PKX - POSCO

[alwaysinvert]

Found a somewhat decent writeup on VIC.

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/46114

 

Some highlights:

 

Posco is one of the world's lowest cost steel producers.  Posco's cost structure is approximately 10%  below peers in Asia.  Posco's low cost structure derives from how the company was created. The Korean government created and owned Posco until it went public in 1994 and was completely privatized in 2000.  Posco received its land and ports for free as well as large government subsidies during its creation. Its ports are very deep and their Pohang facility was built in a U shape that allows ships to drop their raw materials off and then pull forward to pick up finished product.  Posco has a huge advantage with its facilities being on ports. Many of their competitors have to ship their raw materials and finished products across land to ports. In the early 2000s, it was estimated that Posco paid $25 per ton for delivery of its iron ore (most of which came from Australia), while US companies paid about $50 a ton. This difference in cost gave Posco a competitive advantage over Western companies.

 

"I'd love to have a seaport, paid for by the government, just like Posco," said Thomas Usher, the chairman of US Steel.

 

Comment: Huge hidden assets not properly shown on the books.

 

In addition to being the lowest cost producer, Posco has been able to sell its products at a slight premium to their competitors. The historical premium for hot rolled coils has averaged approximately 10% over Baosteel's price and a smaller premium over Dongkuk Steel, Japanese steel producers, China Steel and other Chinese producers according to a UBS research report.

 

It's also important to recognize that Posco's unconsolidated investments don't flow through the net income line (until they are sold) and instead the income or loss affects comprehensive income.

 

Comment: Acquisiton cost of unconsolidated investments total 3.063 trillion won as compared to book value of 3.030 trillion won (Q3-2012). The number of unconsolidated subsidiaries is huge so a a comprehensive analysis of what their intrinsic value is would be pretty much impossible, especially since at least the bigger ones also seem to be privately held. But given that, on average, a number of years must have elapsed since those acquistions were made and that book value probably is sticky, these assets are likely on average undervalued.

 

Korea will be one of the biggest beneficiaries of the removal of export subsidies in China. This will make Posco's products more competitive. Posco was competing with Chinese exports that were subsidized by the government. This is a very positive development for Posco because Chinese producers received a 9% tax rebate on exports. The rebate ended on June 14th 2010.  In the short run this will actually cause oversupply and depress prices but in the long run it will benefit Posco and other foreign producers. 45% of Korea's steel comes from China, this new policy should help Posco's competitive position as Chinese exports decrease

 

Comment: If the author is right, my question is what would constitute the short run here.

[jay21]

Buffet not backing acquisition:

 

http://www.valuewalk.com/2013/04/warren-buffett-bearish-on-shipping-industry/

[alwaysinvert]

Deja vu?

 

http://english.chosun.com/site/data/html_dir/2010/05/17/2010051701206.html

 

 

 

 

[alwaysinvert]

I would argue that what POSCO does is not a commodity business at all – it's a high-tech business. They learned from Nippon Steel and they’re now even more advanced. I'd argue that if you have the most technologically advanced steel company in the world making unusual, [non-commodity] stuff, then business can be quite attractive for a long time.

Charlie Munger at 2007 WESCO meeting

 

Is the same true in 2013, when POSCO is pushing in the direction towards vertical integration? In the steel making business their advantage is clear. They are more operationally efficient than the competitors and on top of that they have absolutely great locations for their mills in South Korea. Is the deployment of capital in different joint ventures and upstream in mining enterprises a wise move? I can't really evaluate that, but the fact that most of the other players in the business (not mining, but steelmaking) have financial challenges in terms of thin balance sheets, may suggest that the odds are skewed in their favour in some areas.

 

On top of that I think there are good reasons to suspect that over the coming years, there will be downward pressure on the iron ore price. Why? Lots of capital is going in to mining enterprises and  the overcapacity of the steel makers and oversupply of steel is not ending soon. Who will benefit? The specialist low-cost producer...

