PKX - POSCO

[Fat Pitch]

I wonder if anyone took the national security angle to steel production? Every country worth their grain of salt would want domestic steel production in the event of war or some other situation. If viewed as such then it becomes rational to think that overcapacity in steel production is a perpetual problem that will plague the industry until some other substitute is created.

 

China is going to keep subsidizing their steel mills even at a loss since it is in their nation’s interest to have domestic production… the same with the EU and others. It’s similar to the auto industry… every country needs their own producers no matter the cost (ie GM).

 

[thekiefs]

Input prices for Posco continue to decrease:

 

http://www.ft.com/cms/s/0/db23688e-ea30-11e3-afb3-00144feabdc0.html

[zenith]

 

Posco is currently about 5.4% in their portfolio

 

Posco ( PKX ) recently experienced a change in management. The new CEO, Oh-joon Kwon, started in March 2014. He had previously been the Chief Technical Officer. His stated mission is to reform the company and, to that end, four out of five board members have been replaced and three new outside directors added. His focus is on enhancing the existing business via organic growth and reducing leverage, whereas the prior CEO's focus was more about empire building. Despite the weakness in the steel business due to macroeconomic challenges, posco has a substantial non-steel business. For example, via its stake in Daewoo international, posco participates in the profits of Daewoo's Myanmar gas field which is just starting to ramp up . The field began production in June 2013 and was producing only 20% of potential production capacity in the fourth quarter of 2013. posco expects the project to provide 150 billion KrW in pre-tax income in 2014, growing to KrW300 billion in 2015. posco also has potential growth opportunities from its Engineering and Construction business and opportunities to divest non- core assets. recent media reports suggest the company seeks to raise 2 trillion won by selling assets and is seeking to make an initial public offering of some of its affiliates including posco Energy, posco Engineering and posco Specialty Steel.

 

Read more: http://www.nasdaq.com/article/third-avenue-management-comments-on-posco-cm359748#ixzz345EhcVop

 

[ASTA]

I did not see any post about this on Posco

http://www.beyondproxy.com/page/3/

 

There is some talk about Posco from Granite Value Capital

[alwaysinvert]

Some new developments in M&A and financial restructuring:

 

http://www.reuters.com/article/2014/06/24/posco-dongbu-idUSL4N0P51GT20140624

 

Tongyang Power:

 

http://koreabizwire.com/posco-energy-cements-its-no-1-position-by-acquiring-tongyang-power/13058

[Aberhound]

I just read this thread. Excellent posts. I am left wondering if the new CEO was not kidding when he said the next 2-3 years would be challenging.

 

1. The recent 20F discloses steadily and significantly declining prices for all steel products for the past 3 years. We see this in the fast declining profits. I read the 20F online at the company website under disclosures in investor relations. It was frustrating to read as you could not scroll through the whole document and then the server stopped responding. Talk about bad omens!

 

2. Past management invested in iron ore production on expectations prices would remain above $100. They were part of the $1B+ purchase of Mittal's 15% share in a Canadian iron ore mine. Rio Tinto is roughly doubling output in Australia and new mines in Africa. Will Rio Tinto scale back or are they trying to punish Fortescue? Posco will likely take losses or lock in high cost iron ore as competitors enjoy lower iron ore prices. I do not know what proportion of their iron ore is now locked in at high prices.

 

3. Posco faces increased domestic competition from Hyundai, while in Japan Nippon has lowered costs primarily from a weaker Yen.

 

4. Yet Posco has increased market share in Japan from ~7% to ~9%! This means Posco must be dropping prices and shows desperation. Note the record high shipments from China but still at a low level. Posco has a quality advantage over Chinese steel.

 

http://www.bloomberg.com/news/2014-05-29/japan-steelmakers-weigh-action-to-stem-flood-of-asian-imports.html

 

5. First quarter was weak everywhere. US picking up in 2nd Q but Nucor enjoys lower costs due to cheap electricity and gas. The US will likely be the dumping ground for Chinese steel. The US is interesting as the Russian steel maker had made big investments and now has to divest. This makes anti-dumping duties unlikely until after the divestment.

