Any mariner worth their salt will tell you they take regular readings of the barometer while at sea, because shifts in barometric pressure are priceless predictors of weather. Similarly, since the Industrial Revolution, economists and savvy investors have looked to the steel industry as a key barometer of economic activity.
The reading from South Korea's POSCO (NYSE: PKX ) this morning provides a very positive snapshot of industrial activity in the region, which should calm fears that rising prices are sapping the growth from Asian economies.
POSCO reported a $1.5 billion profit for the second quarter; a 34% increase over the prior year. Company officials cited success in cost-cutting initiatives, operating profit rose an eye-popping 51%, and sales tracked 28% higher than the year before. Looking forward, POSCO raised 2008 sales targets by around 11% and estimated that operating profits will rise by around 19%. The company attributed its success to "stronger sales of strategic products such as automotive steel, a recovery in steel prices at home and abroad and cost-saving."
Color me unreasonably skeptical, but after watching POSCO lag the competition in terms of passing cost increases along to its buyers, I was concerned for POSCO's margins. I should just always listen to Toby. He saw pricing power where I saw a margin squeeze. Nonetheless, I maintain that vertically integrated steel producers will enjoy superior margins in this environment.
Brazil's Companhia Siderurgica (NYSE: SID ) mines more iron ore than it is able to use for steel production, and select American producers like Nucor (NYSE: NUE ) and Schnitzer Steel (Nasdaq: SCHN ) are intriguing for their use of cheaper scrap metal in their production. That being said, POSCO took a step in the right direction recently when it joined ArcelorMittal (NYSE: MT ) as a stakeholder in Australia's Macarthur Coal. POSCO does enjoy one distinct advantage over American producers. To coin a mantra from the real estate industry: location, location, location.