Get a Real Feel for Steel

The great financial maelstrom of 2008 ravaged growth trends worldwide, leaving a cloud of uncertainty in its wake. But the steel sector is finally delving beyond the here and now, offering increasingly specific previews of the road ahead. The remaining challenge for Fools: determining which of those prognostications are correct.

South Korean steel giant POSCO (NYSE: PKX  ) kicked off steel-sector earnings with a dismal 91% decline in operating profit from the year-ago quarter -- and a 71% drop in net earnings -- despite recording only 15% lower revenue. Margins struggled both from the 20% price cuts POSCO instituted to remain competitive with import prices, and from reduced production volume.

The steelmaker's outlook for the remainder of 2009, however, struck a markedly different tone. POSCO alluded to signs of recovery and expectations for rebounding demand from China as drivers of improved metrics in the second half of the year. The company believes that steel prices bottomed during the latest quarter, and it expects operating profit to more than triple from the $382 million (500 billion Won) recorded for the first half. With lower input pressures from reduced iron ore prices negotiated with Rio Tinto (NYSE: RTP  ) , and the 60% reduction in benchmark metallurgical coal prices confronting miners like Cliffs Natural Resources (NYSE: CLF  ) and Anglo American (Nasdaq: AAUK  ) , POSCO's legendary margin strength could be poised to return.

Stop the presses!
Wait a minute, Fools. Wasn't it just a couple of weeks ago that I relayed Nucor (NYSE: NUE  ) CEO Dan DiMicco's stark warnings about the U.S. steel industry facing a "prolonged and slow recovery" … indeed the "granddaddy of all jobless recoveries"? Which outlook is correct? My regular readers know the answer: They both are

Bolstered by continued (albeit counter-cyclical) strength in shipbuilding activity, POSCO is beautifully positioned to benefit from stabilizing commodity demand from China and the relative economic strength of Pan-Asian economies. Accordingly, POSCO initiated only shallow production cuts as compared with less geographically blessed producers like ArcelorMittal (NYSE: MT  ) or U.S. Steel (NYSE: X  ) . POSCO's bold $4.4 billion capital expenditure budget for 2009 (a 76% increase over 2008) to increase production capacity and upgrade furnaces, furthermore, suggests a company that never doubted its role in an Asia-led recovery. China's Baosteel also joined POSCO in maintaining aggressive capital expenditures while the rest of the world dialed back.

The mounting evidence from this ultimate bellwether industry is too clear to ignore. Asia remains in an ongoing process of decoupling from the economic fates of Europe and the Americas, and I believe that recognizing this phenomenon is critical to forging successful investment strategies.

Further Foolishness:

If you believe that China will be a keystone to recovery for countless companies with exposure there, consider taking the Motley Fool Global Gains newsletter service for a free 30-day test-drive. The Global Gains team watches China carefully in its search for exciting and Foolish investment opportunities around the globe.

Fool contributor Christopher Barker has a head as thick as a double-hulled steel tanker. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He now tweets. He owns shares of Anglo American and Cliffs Natural Resources. POSCO is a Motley Fool Income Investor recommendation. The Motley Fool has a stainless disclosure policy.


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  • Report this Comment On July 14, 2009, at 5:42 AM, wax wrote:

    You and Mr. Geithner must have the same Obama crystal ball that says the world economy and the world commodities markets are on their way back.

    If your readers are as smart as I think they are, they will all simply put their hands in their pants and sent their minds to Arkansas for the next couple of years.

    Perhaps then your article will make better investing sense.

    Wax

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