PKX - POSCO

[zenith]

interesting trading in Posco overnight on the kospi, as it traded down almost 4% to now almost 1% up, quite volatile and normally marks a bottom after the recent 15% correction Posco, on the adr, due to the korean won losing against the dollar, is hurting PKX currently, but the company is holding up fairly well on the Kospi. the won traded as low as 1074 but now is about 1066, so hopefully this will reverse.

[kirkomi]

interesting trading in Posco overnight on the kospi, as it traded down almost 4% to now almost 1% up, quite volatile and normally marks a bottom after the recent 15% correction Posco, on the adr, due to the korean won losing against the dollar, is hurting PKX currently, but the company is holding up fairly well on the Kospi. the won traded as low as 1074 but now is about 1066, so hopefully this will reverse.

 

I have no idea why you think this is relevant. Should you not be hoping for the stock to go down ? I am. Fingers crossed.

[karthikpm]

interesting trading in Posco overnight on the kospi, as it traded down almost 4% to now almost 1% up, quite volatile and normally marks a bottom after the recent 15% correction Posco, on the adr, due to the korean won losing against the dollar, is hurting PKX currently, but the company is holding up fairly well on the Kospi. the won traded as low as 1074 but now is about 1066, so hopefully this will reverse.

 

I have no idea why you think this is relevant. Should you not be hoping for the stock to go down ? I am. Fingers crossed.

 

It's going down.. any one buying? What's driving it?

[alwaysinvert]

interesting trading in Posco overnight on the kospi, as it traded down almost 4% to now almost 1% up, quite volatile and normally marks a bottom after the recent 15% correction Posco, on the adr, due to the korean won losing against the dollar, is hurting PKX currently, but the company is holding up fairly well on the Kospi. the won traded as low as 1074 but now is about 1066, so hopefully this will reverse.

 

I have no idea why you think this is relevant. Should you not be hoping for the stock to go down ? I am. Fingers crossed.

 

It's going down.. any one buying? What's driving it?

 

Yen weakness is smashing all Korean exporters in the market.

[tylerdurden]

Korea would depreciate its currency too so overall cheaper yen might not be a huge impact. Agree that it's a good entry point for POSCO.

[KCLarkin]

interesting trading in Posco overnight on the kospi, as it traded down almost 4% to now almost 1% up, quite volatile and normally marks a bottom after the recent 15% correction Posco, on the adr, due to the korean won losing against the dollar, is hurting PKX currently, but the company is holding up fairly well on the Kospi. the won traded as low as 1074 but now is about 1066, so hopefully this will reverse.

 

I have no idea why you think this is relevant. Should you not be hoping for the stock to go down ? I am. Fingers crossed.

 

It's going down.. any one buying? What's driving it?

 

Yen weakness is smashing all Korean exporters in the market.

 

All the steel companies are weak today.

[MrB]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

[KCLarkin]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

"Most competitive" is probably more meaningful (Posco has won 5 years in a row):

http://globalblog.posco.com/posco-named-worlds-competitive-steelmaker-fifth-straight-year/

 

This is a bit dated now but is pretty convincing:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1505288

 

Anyone have more recent data?

 

 

 

 

[peter1234]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

Guy Spier observed that looking at Net Income Margins over the last 10 years, Posco had higher margins than the others.

 

For example in 2013 when all the other were losing money, Posco still had a 2% margin.

[MrB]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

Guy Spier observed that looking at Net Income Margins over the last 10 years, Posco had higher margins than the others.

 

For example in 2013 when all the other were losing money, Posco still had a 2% margin.

 

Over the last 10 years Posco had lower net margins than SAIL and Ternium. Furthermore it was not that much ahead of Tata, Evraz, Arcelormittal South Africa, Hebei and Mechel Oao. This is based on Reuters data.

The list of positive net margin producers in 2013 is pretty long. All the Chinese producers (so they say) and also Ternium, Tata and SAIL. Again, based on Reuters data.

[alwaysinvert]

I can't speak speak to how this compares to all those competitors but Posco has had extremely conservative depreciation policies up until the change to IFRS in 2011. The current one seems to be at the lower end of industry standards too, although as I said, I haven't done a huge dive into that.

 

Edit: also for an apples to apples comparison, it would be fair to at least break out Daewoo International which contributes lots of revenue but no margin. If competitive strength in steel is the issue, that is.

[rishig]

Question for Alex or someone who has looked at the numbers more carefully.

