When I wrote about Asia's largest steelmaker in the summer, it looked like POSCO (NYSE:PKX) was on top of the world. Costs were clipped and sales were slamming. After the global spookfest in August, POSCO shares ran all the way from $125 to near $200. That enthusiasm now appears slightly misplaced, given the Korean company's latest results.
POSCO's third-quarter sales and net income were off slightly from the prior year, while observers were, on average, expecting a modest gain. Shares were down about 9% on Tuesday as a result.
So where exactly did expectations depart from reality? It's possible folks may be focusing on one part of "the China story" while ignoring other mitigating elements.
Yes, demand for steel is booming in China, which is a major market for POSCO. China consumes more steel than any other country. But that same demand is stoking iron ore prices, which cut into POSCO's profits. Macquarie recently raised its 2008 price forecast by 50% above previous levels. That's great news for the big three iron ore producers: Companhia Vale do Rio Doce (NYSE:RIO), BHP Billiton (NYSE:BHP), and Rio Tinto (NYSE:RTP). But it's a bummer for POSCO.
China is also ramping up capacity like mad. The country's leading steel producer, