PKX - POSCO

[RadMan24]

For what it's worth, Munger said this back in 07:

 

"We think Posco is the best steel company in the world. When we bought it, it was

at 4-5x earnings, had a debt-free balance sheet and was the low-cost producer. "

 

Things have obviously changed, Posco is not debt free and earnings are so low that the multiple is obviously way higher.  Chinese steel and current currency fluctuations are even challenging the low-cost argument.

 

Changes like these are expected to happen, you're definitely not paying a premium today, but the prospects are not that enticing as well.

[farnamstreet]

Here is what he said at the DJCO meeting on the 25th when asked about Posco

 

It's a very interesting example as a matter of fact. It shows how hard the world is. That is the most efficient steel company in the world. It had pretty close to a local monopoly of a whole country for a long, long time.

 

In spite of that, in spite of having some very important steel technology that they have and nobody else in the world has, Posco is selling like an ordinary commoditized steel company. It's very, very hard to avoid being commoditized in high powered competition in the modern world.

 

When places like Dow Chemical have all of their complex chemical products commoditized, in spite of the fact that they've got thousands of PhD chemists. People as talented and brilliant as the people who created Posco find the market's flooded and the price is bad.

 

It shows how hard and dangerous it is to make money in a commoditized business. Many businesses that you thought were hugely advantaged can be hugely commoditized. You've done a wonderful service to this meeting by raising the...Posco is an excellent example for everybody to think about. It shows how hard it is.

 

Source: http://myinvestingnotebook.blogspot.ca/2015/03/daily-journal-2015-meeting-notes.html

[txlaw]

I was at the Daily Journal meeting yesterday. 

 

Sounded to me like Munger has just soured on POSCO and the steel industry, generally.  He basically said that POSCO is still the most efficient steel company in the world with technology that nobody else has -- but that the effects of commoditization in the steel industry have been pretty negative for the company. 

 

So it does seem unlikely that there was any sort of shift from the ADRs to the Korean listed stock.

 

That is a risk, very well known risk for Posco's margins.  Did he also mention that if he had to choose a tech company, it would be Google?  It's interesting that Pabrai dumped Posco and bought Google. 

 

Prospects between the two are almost night and day.

 

Yeah, he actually said that if you put a gun to his head and forced him to choose a tech company to invest in, he'd pick Google.

[sleepydragon]

I was at the Daily Journal meeting yesterday. 

 

Sounded to me like Munger has just soured on POSCO and the steel industry, generally.  He basically said that POSCO is still the most efficient steel company in the world with technology that nobody else has -- but that the effects of commoditization in the steel industry have been pretty negative for the company. 

 

So it does seem unlikely that there was any sort of shift from the ADRs to the Korean listed stock.

 

That is a risk, very well known risk for Posco's margins.  Did he also mention that if he had to choose a tech company, it would be Google?  It's interesting that Pabrai dumped Posco and bought Google. 

 

Prospects between the two are almost night and day.

 

Yeah, he actually said that if you put a gun to his head and forced him to choose a tech company to invest in, he'd pick Google.

 

what? Not IBM? I thought he said something about IBM and Darwinism

[merkhet]

I'm not sure they view IBM as a tech company anymore -- I suspect they view IBM as a services company.

[txlaw]

I was at the Daily Journal meeting yesterday. 

 

Sounded to me like Munger has just soured on POSCO and the steel industry, generally.  He basically said that POSCO is still the most efficient steel company in the world with technology that nobody else has -- but that the effects of commoditization in the steel industry have been pretty negative for the company. 

 

So it does seem unlikely that there was any sort of shift from the ADRs to the Korean listed stock.

 

That is a risk, very well known risk for Posco's margins.  Did he also mention that if he had to choose a tech company, it would be Google?  It's interesting that Pabrai dumped Posco and bought Google. 

 

Prospects between the two are almost night and day.