 

I look at the financials and can't understand how much they really make on EBITDA basis on the steel segment. They don't break out the numbers. Also, I often see people talking about how cheap the business is on a normalized earnings to market cap. But it has another 20$ billion in debt. So, enterprise value to group EBITDA is more like 8x. Can someone walk me through normalized EBITDA on the steel business?

[Green King]

I don't think that is the what is important part of the idea. I think Munger said somewhere about POSCO selling its products lower domestically to allow exports manufactures that use its products and have a pricing edge. Making it strategically important in the whole export economy of South Korea.

 

-note no position

[alwaysinvert]

I don't think that is the what is important part of the idea. I think Munger said somewhere about POSCO selling its products lower domestically to allow exports manufactures that use its products and have a pricing edge. Making it strategically important in the whole export economy of South Korea.

 

-note no position

They did that historically, when Posco was a government-owned enterprise. This is not the case on an organized level anymore. I think Munger was talking about South Korea's history of industrialization. Therein lies also part of the reason for their cost-advantage, too - namely the ports and the two mega steel mills.

[AJB96]

Rishig,

 

Good questions.

 

It makes more sense to look at just parent company debt. Posco has ownership in many different companies and consolidating the debt together gives an unrealistic picture. I think in all or nearly all cases the debt is unencumbered to the parent. For example, Daewoo has over 3 trillion KRW in debt and this debt doesn't pierce Posco parent as they own a 60% interest in the company. They are trying to sell Daewoo anyway. The own over 50% in 6 businesses.

 

This is how I would look at it:

 

Posco market cap: 24.09 trillion KRW based on a closing price of 302,000

Parent debt: 8.663 trillion

Cash: 1.394 trillion

Securities: 6.48 trillion

Bonds: 3.03 trillion

 

EV: 21.5 trillion KRW

 

You can read my report which is attached to see how I'm valuing the company. I think it's a 3-4x from here!

 

They do break out the business by segment in the quarterly reports on their web site and annual report. The 20F is best. Also look at their audit reports on Posco's web site and their earnings release under IR Activities.

 

Alex

[rishig]

Rishig,

 

Good questions.

 

It makes more sense to look at just parent company debt. Posco has ownership in many different companies and consolidating the debt together gives an unrealistic picture. I think in all or nearly all cases the debt is unencumbered to the parent. For example, Daewoo has over 3 trillion KRW in debt and this debt doesn't pierce Posco parent as they own a 60% interest in the company. They are trying to sell Daewoo anyway. The own over 50% in 6 businesses.

 

This is how I would look at it:

 

Posco market cap: 24.09 trillion KRW based on a closing price of 302,000

Parent debt: 8.663 trillion

Cash: 1.394 trillion

Securities: 6.48 trillion

Bonds: 3.03 trillion

 

EV: 21.5 trillion KRW

 

You can read my report which is attached to see how I'm valuing the company. I think it's a 3-4x from here!

 

They do break out the business by segment in the quarterly reports on their web site and annual report. The 20F is best. Also look at their audit reports on Posco's web site and their earnings release under IR Activities.

 

Alex

 

Thank you Alex

[KCLarkin]

Alex, great report. Any thoughts on the India expansion plans?

[phil_Buffett]

great Report Alex. thanks!  :)

[topofeaturellc]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

If you have access to data from Platt's or someone like that you can see that Posco is way down at the left side of the cost curve for costs when you just consider converting ore and coke into steel in a BOF.  If you take into account feedstock costs they are more like in the bottom third of the cost curve.  Being adjacent to a captive iron ore mine is a big advantage. 

 

Of course feedstock costs are real - so Posco is both better than almost everyone at making steel, but not "the lowest cost producer"

[topofeaturellc]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

Guy Spier observed that looking at Net Income Margins over the last 10 years, Posco had higher margins than the others.

 

For example in 2013 when all the other were losing money, Posco still had a 2% margin.

 

Over the last 10 years Posco had lower net margins than SAIL and Ternium. Furthermore it was not that much ahead of Tata, Evraz, Arcelormittal South Africa, Hebei and Mechel Oao. This is based on Reuters data.

The list of positive net margin producers in 2013 is pretty long. All the Chinese producers (so they say) and also Ternium, Tata and SAIL. Again, based on Reuters data.

 

looking at net margin is not a very good way to do this.  Even looking at EBITDA/T isn't a great way to do this at product mix has a huge impact on that.  Like someone selling coated steel is by definition going to have a higher EBITDA/T than someone selling HRC.  That doesn't mean one company is better than the other.

 

That said - I do agree with you that the "Posco=magic" story is pretty lame.

 

But it doesn't seem like the current share price implies any magic.

 

 

[MrB]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

If you have access to data from Platt's or someone like that you can see that Posco is way down at the left side of the cost curve for costs when you just consider converting ore and coke into steel in a BOF.  If you take into account feedstock costs they are more like in the bottom third of the cost curve.  Being adjacent to a captive iron ore mine is a big advantage. 

 

Of course feedstock costs are real - so Posco is both better than almost everyone at making steel, but not "the lowest cost producer"

 

I would agree with that. The data that I've seen supports a position towards the bottom end of the cost curve, but not the lowest.

[MrB]

POSCO is frequently referred to as the lowest cost producer.

I believe this is a myth.

It is simply believed by most due to the fact that it is a common statement made by investors, especially "value" investors.

 

Please prove me wrong by supplying data.

 

Guy Spier observed that looking at Net Income Margins over the last 10 years, Posco had higher margins than the others.

 

For example in 2013 when all the other were losing money, Posco still had a 2% margin.

 

Over the last 10 years Posco had lower net margins than SAIL and Ternium. Furthermore it was not that much ahead of Tata, Evraz, Arcelormittal South Africa, Hebei and Mechel Oao. This is based on Reuters data.

The list of positive net margin producers in 2013 is pretty long. All the Chinese producers (so they say) and also Ternium, Tata and SAIL. Again, based on Reuters data.

 

looking at net margin is not a very good way to do this.  Even looking at EBITDA/T isn't a great way to do this at product mix has a huge impact on that.  Like someone selling coated steel is by definition going to have a higher EBITDA/T than someone selling HRC.  That doesn't mean one company is better than the other.

 

That said - I do agree with you that the "Posco=magic" story is pretty lame.

 

But it doesn't seem like the current share price implies any magic.

 

I agree and although I think it is a pretty good company, it is a horrible industry. However, the price does demand a look. My biggest concern is how long you are going to wait to get paid? Between China coming off the boil and industry overcapacity and still increasing capacity you might have to wait too long. If you look at steel growth over the very long run (100 years) then you tend to get long periods of very low growth of which the most recent was 1975 to 2000 where it grew at 1% per annum. In 2001 steel prices hit a 20 year low! Then China happened. If you strip out China from the last decade then steel consumption grew by 2% per annum. When you consider we are in a global deleveraging then the risk of 1975-2000 revisted is real.

 

For all the talk about Buffett buying Posco, one might want to consider that he bought in 2006. After hitting a 20 year low in 2001 steel prices only spiked significantly in 2004 and Buffett invests 2 years later. Seems to me more like he invested at a time when it was clear the steel cycle has finally turned after more than 20 years.

 

History shows that one might be a decade or so early on this one.

 

As a closing thought; the following is a list of companies (not all of them) that filed for bankruptcy from 1998-2002

Bethlehem Steel

National Steel

LTV

Wheeling-Pittsburgh Steel

Geneva

Gulf States

Northwestern Wire and Steel

Birmingham Steel

Republic Technologies

GS Industries

Acme Metals

Trico

Qualitech Steel

J&L Structural Steel

Laclede Steel

Erie Forge & Steel

CSC Ltd.

Freedom Forge Corp.

Sheffield Steel

Calumet Steel

Edgewater Steel Ltd.

Galvpro

Metals USA

Action Steel  … and others

 

 

 

[sleepydragon]

Four of the biggest korean companies , one of the posco, did 4 full pages in People Daily in recent days, welcoming korean president's visit to China for the APEC meeting.  I think the ads likely cost a lot.

[tylerdurden]

MrB, it is hard not to agree with you in terms of the oversupply and challenges but in terms of the story, we should keep in mind what's going on the in iron ore market, which should help posco to increase its margins to a degree and also the restructuring  (asset sales etc.) Those two items could drive this thing higher in a couple of years.

[TwoCitiesCapital]

Who cares about annualized growth in steel if Posco has the ability to be a consolidator in the industry? Sure we won't  count it as a tailwind but steel demand doesn't need to grow  much for this to generate good returns. Especially when purchased at .5x book. The industry is highly fragmented and will tend towards consolidation to a handful of players. Posco, as a low cost and high-quality company with higher margins then competitors, stands in a position of advantage to consolidate in tough conditions.

 

You also have to consider that China and India will continue to have above average steel demand for awhile. There might be a few slow years as excess works itself out,  but they are 1/3rd of the goal population and they're  modernizing very quickly.  For the next  20 years or so I'd expect  higher than average demand from them so you can't just exclude them from analysis - not like they'll stop growing tomorrow. Will just be slower, more deliberate, better quality growth.