[alwaysinvert]

Now 10% of my portfolio

[alwaysinvert]

http://online.wsj.com/article/SB10001424127887324474004578444051826982148.html

Operating profit fell 4.7% to 716.92 billion won from 752.36 billion won a year earlier. Sales dropped 11% to 14.582 trillion won from 16.309 trillion won.

Seems decent. Not much control over revenue, but flexible when it comes to costs.

 

http://www.posco.com/homepage/docs/eng2/dn/invest/archive/2013_1Q_Presentation_eng_final.pdf

[SwedishValue]

I took a 15% portfolio position today. I really believe this is a bet with a lot of very favorable characteristics although there is limited investor information and it is impossible for me to understand the width of their operations.

 

1. Steel is not going anywhere, as far as I am concerned. The world is growing increasingly urban, and steel is needed for the ongoing and continuous urbanization.

 

2. Posco is the low cost producer. The only way I can vouch for this myself other than comparing their historical financial data to that of other steel producers, where they perform superbly. Much more important to me is the voucher from both Buffett and Munger. I do not consider it remotely possible that Buffett or Munger would err in this respect. If Buffett did not like the economics of the company he would have sold it allready, and I cannot see in what way the underlying long-term intrinsic value of Posco could possibly have decreased to the degree the share price has decreased the last year or two.

 

3. Posco has deployed a lot of cash for projects soon due that will increase their steel production capacity. Had they not done this, they could have redistributed a lot of money to shareholders during the last couple of years. In the case that the steel industry continues to be distressed, I would be surprised if they continued committing to building additional plants (if they do in a bad way, I would watch what Buffett is doing and sell whenever he was selling).

 

4. The company is outright CHEAP. Normalize earnings levels for the last five years (not a super good cycle in any way for the steel industry) and adjust to the increased production capacity of Posco and you have a company that is trading below 5 times operating earnings. I believe such a normalization is called for when looking at the Posco numbers, and see more volatility on the upside than the downside: Remember that Posco is currently operating below maximum capacity. As the low cost producer they should most certainly have good staying power.

 

For some additional speculative conspiracy thoughts that bear no meaning for my investment thesis, we can take a look at their latest earnings Q&A http://www.posco.com/homepage/docs/eng2/dn/invest/archive/2013_1Q_Presentation_Q&A.pdf . When asked about the current credit rating, the company states that "We are also carying out activities for non-debt financing this year to maintain the current credit ratings although we can not disclose out detailed plans at this occasion." - Perhaps Buffett is interested in some kind of preffered arrangement?

 

The disclaimer would be that I consider alwaysinvert one of my very closest friends and collegues in the Swedish investing field. Last time alwaysinvert pitched me an idea he made me a lot of money. I hope I can return the favor to him someday.

[constructive]

If Buffett did not like the economics of the company he would have sold it already

 

And if he loved the economics, I assume he would own a lot more?

 

When asked about the current credit rating, the company states that "We are also carying out activities for non-debt financing this year to maintain the current credit ratings although we can not disclose out detailed plans at this occasion." - Perhaps Buffett is interested in some kind of preferred arrangement?

 

Buffett is a greedy guy when it comes to yield. You don't want him owning debt or preferred in your company unless it's an emergency.

 

And isn't it pretty bad news that they're working on financing, just to maintain their current credit ratings? It would be good news if they could maintain (and improve) their credit ratings without raising money.

[SwedishValue]

No need to be rude, I think BAC/GS/GE got fair value for their deal. One point I'm raising is that Buffett has held his investment through price levels significantly higher than the present ones. Another thing, look at the ratings of your normal steel company - the downgrades have been an industry specific event rather than a Posco idiosyncratic one. Posco has much better financials than their present competitors, and if steel isn't going away, Posco will continue to overperform its industry.

 

However, it is possible that the industry dynamics have changed since the Buffett investment and the Munger comment. I'm not smart enough to find out.

 

Disclaimer: Drunk.

[LC]

Lunchtime beers eh? :D

 

How do you rationalize the increased debt they've taken on in recent years?