 

Yeah, he actually said that if you put a gun to his head and forced him to choose a tech company to invest in, he'd pick Google.

 

what? Not IBM? I thought he said something about IBM and Darwinism

 

He mentioned IBM in the context of discussing Kodak, GM, Xerox, etc.  Basically as a counterexample to all the outstanding businesses that have died over time.

 

I think merkhet is right in that Munger probably thinks of IBM's core offering as packaging technology for businesses (as a service), rather than as a pure tech company.

[Jurgis]

OT.

 

IIRC, the question wasn't worded as "what tech company would you buy if you had to buy tech company". The questioner mentioned Google directly, so Munger answered about Google directly with his "gun to the head" answer.

 

So we don't know if he'd prefer another tech company. We also don't know if he'd include something like Visa into the universe (which I could argue is more tech company than a lot of tech companies :)).

[RadMan24]

Here is what he said at the DJCO meeting on the 25th when asked about Posco

 

It's a very interesting example as a matter of fact. It shows how hard the world is. That is the most efficient steel company in the world. It had pretty close to a local monopoly of a whole country for a long, long time.

 

In spite of that, in spite of having some very important steel technology that they have and nobody else in the world has, Posco is selling like an ordinary commoditized steel company. It's very, very hard to avoid being commoditized in high powered competition in the modern world.

 

When places like Dow Chemical have all of their complex chemical products commoditized, in spite of the fact that they've got thousands of PhD chemists. People as talented and brilliant as the people who created Posco find the market's flooded and the price is bad.

 

It shows how hard and dangerous it is to make money in a commoditized business. Many businesses that you thought were hugely advantaged can be hugely commoditized. You've done a wonderful service to this meeting by raising the...Posco is an excellent example for everybody to think about. It shows how hard it is.

 

Source: http://myinvestingnotebook.blogspot.ca/2015/03/daily-journal-2015-meeting-notes.html

 

If that doesn't make you humble, not sure what will! 

[bennycx]

His comment is very weird. Could have said the same thing about wells and us bank (most efficient in a commoditised business), and for bac it isn't even efficient. I think he's missing out alot of details here about the steel industry.

 

 

Here is what he said at the DJCO meeting on the 25th when asked about Posco

 

It's a very interesting example as a matter of fact. It shows how hard the world is. That is the most efficient steel company in the world. It had pretty close to a local monopoly of a whole country for a long, long time.

 

In spite of that, in spite of having some very important steel technology that they have and nobody else in the world has, Posco is selling like an ordinary commoditized steel company. It's very, very hard to avoid being commoditized in high powered competition in the modern world.

 

When places like Dow Chemical have all of their complex chemical products commoditized, in spite of the fact that they've got thousands of PhD chemists. People as talented and brilliant as the people who created Posco find the market's flooded and the price is bad.

 

It shows how hard and dangerous it is to make money in a commoditized business. Many businesses that you thought were hugely advantaged can be hugely commoditized. You've done a wonderful service to this meeting by raising the...Posco is an excellent example for everybody to think about. It shows how hard it is.

 

Source: http://myinvestingnotebook.blogspot.ca/2015/03/daily-journal-2015-meeting-notes.html

 

If that doesn't make you humble, not sure what will!

[Two Coins and Widow]

Two articles published on April 1, 2015 (Korean time)

 

http://news.mk.co.kr/english/newsRead.php?sc=30800001&cm=Top%20Story&year=2015&no=305533&selFlag=&relatedcode=&wonNo=&sID=308

 

“A researcher at FactSet said, “between last April and June, Berkshire Hathaway sold off 3,947,555 common shares at the headquarters in Omaha, the US.” FactSet is among the world’s top three financial information service providers along with Bloomberg and Reuters.”

 

http://english.yonhapnews.co.kr/news/2015/04/01/99/0200000000AEN20150401002300320F.html

 

“POSCO officials said that they are not capable of confirming the reports because most of Berkshire Hathaway's transactions are done through private equity funds.”

