoever has any input!

[Myth465]

I dont know. If I sell oil, I want oil consumption to be high regardless of where I am. If you take a look at Granthams last few letters you will see that China is the marginal consumer for most commodities. I dont know how interchangable steel is, but if it is interchangable or if it all has the same feedstock then a drop wouldnt be a good thing inmo.

 

I could be totally off the mark, but I feel China will slow sooner or later. With that said I still own alot of oil, so perhaps I should take my own advice  ;D. Investing seems a bit tougher these days, Macro and Micro......

[Shane]

Agreed, things are getting more complicated.  It'll be an interesting learning experience!

[Myth465]

Very interesting comments from Kuppy. LOL a funny way to look at it.

 

Perhaps there are several ways to win. This correlates rather well with what was shown on a 2 minute bloomberg piece. So many factors.....

I never thought shoddy construction could have a benefit.

 

http://adventuresincapitalism.com/askkuppy.aspx

 

I have seen many articles describing how China's GDP is mostly construction based. Don't you think that when they stop building stuff, the economy will collapse?

 

Firstly, China's GDP has a lot more going on than just construction--have you ever been to a Wal Mart?

 

Secondly, have you ever seen Chinese construction? The stuff they built a few years ago is already collapsing and the concept of maitenance cap-ex hasn't exactly gone mainstream. If they have to rebuild much of the infrastructure, construction can remain a big piece of GDP for decades into the future.

[Shane]

Myth - Who knows, interesting read though!

 

I feel like a chicken with its head cut-off right now.  I hold 2 event driven equities, super cheap gold miners, and JNJ and PKX.  The last two are more to help me learn as I watch them closely, if they don't pay off I'm not concerned in the long run.

[Liberty]

This one's also hitting 52 week lows.

[Shane]

I am considering taking my 10% loss and selling this week, it is tough when its selling at such a substantial discount to book value.  FedEx reported that Asian demand for shipping has declined, which is a serious concern.  However if the emerging markets and global economy recover this could be a company that benefits immensely.

 

EDIT: I'm sitting on my position, although the short-term looks bleak right now.  This has become a more speculative holding.  Long-term I am still confident steel demand in the emerging markets will grow.

[PlanMaestro]

http://www.bloomberg.com/news/2012-05-31/mittal-price-squeeze-in-960-billion-steelmaking-industry.html

 

Lakshmi Mittal, whose $46 billion takeover in 2006 created ArcelorMittal as the world’s largest steelmaker, is getting pushed around. The U.K.’s richest person can’t stop his iron-ore suppliers from raising prices and can’t pass on higher costs to customers like Volkswagen AG (VOW), after the Luxembourg-based company’s market share fell to its lowest since 2009. The stock slid to a record in May this year, and its bond yields are close to record highs.

 

Even after years of consolidation, today’s five biggest steelmakers including ArcelorMittal and South Korea’s Posco control no more than 19 percent of the $960 billion global market, too little to defend their prices. In contrast, BHP Billiton Ltd. (BHP), Vale SA (VALE) and Rio Tinto Group mine about 63 percent of the world’s iron ore exported as the main ingredient in steelmaking, while the five biggest automakers that buy ArcelorMittal’s steel make about 51 percent of the world’s cars“ They really are between two behemoth industries,” said Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin. “They are just one cog in a chain between large suppliers and customers and they are just the middle man with no pricing power.” ArcelorMittal reported an operating margin of 5.2 percent last year, compared with 49 percent at Vale, the world’s biggest iron-ore exporter.

....

 

ArcelorMittal (MT) “gives one the impression that there is a relatively high degree of consolidation,” Georges said. “The truth is that one big guy can’t change the logic of the industry. What does change it is when you have an oligopoly of three or four guys.”

....

 

Under Mittal, the 61-year-old chairman and chief executive who began his industrial career in his parents steel company, the company trimmed output about 20 percent from the 116 million tons produced in 2007, while Chinese mills have more than doubled volumes since 2004 to 684 million metric tons last year.

....

 

 

Rio Tinto (RIO), Vale and BHP posted record operating profit last year, driven by profit from their iron-ore units. The steel producers have struggled to adapt to changes in raw-material pricing introduced two years ago as mining companies ended a decades-old system of annual contract talks in favor of quarterly accords or spot pricing. That means steelmakers have lost the ability to negotiate the price of their biggest cost base, eroding margins as too much steelmaking capacity and competition for sales makes it difficult to pass on cost rises to their customers.

.....

 

“Steel production is essentially a conversion business now, and the days when raw materials made up only 30 percent to 35 percent of costs, compared to 75 percent to 80 percent now, are long gone,” Macquarie Group said in a May 14 report. Given weak demand and overcapacity “the coming months and even years are set to see relatively tepid price action and thin steelmaker margins.”