 

6. Posco diversified heavily. This rarely goes well. LNG power plants seem risky to me. Posco now may have difficulty reducing capex due to commitments. The India steel investment will likely pay off long term but consider the $12B capex demands when they are having problems elsewhere. Posco is unlikely to enjoy favourable pricing selling assets in a deflationary environment when they have great need to raise monies by selling assets.

 

7. China is likely to ramp up steel exports as the domestic demand diminishes. We know ship building, cars, (both worldwide) and construction (China) all are oversupplied and there is a lag between orders and production so in the coming quarters steel demand will diminish further while competition worsens. There will be a boom in steel needed in China for fracking and pipelines. The easy to justify infrastructure projects are all done. How many roads, bridges, highways, railways, airports, subways, ports etc. do you need? More and bigger cities could be built but there should be a pause to allow demand to catch up to the massive oversupply of empty buildings.

 

8. All the positives from the other posts are true except for quality of management. So it will be a big shock to the market if they report losses over the coming quarters. My guess is that this will turn out well in the long run, but only after competitors bleed and die. Too bad previous management didn't pay down debt when times were good and focused on Posco's strengths.

 

9. This is in the too hard pile with too many unknowns and too many moving parts. Chinese policy is unsustainable due to increasing debt so the model will change. Powerful vested interests in China profit from the current model so it is difficult to predict how China will reform instead of speeding at 90 MPH over a cliff. Faber is correct to observe that central banks solve every problem by printing money and destroying the value of their currency. But won't the Chinese government also copy Korea's example? Korea's competitive advantage is clear when you compare the stories of Posco building steel mills in Korea v. India. My bet is that out of the chaos in China one or two Posco like competitors will appear with similar advantages but bigger scale.

 

I think of Hugh Hendry's comments about suffering from doubts and being too much of a pessimist when I come to a different conclusions from other board members who write consistently excellent posts. I plan to sit on my hands on this one.

 

[Green King]

I just read this thread. Excellent posts. I am left wondering if the new CEO was not kidding when he said the next 2-3 years would be challenging.

 

1. The recent 20F discloses steadily and significantly declining prices for all steel products for the past 3 years. We see this in the fast declining profits. I read the 20F online at the company website under disclosures in investor relations. It was frustrating to read as you could not scroll through the whole document and then the server stopped responding. Talk about bad omens!

 

2. Past management invested in iron ore production on expectations prices would remain above $100. They were part of the $1B+ purchase of Mittal's 15% share in a Canadian iron ore mine. Rio Tinto is roughly doubling output in Australia and new mines in Africa. Will Rio Tinto scale back or are they trying to punish Fortescue? Posco will likely take losses or lock in high cost iron ore as competitors enjoy lower iron ore prices. I do not know what proportion of their iron ore is now locked in at high prices.

 

3. Posco faces increased domestic competition from Hyundai, while in Japan Nippon has lowered costs primarily from a weaker Yen.

 

4. Yet Posco has increased market share in Japan from ~7% to ~9%! This means Posco must be dropping prices and shows desperation. Note the record high shipments from China but still at a low level. Posco has a quality advantage over Chinese steel.

 

http://www.bloomberg.com/news/2014-05-29/japan-steelmakers-weigh-action-to-stem-flood-of-asian-imports.html

 

5. First quarter was weak everywhere. US picking up in 2nd Q but Nucor enjoys lower costs due to cheap electricity and gas. The US will likely be the dumping ground for Chinese steel. The US is interesting as the Russian steel maker had made big investments and now has to divest. This makes anti-dumping duties unlikely until after the divestment.

 

6. Posco diversified heavily. This rarely goes well. LNG power plants seem risky to me. Posco now may have difficulty reducing capex due to commitments. The India steel investment will likely pay off long term but consider the $12B capex demands when they are having problems elsewhere. Posco is unlikely to enjoy favourable pricing selling assets in a deflationary environment when they have great need to raise monies by selling assets.

 

7. China is likely to ramp up steel exports as the domestic demand diminishes. We know ship building, cars, (both worldwide) and construction (China) all are oversupplied and there is a lag between orders and production so in the coming quarters steel demand will diminish further while competition worsens. There will be a boom in steel needed in China for fracking and pipelines. The easy to justify infrastructure projects are all done. How many roads, bridges, highways, railways, airports, subways, ports etc. do you need? More and bigger cities could be built but there should be a pause to allow demand to catch up to the massive oversupply of empty buildings.