 

[TwoCitiesCapital]

His comment is very weird. Could have said the same thing about wells and us bank (most efficient in a commoditised business), and for bac it isn't even efficient. I think he's missing out alot of details here about the steel industry.

 

 

Here is what he said at the DJCO meeting on the 25th when asked about Posco

 

It's a very interesting example as a matter of fact. It shows how hard the world is. That is the most efficient steel company in the world. It had pretty close to a local monopoly of a whole country for a long, long time.

 

In spite of that, in spite of having some very important steel technology that they have and nobody else in the world has, Posco is selling like an ordinary commoditized steel company. It's very, very hard to avoid being commoditized in high powered competition in the modern world.

 

When places like Dow Chemical have all of their complex chemical products commoditized, in spite of the fact that they've got thousands of PhD chemists. People as talented and brilliant as the people who created Posco find the market's flooded and the price is bad.

 

It shows how hard and dangerous it is to make money in a commoditized business. Many businesses that you thought were hugely advantaged can be hugely commoditized. You've done a wonderful service to this meeting by raising the...Posco is an excellent example for everybody to think about. It shows how hard it is.

 

Source: http://myinvestingnotebook.blogspot.ca/2015/03/daily-journal-2015-meeting-notes.html

 

If that doesn't make you humble, not sure what will!

 

Another transcript I read basically had him talking about how hard it was to avoid being commoditized, used Dow Jones as an example, and then said that Posco had actually done it. It seems weird to have these multiple versions of what he said floating around suggesting very different things. Surely Posco is not as attractive as it once was in 2009, but to sell the innovator of the industry with low-cost production at 1/2 book seems strange to me no matter how you slice it regardless of what he really said.

[alwaysinvert]

His comment is very weird. Could have said the same thing about wells and us bank (most efficient in a commoditised business), and for bac it isn't even efficient. I think he's missing out alot of details here about the steel industry.

 

 

Here is what he said at the DJCO meeting on the 25th when asked about Posco

 

It's a very interesting example as a matter of fact. It shows how hard the world is. That is the most efficient steel company in the world. It had pretty close to a local monopoly of a whole country for a long, long time.

 

In spite of that, in spite of having some very important steel technology that they have and nobody else in the world has, Posco is selling like an ordinary commoditized steel company. It's very, very hard to avoid being commoditized in high powered competition in the modern world.

 

When places like Dow Chemical have all of their complex chemical products commoditized, in spite of the fact that they've got thousands of PhD chemists. People as talented and brilliant as the people who created Posco find the market's flooded and the price is bad.

 

It shows how hard and dangerous it is to make money in a commoditized business. Many businesses that you thought were hugely advantaged can be hugely commoditized. You've done a wonderful service to this meeting by raising the...Posco is an excellent example for everybody to think about. It shows how hard it is.

 

Source: http://myinvestingnotebook.blogspot.ca/2015/03/daily-journal-2015-meeting-notes.html

 

If that doesn't make you humble, not sure what will!

 

Another transcript I read basically had him talking about how hard it was to avoid being commoditized, used Dow Jones as an example, and then said that Posco had actually done it. It seems weird to have these multiple versions of what he said floating around suggesting very different things. Surely Posco is not as attractive as it once was in 2009, but to sell the innovator of the industry with low-cost production at 1/2 book seems strange to me no matter how you slice it regardless of what he really said.

 

Someone posted audio here on the board and the transcript above is correct.

[cubsfan]

I think some of this may have to do with having a state sponsored irrational competitor like China that you are

competing against who is dumping steel at non-economic prices. So this makes it really tough even if you

are the most efficient low cost producer. In this regard, his comments make sense.

[frommi]

Another transcript I read basically had him talking about how hard it was to avoid being commoditized, used Dow Jones as an example, and then said that Posco had actually done it. It seems weird to have these multiple versions of what he said floating around suggesting very different things. Surely Posco is not as attractive as it once was in 2009, but to sell the innovator of the industry with low-cost production at 1/2 book seems strange to me no matter how you slice it regardless of what he really said.

