Posco Earnings Disappoint: Global Steel Demand in Trouble?

HomePosco Earnings Disappoint: Global Steel Demand in Trouble? Global consumption of met coal will grow by 600 million metric tons over the next 10 years, with demand in China and India leading the way. 

— Elliott Gue, The Energy Strategist

I’ve been bullish on the steel sector since the beginning of the year, and so far I’ve been, uh, early.  The Market Vectors Steel ETF (NYSE: SLX) has underperformed the S&P 500 ETF (NYSE: SPY) by five percentage points since December 31st. The reason? Prices for iron ore and metallurgical coal, the two cost inputs of steel manufacturing, continue to climb as China and other emerging markets battle roaring inflation. Devastating floods in Australia, the largest exporter of met coal, haven’t helped matters.

A good illustration of the continued problems faced by the steel industry is South Korean steel manufacturer Posco (NYSE: PKX). Last Friday (April 22nd), the company released its first-quarter financial report ending in March and the results disappointed Wall Street.analysts. Posco’s stock has gapped down 2% this morning (April 25th).

Operating income plunged 36% year-over-year despite a 31% rise in sales because input costs are rising much faster than steel prices. This is especially true for Posco, since over 60% of its steel output is sold domestically and the Korean government successfully pressured the company to freeze its steel prices from July 2010 until the beginning of April.

Take a look at the 50%-plus increases in Posco’s iron ore and met coal costs since July 2010:

Source: Posco

In the conference call following the earnings release, Posco CFO Choi Jong-tae stated that “this year’s business environment is likely to remain tough.” Input costs are only one problem; another is reduced steel demand caused by the Japanese nuclear crisis. Toyota Motor (NYSE: TM), the world’s largest auto manufacturer and a heavy user of steel, recently announced that its Japanese auto production is down by 50% through at least June 3rd and its U.S. production is down 75%. There is also concern that Chinese demand may weaken as its interest rate hikes takes effect and slow down the economy. After all, the Chinese government has consumed a lot of steel to build “ghost cities” that have no residents. There is a fascinating YouTube video on the subject. Steel demand for speculative construction projects is unsustainable. 

That’s all of the bad news. Here’s the good news:

On April 22nd, Posco finally raised its steel prices by 17% on average. This will help second-quarter results improve.First quarter 2011 results, while weak, were much better than fourth quarter 2010 results, which Posco has labeled “the bottom.” Australia is recovering from its floods as summer recedes into autumn and met coal production will increaseChinese inflation is expected to ease in the second half of the year, which might reduce iron ore prices.The World Steel Association forecasts that global steel demand will grow 5.9% in 2011 and then accelerate to 6.0% in 2012.Japanese demand for steel will likely increase in the face of efforts to rebuild from the earthquake and tsunami disaster.

With regard to Posco, let’s not forget that some famous investors own the stock, including Warren Buffett and Mohnish Pabrai. And seasonally speaking, the second quarter coming up is the best quarter of the year for steel companies. I don’t think now is the time to sell steel stocks.

Elliott Gue, editor of the market-beating Energy Strategist investment service isn’t too keen on steel producers but is a big bull on producers of steel inputs: iron ore and met coal. In fact, he has strong buy recommendations on a met coal stock, an iron ore stock, and a mining equipment company right now.

To find out the specific names of the stocks he likes best in iron ore and met coal, give the Energy Strategist a try today!

Jim Fink is the senior online editor for Investing Daily and is also chief investment strategist for Jim Fink’s Options for Income. He has traded options for more than 20 years and generated personal profits of more than $5 million. When not trading options, he writes the “Stocks to Watch” daily column that provides readers with timely insight into current events and their potential impact on publicly listed companies.

Hopelessly overeducated, Jim holds a bachelor’s degree from Yale University, a master’s degree from Harvard’s Kennedy School of Government, a law degree from Columbia University, and an MBA from the University of Virginia’s Darden School of Business. For good measure, he has been a member of the Illinois and D.C. bars and is a CFA charterholder.

Prior to joining Investing Daily, and when not incurring student loans hiding out in academe, Jim practiced telecommunications regulatory law for nine years until he realized that he made more money trading stock options than writing briefs. After attending business school, Jim switched gears to the investment realm full-time, working for a university endowment, a private wealth management firm, an insurance and financial planning company, and as a Senior Analyst for an online investment newsletter service that encourages the wearing of funny hats.

A possible but unlikely descendant of legendary brawler and boatman Mike Fink, Jim defies his heritage, believing that investing success requires patience and analysis, not swashbuckling bravado. Besides his passion for analyzing and writing about stocks, Jim likes to hike in the desert Southwest, vacation in Las Vegas, play tennis, and feed his toddler son cheerios.