 

8. All the positives from the other posts are true except for quality of management. So it will be a big shock to the market if they report losses over the coming quarters. My guess is that this will turn out well in the long run, but only after competitors bleed and die. Too bad previous management didn't pay down debt when times were good and focused on Posco's strengths.

 

9. This is in the too hard pile with too many unknowns and too many moving parts. Chinese policy is unsustainable due to increasing debt so the model will change. Powerful vested interests in China profit from the current model so it is difficult to predict how China will reform instead of speeding at 90 MPH over a cliff. Faber is correct to observe that central banks solve every problem by printing money and destroying the value of their currency. But won't the Chinese government also copy Korea's example? Korea's competitive advantage is clear when you compare the stories of Posco building steel mills in Korea v. India. My bet is that out of the chaos in China one or two Posco like competitors will appear with similar advantages but bigger scale.

 

I think of Hugh Hendry's comments about suffering from doubts and being too much of a pessimist when I come to a different conclusions from other board members who write consistently excellent posts. I plan to sit on my hands on this one.

 

care to share how you can tell there is a over supply in cars?

 

[Aberhound]

The oversupply of cars is suggested by the many reports of channel stuffing and pictures from google earth showing cars stored on runways etc.. Further there are many articles about the shrinkage of the middle class and how many keep cars much longer or have one car families. The success of Uber and other car sharing services is indicative of a long term switch in demand. Yet I have seen no announcement of car factories being closed.

 

You are right if your comment is that there is no oversupply of cars in Africa and the like where there is a growing number of poor reaching income levels which allow them to purchase cars. I think there is a lull in this type of new car demand due to increases in the cost of food, particularly meat and a lull in growth in income due to lower commodity prices.

[TwoCitiesCapital]

The oversupply of cars is suggested by the many reports of channel stuffing and pictures from google earth showing cars stored on runways etc.. Further there are many articles about the shrinkage of the middle class and how many keep cars much longer or have one car families. The success of Uber and other car sharing services is indicative of a long term switch in demand. Yet I have seen no announcement of car factories being closed.

 

You are right if your comment is that there is no oversupply of cars in Africa and the like where there is a growing number of poor reaching income levels which allow them to purchase cars. I think there is a lull in this type of new car demand due to increases in the cost of food, particularly meat and a lull in growth in income due to lower commodity prices.

 

The pictures you've seen floating around on the internet, and reposted by sites like zerohedge, are years old and are misrepresenting what they claim to be showing.

 

This isn't to say iron/car industries aren't in for a rough future but that this supposed proof of over supply isn't proof of anything other than the ease in which one is able to lie to millions on the internet.

[jay21]

The oversupply of cars is suggested by the many reports of channel stuffing and pictures from google earth showing cars stored on runways etc.. Further there are many articles about the shrinkage of the middle class and how many keep cars much longer or have one car families. The success of Uber and other car sharing services is indicative of a long term switch in demand. Yet I have seen no announcement of car factories being closed.

 

You are right if your comment is that there is no oversupply of cars in Africa and the like where there is a growing number of poor reaching income levels which allow them to purchase cars. I think there is a lull in this type of new car demand due to increases in the cost of food, particularly meat and a lull in growth in income due to lower commodity prices.

 

Did you get the google earth photos yourself?

 

http://www.bloombergview.com/articles/2014-05-19/the-truth-about-auto-sales

[cobafdek]

"This is in the too hard pile with too many unknowns and too many moving parts. Chinese policy is unsustainable due to increasing debt so the model will change. Powerful vested interests in China profit from the current model so it is difficult to predict how China will reform instead of speeding at 90 MPH over a cliff. Faber is correct to observe that central banks solve every problem by printing money and destroying the value of their currency. But won't the Chinese government also copy Korea's example? Korea's competitive advantage is clear when you compare the stories of Posco building steel mills in Korea v. India. My bet is that out of the chaos in China one or two Posco like competitors will appear with similar advantages but bigger scale."

 

 

 

Aberhound, thanks for your great review:  a cogent argument for why not to buy PKX.  So it might come down to psychology. 