 

Perhaps because bookvalue is meaningless in most cases and has nothing to do with how this business is valued? :)

They will have a hard time competing in Japan or other asian countries against local competition in lower currencies.

[tylerdurden]

Their margins from the steel business did not deteriorate although they had significant headwinds like FX or steel prices going down. Korea is in the devaluation war too so FX headwinds might become less of an issue going forward.  There were too much noise coming from the subsidiaries, corruption investigations etc. and now there are rumors that Buffett sold all his stake last year. To me it is a good entry point. I am still suspicious about Berkshire selling all their shares and not mentioning anything in the annual letter. It was not a very small position I think...

[TwoCitiesCapital]

Another transcript I read basically had him talking about how hard it was to avoid being commoditized, used Dow Jones as an example, and then said that Posco had actually done it. It seems weird to have these multiple versions of what he said floating around suggesting very different things. Surely Posco is not as attractive as it once was in 2009, but to sell the innovator of the industry with low-cost production at 1/2 book seems strange to me no matter how you slice it regardless of what he really said.

 

Perhaps because bookvalue is meaningless in most cases and has nothing to do with how this business is valued? :)

They will have a hard time competing in Japan or other asian countries against local competition in lower currencies.

 

Book value is generally how I value commodity businesses. Any reason why you would suggest something different?

[frommi]

Book value is generally how I value commodity businesses. Any reason why you would suggest something different?

 

I only value financials or Net-Nets/liquidations that way. Every other business via earnings, and i think the market does it that way too.

[TwoCitiesCapital]

Book value is generally how I value commodity businesses. Any reason why you would suggest something different?

 

I only value financials or Net-Nets/liquidations that way. Every other business via earnings, and i think the market does it that way too.

 

This doesn't make a lot of sense to me.

 

A commodity business is one where people only compete on price and the lowest price in a location takes all the business (extreme example, but we're keeping it simple). Earnings will fluctuate wildly based on the input costs and output prices and only the one with the lowest cost output wins. In an industry like this, with high fragmentation and low barriers to entry, net profits are 0 (actually, probably negative, but theoretically 0). There are two earnings environments that a commodity business experiences:

 

1) Earnings are good

2) Earnings are bad.

 

Neither state is long-lasting as good earnings are followed by increased competition until the margin erodes and bad earnings are followed by reduced supply/bankruptcies until prices rise and earnings are good again. The net gain across the whole industry for the whole cycle is likely to be 0 with value accruing to the best and being negative for the worst.

 

In this type of industry, it's impossible to use earnings as a value metric given that expected earnings for the entire industry is 0 and because earnings are so erratic and based on things entirely outside of the control of the company. A better, less volatile proxy is the value of the assets - which will also derive their value from the earnings, but will be less volatile in doing so.

 

In a good earnings environment, asset values will rise as margins increase, companies are flush with cash and can afford to spend, demand is high for assets as competitors get into the business, etc. etc. etc. So assets do a pretty good job reflecting the value of a good environment. Asset prices rise less than suggested by earnings due to depreciation, maintenance, and general wear and tear making them economically worthless where earnings receive no such discounts.

 

In a bad earnings environment, asset values will fall as margins decrease, companies find cash scarce, and competition is fleeing the industry and not joining it.  But there is a floor value for the assets as to what they can be used in their next best application (like Posco's port that doesn't have to be used for steel and is insanely valuable regardless of the industry you're in).