.....

 

 

[Shane]

yikes

[Liberty]

Thanks for posting, PlanMaestro. It definitely seems like the steel producers are losing pricing power to iron ore producers and their biggest clients. Very interesting. Def not good for PKX, unless it can be bought cheap enough (but even then, probably risky in the long term once it reaches back fair value). I'm not interested in it, in any case. It's an interesting company to study, though.

[alwaysinvert]

Stock is hitting levels not seen since 2009, but revenue has gone up considerably. If the 5 year average margins of 8% are representable that would put the stock at 4.5x normalized earnings. 10 year average net margins are 10%... Even if we ignored the revenue growth completely and went with 5 year average earnings, the multiple would be 6.7x. Also trades at a respectable discount to book.

 

Munger has called Posco the best steel company in the world. The question is how much of earnings can be distributed to shareholders in a steady state scenario.

 

Anyone taken a look lately?

[alwaysinvert]

For starters, the company operates in the pseudo-socialist, labor-friendly market of South Korea. POSCO was a public (government-owned) entity until 2000, when it became fully privatized. Yet it retains a good number of the benefits of a public company, including a locked-in rate of return in Korean markets. You read that correctly. The company is basically guaranteed some level of profit for each ton of steel it moves in the Korean market. When Korean sales clock in at 71% of sales in the last fiscal year, that's nothing to scoff at.

 

I'll put it as simply as possible: POSCO's the closest thing to a monopoly you'll find on American exchanges, short of perhaps Microsoft (Nasdaq: MSFT  ) . This has the very simple and obvious effect of making POSCO a huge cash cow.

http://www.fool.com/investing/dividends-income/2006/11/24/the-best-international-stock-for-2007-posco.aspx

 

This is highly interesting, but I can't find anything specific about this in the company's reporting, or really anywhere else, but that might be me sucking at searching.

[Phaceliacapital]

Interesting, will spent half an hour to see if I find something else.

 

In 2009 their Korean sales were around 65% of the total. Funny that BB doesn't report segmental data after 2009...

[alwaysinvert]

When Buffett invested in Posco in 2006 he got:

 

*19 trillion won in net tangible book

 

*4 trillion won in net profit (2005), steadily grown from 800 billion in 2001

 

*5.5 trillion won in net cash from operations (2005), steadily grown from 1.9 trillion in 2001

 

*26.3 trillion win in revenues (2005), steadily grown from 11 trillion in 2001

 

He paid $572 million for 4% of the company. At that time that would probably indicate a market cap of approximately 14 trillion won.

 

What have we got from that point? Market cap is now 24 trillion won.

 

I'm confused about if the 2012 annual report has been released or not since I can't obtain it from their absolutely horrible IR site, but have seen figures quoted on different sites (maybe not yet translated? idk). I'll use 2011 (apparently the annual reports from 2009 on are now hidden in their "sustainability reports", still have no clue where the 2012 one is) and Q3-2012 figures:

 

*Net tangible book: 36.6 trillion won (Q3-2012)

 

*Net cash from operations: 1.7 trillion won (2011), down from 3.6 trillion in 2010

 

*Net profit: 2.9 trillion (Q3-2012 rolling), 5y average of 3.7 trillion won and maximum of 4.9 trillion won (2010)

 

*Revenues 67.2 trillion won (Q3-2012 rolling)

 

During the boom growth years iron ore was relatively stable and since it shot up the earnings have been poorer. What has happened? The old system for iron ore pricing broke down.

 

Links:

http://www.ft.com/intl/cms/s/0/b0580bf6-c220-11de-be3a-00144feab49a.html#axzz2PdzdMgsk

http://www.ft.com/intl/cms/s/0/3561ce38-b8e7-11de-98ee-00144feab49a.html#axzz2PdzdMgsk 

http://www.ft.com/intl/cms/s/0/d15d7758-3bad-11df-a4c0-00144feabdc0.html#axzz2PdzdMgsk

 

In terms of production, Posco seems more consistent in volume growth from year to year than most of their competitors:

 

http://worldsteel.org/dms/internetDocumentList/downloads/statistics/Topsteelproducers/document/Topsteelproducers.pdf

 

What happened when the old price system was breaking down seems to be that for a while the steelmakers could squeeze the miners by choosing whichever system was more profitable for them, but that now seems to be over.  Maybe part of the reason why Posco bought Daewoo International in 2010 was to be able to better hedge the spot market iron ore prices. The timing with the 2010 changes in iron ore pricing seems conspicuous.

 

So the old equilibrium was put out of whack. However, over time I have a hard time seeing why it shouldn't be possible for steelmakers to get a decent profit margin, but it seems the earnings will keep being more volatile. And maybe 2009 and 2010 earnings were a bit bloated for the steel mill operators.