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Higher Prices Going Global

American consumers being squeezed by the rising prices of items like food and gasoline might take momentary solace in knowing that they're not alone.

The revelation last night that Korean steelmaker POSCO (NYSE: PKX  ) has agreed to a 200% price increase for coking coal provides fuel to the notion that consumers at all levels are coming face to face with increased costs.

That news might fan embers of solidarity or schadenfreude deep in your soul, and the cold trickle of those higher prices getting passed down the economic chain might douse them.

Already reeling from a 65% increase in the cost of iron ore earlier this year, the global steel industry is now feeling the heat from this latest dramatic rise in production costs. While it was plausible that companies could have fully defended profit margins as they absorbed the iron ore increases, this latest hit will eventually be shouldered both by consumers and the steelmakers themselves. POSCO already raised prices for its steel products once this year, by 11.5%. Following yesterday's announcement, another increase can be presumed imminent.

Although demand for steel products in Asia remains extremely strong, there is a point at which price increases will begin to erode that demand, and that is where a company like POSCO will begin to feel the squeeze.

This news affects consumers everywhere. Demand for coking coal is driving steam coal prices higher as well, and this will ultimately trickle down to consumers in the form of higher electricity rates. Coal is also used in the industrial production of cement, glass, ceramic, and paper, to name a few, so prices for these classes of products must also be forecast to rise.

As for investors, I see pitfalls as well as opportunities emanating from expensive coal. As a rule of thumb, greater gains in a rising cost environment can be found closest to the top of the supply chain. Coal mining companies such as Massey Energy (NYSE: MEE  ) , Arch Coal (NYSE: ACI  ) , and Patriot Coal (NYSE: PCX  ) should report solid profits moving forward. Another winner could well be Joy Global (NYSE: JOYG  ) , the maker of mining equipment, since coal companies will be scrambling to mine more product to meet global demand. Steel companies may continue to profit on strong demand, but the risk to future margins just seems too great.

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10/25/2016 4:02 PM
PKX $54.70 Up +0.97 +1.81%
POSCO (ADR) CAPS Rating: ****
ACIIQ $0.00 Down +0.00 +0.00%
Arch Coal, Inc. CAPS Rating: *
MEE.DL $0.00 Down +0.00 +0.00%
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