 

The value of a commodity business shouldn't be based on unpredictable, uncontrollable earnings, It's extremely aggressive to do so when you know that total industry profits will likely be negative or 0 and that it will cause you to overestimate value in good time and underestimate in bad times. It's just a flawed metric for this type of business. It makes sense that the net-assets is a better, less volatile proxy for value in commodity industries as both upside and downside are more muted throughout the cycle making it easier to find actual value in the middle ground. Posco has extremely valuable assets - many of which are valuable to members outside of the steel industry. It trades at a large discount to these assets (roughly estimated at 50% but could be more or less based on your adjustments for depreciation, carrying value, resale value, etc). You can discount this asset value back using whatever rate that you want but given that a 50% haircut is already implied and that earnings are still positive (generally delaying any time-value deterioration in asset values) it's hard for me to understand a discount this large.

[frommi]

Normalized earnings in this case. Normalized EBITDA is around 20% higher than current EBITDA, and on that metric it trades at an EV/EBITDA of 6-7. In 2005 it traded at 2.5, in 2008 around 3, in 2010 at 4.7. The debt is what makes it not cheap at current prices.

[bennycx]

If you expect the industry's net earnings to be 0 or negative then the value of POSCO would be far far far less than half of book...

cubsfan's point makes most sense - your advantage of being the lowest cost producer only works when others who have higher costs actually exit the industry so you can gain share. If they still can compete with negative earnings (supported by government or some other way), then you lose the advantage being the lowest cost producer..

 

Book value is generally how I value commodity businesses. Any reason why you would suggest something different?

 

I only value financials or Net-Nets/liquidations that way. Every other business via earnings, and i think the market does it that way too.

 

This doesn't make a lot of sense to me.

 

A commodity business is one where people only compete on price and the lowest price in a location takes all the business (extreme example, but we're keeping it simple). Earnings will fluctuate wildly based on the input costs and output prices and only the one with the lowest cost output wins. In an industry like this, with high fragmentation and low barriers to entry, net profits are 0 (actually, probably negative, but theoretically 0). There are two earnings environments that a commodity business experiences:

 

1) Earnings are good

2) Earnings are bad.

 

Neither state is long-lasting as good earnings are followed by increased competition until the margin erodes and bad earnings are followed by reduced supply/bankruptcies until prices rise and earnings are good again. The net gain across the whole industry for the whole cycle is likely to be 0 with value accruing to the best and being negative for the worst.

 

In this type of industry, it's impossible to use earnings as a value metric given that expected earnings for the entire industry is 0 and because earnings are so erratic and based on things entirely outside of the control of the company. A better, less volatile proxy is the value of the assets - which will also derive their value from the earnings, but will be less volatile in doing so.

 

In a good earnings environment, asset values will rise as margins increase, companies are flush with cash and can afford to spend, demand is high for assets as competitors get into the business, etc. etc. etc. So assets do a pretty good job reflecting the value of a good environment. Asset prices rise less than suggested by earnings due to depreciation, maintenance, and general wear and tear making them economically worthless where earnings receive no such discounts.

 

In a bad earnings environment, asset values will fall as margins decrease, companies find cash scarce, and competition is fleeing the industry and not joining it.  But there is a floor value for the assets as to what they can be used in their next best application (like Posco's port that doesn't have to be used for steel and is insanely valuable regardless of the industry you're in).

 

The value of a commodity business shouldn't be based on unpredictable, uncontrollable earnings, It's extremely aggressive to do so when you know that total industry profits will likely be negative or 0 and that it will cause you to overestimate value in good time and underestimate in bad times. It's just a flawed metric for this type of business. It makes sense that the net-assets is a better, less volatile proxy for value in commodity industries as both upside and downside are more muted throughout the cycle making it easier to find actual value in the middle ground. Posco has extremely valuable assets - many of which are valuable to members outside of the steel industry. It trades at a large discount to these assets (roughly estimated at 50% but could be more or less based on your adjustments for depreciation, carrying value, resale value, etc). You can discount this asset value back using whatever rate that you want but given that a 50% haircut is already implied and that earnings are still positive (generally delaying any time-value deterioration in asset values) it's hard for me to understand a discount this large.

