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Beauty is in the eye of the beholder, and the beholder needs something to compare it to.
When it comes to assessing the attractiveness of third-quarter results from Korean steelmaker POSCO (NYSE: PKX ) , those looking solely at year-over-year comparisons could easily overlook the beauty of an emerging recovery in global steel demand and POSCO's extraordinary preparedness to ramp up profitability in the process.
Fools may recall that POSCO posted robust quarterly earnings through the third quarter of 2008, managing a 40% earnings increase over the comparable 2007 quarter. Skyrocketing commodity prices and a seemingly endless pit of demand from China stoked enormous profit margins as producers cranked at full capacity.
Comparing results released this week with the comparable period in 2008, we find revenue down by 22%, and operating income off by some 49%. Those numbers don't sound pretty until we consider POSCO's gains in profitability.
Net income slid by only 6.3% from those impressive year-ago levels. Net profit margin exploded sequentially from 6.8% in the second quarter 2009 to 16.7% in the third. POSCO's realized prices for exported products increased 12.6% in the third quarter, while domestic Korean demand recorded best-of-year levels across all segments. Demand from Korean shipbuilders has returned to 92% of peak 2008 levels.
Continuing the sequential analysis, we see POSCO's capacity utilization surging steadily from 75% in the first quarter of 2009, to 85% for the second quarter, and 92% most recently. American steelmaker Nucor (NYSE: NUE ) had observed a similar trend, but domestic producers are crawling out of a much deeper hole. United States Steel (NYSE: X ) saw this key measure of demand sink to 33% at the worst levels, and the domestic steelmaking sector stood at about 56% of capacity when I last checked in.
POSCO now sees global steel demand returning to those lofty 2008 levels sometime in 2010, and anticipates tight supply for both coking coal and iron ore as a result. Coking coal exporters like Teck Resources (NYSE: TCK ) and Peabody Energy (NYSE: BTU ) stand as clear beneficiaries of China's accelerating imports (from just 3 million tons in 2008 to a forecasted 29 million tons in 2009). With a potential iron ore supply shortfall of 52 million tons in 2010, miners from Vale (NYSE: VALE ) to BHP Billiton (NYSE: BHP ) will soon find those production curtailments a nostalgic blast from the past.