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Buy Stocks as Global Markets Weaken

HomeBuy Stocks as Global Markets Weaken At the time that Elliott Gue, David Dittman, and I wrote our latest book, The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, many doubted the book’s central premise. We argued that a shifting global political landscape would drastically affect the way investors allocate funds, making an already complicated investment process even more fraught with peril. The recent political developments in North Africa have confirmed that we are experiencing a true transformation of the global economy on multiple levels.

Unrest in the resource-rich countries of North Africa, as well as civil uprisings in Gulf countries such as Bahrain, have led investors and market commentators to question whether this instability could spill over into the region’s energy heavyweights–Saudi Arabia, Iran and other Gulf states.  

Although Iran’s economy is relatively weak compared to those of its neighbors, the country will likely remain stable. The strength of its army and the perception among many Iranians that their country faces threats from other global powers, make social unrest unlikely for the time being.

This doesn’t mean that Iran’s sociopolitical situation is enviable or secure. But the foreign investment capital flowing into the country–mainly from China, India and Russia–will enable Iran’s government to navigate these tricky economic waters. One cannot underestimate the potential for social unrest in Iran, but at this point we see no reason for investors to be alarmed.

The Gulf states will most likely remain stable as well. The hierarchical structure of these societies, combined with the massive amounts of capital flowing into these oil-rich nations, should prevent any meaningful threat to the ruling elite. Economic studies have demonstrated that a USD10 hike in the price of a barrel of oil increases the current account and budget balances of Saudi Arabia and Kuwait by 6 to 7 percent of GDP. These are powerful numbers. Furthermore, the leaders of these Gulf countries may implement limited reforms so as to avoid the predicament that befell their counterparts in North Africa.  

These governments are spending heavily to keep their citizens happy and avoid social strife. A little more than a month ago, the Emir of Kuwait ordered the distribution of USD4 billion to the emirate’s citizens as well as free essential foodstuffs for 14 months. Each citizen will receive about USD3,500 and more than a year of free food–a good deal overall.

Markets are short-term in nature and consequently unable to assess geopolitical events in advance. As a result, markets usually react to such events after they’ve begun. The same holds true for financial shocks, as the recent financial crisis has demonstrated.

We maintain our view that investors should buy stocks amid the current market weakness because global markets appear to be consolidating rather than “correcting.” However a correction could be in the cards should the S&P 500 drop decisively below 1,275. It’s not unthinkable that the index could drop to the 1,100 to 1,150 level this year. Needless to say, investors will have to monitor the situation closely.

As things stand now, the global economic recovery is still on track. Recent events in North Africa will have grave consequences for the local economies, but they won’t damage overall global economic growth.  

It’s true that high oil prices could hamper growth. But as we noted in the Dec. 30, 2010, issue of Passport to Profits: “…a prolonged period of high oil prices–in the neighborhood of USD120 per barrel–can lead to serious problems for the US consumer. Although there is some threat that the price of oil will spike to between USD130 to USD140 per barrel in the short term, it’s unlikely that these prices would be sustained. Emerging-market economies are cooling down and oil supply is forecasted to be at a minor deficit.”

That assessment remains valid. Consequently investors must remain cautious and selective when picking stocks in 2011.

With his experience in  international market analysis and venture financing, Yiannis G. Mostrous is  more than just a world traveler; he’s also an expert on identifying investment opportunities in emerging and overlooked markets—the places most of us only see on television.

As an analyst with Artemel International, Yiannis worked with developmental  institutions to promote business development in the Mediterranean, while as an associate in the venture capital Finance & Investment Associates was  involved in analyzing start up companies’ business plans evaluating their  potential while bringing together worthy candidates and angel investor groups.

He also worked as a consultant for brokers in Intersec Securities, a brokerage firm in Athens, Greece, where he did primary research and solicited business from high net worth clients. In 2006 Yiannis coauthored a book on investment opportunities in Asia, The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity. More recently, Yiannis was lead author of The Rise of the State: Profitable Investing and Geoplitics in the 21st Century.

Since joining KCI, Yiannis has dedicated himself to helping  individual investors bolster their returns and give their portfolios an international flavor. In his financial advisory The Global Investment Strategist, Yiannis explains the most profitable facets of emerging global economies such as China and India. With Stocks on the Run, Yiannis teams up with fellow KCI editor Elliott Gue, seeking out opportunities for triple-digit gains in 3-9 months.
Yiannis has an MBA from Marymount University with a major in Finance and a BBA from Radford University focusing on investments in natural resource markets around the globe. He is also a veteran of the Hellenic Navy in the Landing Ships Command Office.

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