 

One type of deep value investor might consider all these unknowns as "known unknowns," and no doubt your list may only be the tip of the iceberg of unknowns.  This type of investor might then label these as only so much minutiae, and that it is the minutiae that should be put in the too hard pile and not worry about them.  He will continue to monitor the known unknowns, but with no more intensity than a quick skim through the press releases and other reports.

 

With the market price at 50-60% of book value, a Graham/Schloss/TweedyBrowne-type investor might think, "Hey, what's not to like?  Let's pull the trigger for 1% of the portfolio, and something good might happen in the next 5 years."

 

A value investor who likes concentrated positions in his portfolio, like a Munger, might leave PKX in the too hard pile.  (But wait!  Munger likes Posco!?)

[frommi]

When this company is the lowest cost producer, it can only go out of business when nobody uses steel anymore or someone else comes along and produces cheaper. Is this likely?

[alwaysinvert]

Great post, Aberhound. Really appreciate some counterpoints. I'll comment on some of your stuff.

 

I just read this thread. Excellent posts. I am left wondering if the new CEO was not kidding when he said the next 2-3 years would be challenging.

 

I agree and think he was being mostly genuine. In the same way that Meg Whitman probably was mostly genuine when she took over at HPQ. There is a bit of a mess from before, but I think it's fixable and that they are communicating the right steps. And they don't need to have a perfect solution for this to end well. If the market turns sooner rather than later on top of that, this will be a killer.

 

1. The recent 20F discloses steadily and significantly declining prices for all steel products for the past 3 years. We see this in the fast declining profits. I read the 20F online at the company website under disclosures in investor relations. It was frustrating to read as you could not scroll through the whole document and then the server stopped responding. Talk about bad omens!

I don't have any problems downloading any documents from their site, even though I do agree that it is a horrible site. I also think it's par for the course when it comes to Korean companies.

 

2. Past management invested in iron ore production on expectations prices would remain above $100. They were part of the $1B+ purchase of Mittal's 15% share in a Canadian iron ore mine. Rio Tinto is roughly doubling output in Australia and new mines in Africa. Will Rio Tinto scale back or are they trying to punish Fortescue? Posco will likely take losses or lock in high cost iron ore as competitors enjoy lower iron ore prices. I do not know what proportion of their iron ore is now locked in at high prices.

 

I will not claim any great insights on their iron ore deals, but I'd guess most of us are skeptical of vertical integration in most areas. However, I don't think these are big sums in comparison to what lower iron ore prices will do for their input costs; the majority of iron ore still comes from other sources. 

 

3. Posco faces increased domestic competition from Hyundai, while in Japan Nippon has lowered costs primarily from a weaker Yen.

Most of which has already struck Posco's results. The Hyundai businesses have moved away to inhouse steel in large parts. With Dongbu's insolvency there will be some competitive easing. I don't really see their steel business continuing if Posco won't buy it, so that's less domestic supply. And that could be significant, Dongbu Steel could even have been selling at below cost for all we know (I can't find any up-to-date financials from them). They seem to have grown sales a lot in recent years, too. 

 

4. Yet Posco has increased market share in Japan from ~7% to ~9%! This means Posco must be dropping prices and shows desperation. Note the record high shipments from China but still at a low level. Posco has a quality advantage over Chinese steel.

http://www.bloomberg.com/news/2014-05-29/japan-steelmakers-weigh-action-to-stem-flood-of-asian-imports.html

 

Thanks. Didn't know this before.

 

6. Posco diversified heavily. This rarely goes well. LNG power plants seem risky to me. Posco now may have difficulty reducing capex due to commitments. The India steel investment will likely pay off long term but consider the $12B capex demands when they are having problems elsewhere. Posco is unlikely to enjoy favourable pricing selling assets in a deflationary environment when they have great need to raise monies by selling assets.

They are already heavily slashing capex. I don't think the Odisha project is a big worry, either way. It could still be years and years down the road. And if it makes as much economic sense as many seem to believe, why couldn't they make it a JV?

 

7. China is likely to ramp up steel exports as the domestic demand diminishes. We know ship building, cars, (both worldwide) and construction (China) all are oversupplied and there is a lag between orders and production so in the coming quarters steel demand will diminish further while competition worsens. There will be a boom in steel needed in China for fracking and pipelines. The easy to justify infrastructure projects are all done. How many roads, bridges, highways, railways, airports, subways, ports etc. do you need? More and bigger cities could be built but there should be a pause to allow demand to catch up to the massive oversupply of empty buildings.