[Liberty]

Lunchtime beers eh? :D

 

Based on the flag next to his name, he or she is in Sweden, so probably not lunchtime :)

[alwaysinvert]

Lunchtime beers eh? :D

 

How do you rationalize the increased debt they've taken on in recent years?

Huge investments in more capacity. Daewoo International, JVs etc. Now they are divesting financial positions which is a plus in my view. Absolutely no need for them to hold stock in telecom companies. Remeber - they have taken on more debt and made more investments (and made money) when their competitors has been on the defensive. I like those odds. Earnings leverage in a good market is huge. And in the toughest steel market in a long while, they still make a decent return for investors at current price levels. Maybe things get worse before they get better. Maybe China will crash and burn short-term. Maybe North Korea will go to war. I don't have a clue (especially not about China, but the story is out there, it's what everyone thinks will happen now). I find taking on those risks appealing at these prices. Marty Whitman and Buffett/Munger seem to agree with me and that gives me some more courage.

[SwedishValue]

I second alwaysinvert. I'm not suggesting it's the perfect shareholder oriented company. I would have preferred a massive buckback to investing in new capacity, but given the present circumstances I still like the odds.

[Aberhound]

1. Steel is not going anywhere, as far as I am concerned. The world is growing increasingly urban, and steel is needed for the ongoing and continuous urbanization.

 

Technology is advancing rapidly. One fellow from Toronto has been trying to build a basalt steel substitute in Poland. You can already get the rebar and the Toronto fellow has been trying to build an I-Beam factory. In China there is a factory being built to make a aluminium + silicon product which is crystalline like the Basalt. GM plans to use more Magnesium in cars than the current magnesium world production to take advantage on their patents for anti-corrosion magnesium and a new magnesium alloy which allows lower temperature metal forming.

 

It always takes longer than you expect but you can't hold back the tide. Steel is a lousy business long term because the business cycle causes excess capacity then price collapse. Eventually there is a slow down but the steel foundries mostly stay open because these factories have high fixed costs and a lot of debt that need servicing. Prices will be driven down close to the marginal cost and well below the fixed costs. Meanwhile the new steel substitutes will slowly become available which will be used because it is lighter, stronger or equally strong and does not rust.

 

Broad in China will eventually be allowed to build their 90 day massive towers because they fit the Agenda 21 plan for us all to live in rabbit warrens. Being a supplier to Broad might be ugly in the same way Rubbermaid went bankrupt supplying Walmart.

[ASTA]

I will take a look better 3 swedes then 2 in this one ;D Swedish Mafia unite ;D

[SwedishValue]

In general steel is a lousy business. Insurance is not a good business either. But having the low cost advantage as Posco in steel or GEICO in insurance can be a wonderful thing, to paraphrase Buffett. If your opinion is that steel is rapidly getting abundant, then we are of two diametrically opposition opinions. Posco sold a LOT more steel last year to automotive companies than they did the year before.

[alwaysinvert]

Good write-up on Posco: http://seekingalpha.com/article/1398951-posco-sustainable-competitive-advantages-significant-margin-of-safety-and-catalysts-for-150-upside?

[PlanMaestro]

http://online.wsj.com/article/SB121995765443180931.html

 

http://www.siemens.com/press/en/pressrelease/?press=/en/pressrelease/2011/industry_solutions/iis201109998.htm

 

http://posco-india.com/File/projectProgres1.pdf

 

http://www.slideshare.net/gobarganesh/posco-india

 

http://blogs.ft.com/beyond-brics/2011/01/31/india-steel-posco-gets-green-light/#axzz2SqSOENhN

 

http://blogs.ft.com/beyond-brics/2011/05/03/posco-in-india-hold-the-cheers/#axzz2SqSOENhN

 

 

 

http://timesofindia.indiatimes.com/topic/Posco/news/

 

http://articles.economictimes.indiatimes.com/2012-03-23/news/31230154_1_finex-posco-officials-chan-ryu