[tylerdurden]

I think real life is much more complicated than that. It is true that especially the  Chinese government does not seem interested in letting loss making manufacturers go bankrupt anytime soon but price is not the only factor that buyers look. Posco held its steel sales and margins pretty well last year in a challenging environment and this demonstrates the quality of their products to me. They should still have a cost advantage in more high quality products segment, which I don't think they compete with the Chinese anyways. I don't have any problems using normalized earnings for valuation but how you normalize those earnings is important. As I said, last year was really noisy with the losses in subsidiaries, investments and tax penalties etc. 2015 should give you a better idea about the earnings potential of this company in this challenging environment.     

 

If you expect the industry's net earnings to be 0 or negative then the value of POSCO would be far far far less than half of book...

cubsfan's point makes most sense - your advantage of being the lowest cost producer only works when others who have higher costs actually exit the industry so you can gain share. If they still can compete with negative earnings (supported by government or some other way), then you lose the advantage being the lowest cost producer..

 

Book value is generally how I value commodity businesses. Any reason why you would suggest something different?

 

I only value financials or Net-Nets/liquidations that way. Every other business via earnings, and i think the market does it that way too.

 

This doesn't make a lot of sense to me.

 

A commodity business is one where people only compete on price and the lowest price in a location takes all the business (extreme example, but we're keeping it simple). Earnings will fluctuate wildly based on the input costs and output prices and only the one with the lowest cost output wins. In an industry like this, with high fragmentation and low barriers to entry, net profits are 0 (actually, probably negative, but theoretically 0). There are two earnings environments that a commodity business experiences:

 

1) Earnings are good

2) Earnings are bad.

 

Neither state is long-lasting as good earnings are followed by increased competition until the margin erodes and bad earnings are followed by reduced supply/bankruptcies until prices rise and earnings are good again. The net gain across the whole industry for the whole cycle is likely to be 0 with value accruing to the best and being negative for the worst.

 

In this type of industry, it's impossible to use earnings as a value metric given that expected earnings for the entire industry is 0 and because earnings are so erratic and based on things entirely outside of the control of the company. A better, less volatile proxy is the value of the assets - which will also derive their value from the earnings, but will be less volatile in doing so.

 

In a good earnings environment, asset values will rise as margins increase, companies are flush with cash and can afford to spend, demand is high for assets as competitors get into the business, etc. etc. etc. So assets do a pretty good job reflecting the value of a good environment. Asset prices rise less than suggested by earnings due to depreciation, maintenance, and general wear and tear making them economically worthless where earnings receive no such discounts.

 

In a bad earnings environment, asset values will fall as margins decrease, companies find cash scarce, and competition is fleeing the industry and not joining it.  But there is a floor value for the assets as to what they can be used in their next best application (like Posco's port that doesn't have to be used for steel and is insanely valuable regardless of the industry you're in).

 

The value of a commodity business shouldn't be based on unpredictable, uncontrollable earnings, It's extremely aggressive to do so when you know that total industry profits will likely be negative or 0 and that it will cause you to overestimate value in good time and underestimate in bad times. It's just a flawed metric for this type of business. It makes sense that the net-assets is a better, less volatile proxy for value in commodity industries as both upside and downside are more muted throughout the cycle making it easier to find actual value in the middle ground. Posco has extremely valuable assets - many of which are valuable to members outside of the steel industry. It trades at a large discount to these assets (roughly estimated at 50% but could be more or less based on your adjustments for depreciation, carrying value, resale value, etc). You can discount this asset value back using whatever rate that you want but given that a 50% haircut is already implied and that earnings are still positive (generally delaying any time-value deterioration in asset values) it's hard for me to understand a discount this large.

[TwoCitiesCapital]

If you expect the industry's net earnings to be 0 or negative then the value of POSCO would be far far far less than half of book...

cubsfan's point makes most sense - your advantage of being the lowest cost producer only works when others who have higher costs actually exit the industry so you can gain share. If they still can compete with negative earnings (supported by government or some other way), then you lose the advantage being the lowest cost producer..