 

I don't follow this logic. I don't think you can have both a collapse in Chinese steel consumption andsubsidized Chinese steel mills (which are at a cost disadvantage and levered to the hilt) successfully competing on the international markets.

[jouni1]

When this company is the lowest cost producer, it can only go out of business when nobody uses steel anymore or someone else comes along and produces cheaper. Is this likely?

governments are willing to support domestic steel production. there are all sorts of taxes and tariffs even in the united states for foreign steel if i'm not completely wrong. so it's not a completely free market and weird things can happen.

[Aberhound]

I thank the kind comments. I reply in regards to my lack of clarity about Chinese exports and the suggestion of of their lesser ability to compete on world markets.

 

http://www.issb.co.uk/graphs/asia/asia2_small.gif

 

This chart that I have linked shows the rise of Chinese steel exports from 2 to 7 mt per month from 2009 with an increase from about 5mt to above 7mt in the past 6 months. I suggest the Chinese put more efforts into exporting when their domestic market weakens.

 

Baosteel is an example of a Chinese steel maker which prides itself as a technology leader. Over time such companies can and do compete on world markets. Perhaps the Chinese steel sector concentrated in the north east sea coast enjoys some of the silicon valley network effects. But in truth US has a massive lead on material sciences so whether China can compete or not depends how rapidly the US government allows US companies and their friends to adopt their many technological advances. Samsung, for instance, seems to have benefited from US technical help to catch up with Apple. Maybe Posco will receive similar assistance.

 

http://www.baosteel.com/group_en/contents/2887/40017.html

[alwaysinvert]

Posco Q2 out and looks pretty decent

 

http://www.posco.com/homepage/docs/eng3/dn/invest/archive/2014_2Q_Presentation_eng_final.pdf

http://www.posco.com/homepage/docs/eng3/dn/invest/archive/2014_2Q_Presentation_Q&A.pdf

 

 

 

[ASTA]

Mohnish Pabrai

just bought a huge stake in POSCO nice to see :D

 

http://www.dataroma.com/m/holdings.php?m=PI

[gfp]

Did Mohnish just cause that price spike when his holdings were disclosed on edgar?

[alwaysinvert]

Good news.

 

Probably an indication that Pabrai likes what's being done and said by the new management, because otherwise he would have jumped in earlier.

[alwaysinvert]

Restructuring time:

http://www.koreatimes.co.kr/www/news/biz/2014/08/123_162939.html

[alwaysinvert]

http://www.koreatimes.co.kr/www/news/biz/2014/08/123_163066.html

 

If you look at it in game theory terms, it seems like a shrewd move to sell the specialty steel divison to Steel-SeAh even if they perhaps don't get top price. Keep competing as is and they will continue to see profit problems for the foreseeable future. Buying out SeAh and the Dongbu specialty steel divison in order to consolidate the market would put further strain on the balance sheet. This accomplishes both a better financial situation short-term for Posco and makes life harder for Hyundai Steel. Two birds with one stone.

[cavrad]

http://online.wsj.com/articles/trade-commission-confirms-tariffs-on-steel-from-south-korea-1408727894

[AJB96]

Guy Spier is currently speaking at the Value Investing Congress and mentioned Posco.

 

Berkshire, Munger, Pabrai and Spier all own Posco so I thought I'd attach my report for those interested.

 

Alex

[buylowersellhigh]

Guy Spier is currently speaking at the Value Investing Congress and mentioned Posco.

 

Berkshire, Munger, Pabrai and Spier all own Posco so I thought I'd attach my report for those interested.

 

Alex

 

Do you know where there might be live updates from the presentations?  I don't see any...

[peter1234]

Guy Spier is currently speaking at the Value Investing Congress and mentioned Posco.

 

Berkshire, Munger, Pabrai and Spier all own Posco so I thought I'd attach my report for those interested.

 

Alex

 

Do you know where there might be live updates from the presentations?  I don't see any...

 

This time, there is no media cover until the congress is over.

;)