 

http://economictimes.indiatimes.com/news/news-by-industry/indl-goods/svs/steel/environmental-clearance-to-posco-project-revoked/articleshow/19732030.cms

 

http://economictimes.indiatimes.com/news/news-by-industry/indl-goods/svs/steel/land-acquisition-for-posco-steel-plant-in-odisha-starts-again/articleshow/19675182.cms

 

http://economictimes.indiatimes.com/news/news-by-industry/indl-goods/svs/steel/posco-uttam-galva-in-talks-to-set-up-3-mtpa-steel-plant/articleshow/19561955.cms

 

http://www.indianexpress.com/news/posco-india-has-no-knowledge-about-its-mou-renewal-with-odisha/1102874/

 

 

[PlanMaestro]

http://www.readability.com/articles/weids1ly

[alwaysinvert]

If the India expansion is good business (and I guess you have to suppose so from what I've read), that's a nice little added kicker if it will ever get off the ground. But it's not something that's of any major concern to me either way at this time.

[PlanMaestro]

Yep, Posco is cheap. Though, the low cost expansion is what makes it interesting.

 

If the India expansion is good business (and I guess you have to suppose so from what I've read), that's a nice little added kicker if it will ever get off the ground. But it's not something that's of any major concern to me either way at this time.

[Kiltacular]

Yep, Posco is cheap. Though, the low cost expansion is what makes it interesting.

 

 

 

Quote from: alwaysinvert on Today at 01:30:42 PM

 

If the India expansion is good business (and I guess you have to suppose so from what I've read), that's a nice little added kicker if it will ever get off the ground. But it's not something that's of any major concern to me either way at this time.

 

I agree with both of you...the Indian expansion is not necessary to make it cheap but it does make it much more interesting -- but, to this point, the wait has been loooooong.

 

The persistence of the S. Koreans with this is amazing.  The process of government decisions in India a bit stunning.  I admire Indians so much but they've got to get some grease in the wheels of government in my opinion (just my view based on watching this Posco thing for much more than half a decade).  I've be interested in others views about the Indian system for gov't as it currently runs.  How did they get here?

 

Anyway, a few other things that concern me about Posco are their moves into other areas over the years.  There just hasn't been much payoff for these and a lot of debt was added.  There's always hinting at moving into something new -- Shipbuilding comes to mind.

 

I was hoping by now that they would be even more self sufficient for coal and ore and I thought that they would have achieved more with Finex by now.  They've been working on doing this for a long, long time.

 

With the Yen dropping massively, it may help the Japanese exporters though, as for Posco, the fall in the Yen will make their raw materials more expensive, I believe -- so, it may be a wash.

 

But, to the extent they can focus on making superb, cheap steel and IF they can get the deal done in India with their own ore, this could be a homerun when the cycle turns.  Originally, they wanted the ability to get a 12 mpta project in India PLUS the right to export some of the iron ore they wanted with the project.  Now, we're down to the Supreme Court having to decide on this stuff.

 

It took years to get the land as well, which still isn't completed and that was moved from 4000 acres to, IIRC, 2400 or 2700 acres.  This also finally appears to be happening.

 

It does seem that for the first time in years, the project might move forward.  I am watching.  Anyone with a good link that captures their saga since 2005 trying to get this project off the ground.

 

 

 

 

 

 

 

[alwaysinvert]

The Krakatau Posco JV mill in Indonesia will start running in January '14 and the expected investment up to that point is $2.66b. In the first stage this mill will produce low-margin slab steel. Building started in mid '11. Capacity at start-up: 3 million tonnes.

 

One considerable earnings drag that will ease up soon and that's not correlated to a bad market.

[PlanMaestro]

http://www.bloomberg.com/news/2013-05-28/abe-s-adviser-tells-south-korea-to-cope-with-yen-not-blame-japan.html

[Kiltacular]

http://articles.economictimes.indiatimes.com/2013-06-02/news/39675386_1_iron-ore-posco-india-odisha

 

Decent article on the Posco saga in India.

 

It begins in 1990 !!