 

Not if your company is one of the low cost producers and has assets that are valuable to other low cost producers and/or other people outside of your industry.

 

Also, maybe competition from China was relevant for the last couple of years and is partly responsible for Posco's troubles, but China has been decreasing steel production in recent months in a bid to curb pollution as well as to reduce the costs for supporting so many failing/noncompetitive enterprises. Currencies are a transitory matter - they'll fluctuate. I don't make my investment decisions based off of near-term currency movements that I can't forecast. Sometimes S.K. will benefit from currency fluctuations, sometimes they'll hurt from them - if experience is any guide, you generally want to buy when something after it's hurting to profit when it starts to benefit. It just seems to me like the price, the falling costs of inputs, the reduction of China's participation, the restructuring/refocusing of the company, the shareholder friendly policies passing in South Korea, etc. all make for a supportive environment and don't seem to warrant selling at 0.5x book value.

 

Then again, maybe I'm wrong. Buffett/Munger/Pabrai certainly have a better understanding of things then I do, but I don't really buy the excuse to sell something at such a low valuation just because competition is tough. All of these are value guys who cut their teeth on buying out of favor corporations with fixable problems and the problem here is fixable - stop endless supply of resources funding the uneconomic players. It's already starting to happen with China using pollution as the front but we'll eventually get to the point where a large number of steel mills in China won't survive.

 

 

[tylerdurden]

 

It's already starting to happen with China using pollution as the front but we'll eventually get to the point where a large number of steel mills in China won't survive.

 

China has been telling they will close steel plants for some time I think and they were not serious until now. I would not expect anything different at this point.

[TwoCitiesCapital]

 

It's already starting to happen with China using pollution as the front but we'll eventually get to the point where a large number of steel mills in China won't survive.

 

China has been telling they will close steel plants for some time I think and they were not serious until now. I would not expect anything different at this point.

 

http://www.reuters.com/article/2015/03/05/china-steel-production-idUSL4N0W72YR20150305 Seems like it has already started. Granted, it's only 7-8M tons of production covered in the article, out of a capacity of 1B tons, but I suspect that we'll see more activity like this in the future now that pollution has become a major public policy concern. Especially since these companies aren't economically efficient.

 

Even with it is "strategically important", China doesn't have to be supporting a highly fragmented, economically inefficient industry. It'd be better and easier for them to support a handful of economically efficient producers and let the others go bust. I think the fight on pollution will push them there which should be a tailwind. Even if it doesn't pan out like planned (rarely does...) then paying 0.5x book and a reasonably multiple to earnings isn't a bad gamble.  I'm content to wait it out.

[tylerdurden]

I hope you are right. Unemployment and social unrest issues come into play when talking about shutting plants in China as well though. Depressed iron ore prices probably would give additional breathing room for the uneconomical facilities also. In any case, I agree with you that best approach is sitting on it for the posco holders for now.

 

 

It's already starting to happen with China using pollution as the front but we'll eventually get to the point where a large number of steel mills in China won't survive.

 

China has been telling they will close steel plants for some time I think and they were not serious until now. I would not expect anything different at this point.

 

http://www.reuters.com/article/2015/03/05/china-steel-production-idUSL4N0W72YR20150305 Seems like it has already started. Granted, it's only 7-8M tons of production covered in the article, out of a capacity of 1B tons, but I suspect that we'll see more activity like this in the future now that pollution has become a major public policy concern. Especially since these companies aren't economically efficient.

 

Even with it is "strategically important", China doesn't have to be supporting a highly fragmented, economically inefficient industry. It'd be better and easier for them to support a handful of economically efficient producers and let the others go bust. I think the fight on pollution will push them there which should be a tailwind. Even if it doesn't pan out like planned (rarely does...) then paying 0.5x book and a reasonably multiple to earnings isn't a bad gamble.  I'm content to wait it out.