The trouble with booms is that they often go bust, especially in commodities. Spot prices and stock prices soar for a bit, and then the prices ease back down and the stocks sometimes crash-land. While 2005 has been tough a year for steel stocks compared with last year, POSCO (NYSE:PKX) management seems to think 2006 could be a bit more stable.
Korea's largest (and the world's fifth-largest) steel maker posted results on Tuesday that were basically in line with expectations. Sales were up about 6% over last year, and net income rose about 5% as margins dipped a bit. In response to weaker demand and Chinese production, the company, a Motley Fool Income Investor pick, continued to experience lower pricing and higher inventories.
One of the neat things about following POSCO is that the company always tries to give a reasonably detailed general overview of worldwide steel conditions. Looking at some of the information management presented, steel prices continue to fall in Asia, while they appear to have stabilized in Europe and actually picked up a bit in Japan and the United States relative to the prior quarter. That said, prices have fallen from the beginning of the year in every region but Japan, as much as 30% in China, and by double-digit rates in Europe and America as well.
What's interesting about the steel market now for POSCO is that high-grade products are holding up OK while the low-grade market is in rough shape. That actually makes quite a bit of sense because the Chinese can pump out copious amounts of low-grade steel but don't have nearly as much capacity for higher-grade products. It would seem that the company expects this to continue. While management sounded the usual warnings about the unpredictability of the market, it's looking for more stability in 2006, with ongoing strength in high-end products and weakness in low-end goods.
Even if you think POSCO is one of the best steel ideas out there (and I'd be tempted to agree with you if you think that), it can still be very tough to make money over the long haul in such a commodity company. While I would likely pick POSCO before Mittal (NYSE:MT), Tenaris (NYSE:TS), Nucor (NYSE:NUE), or US Steel (NYSE:X), investors shouldn't expect a repeat of the stock performance seen in 2003 or 2004.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
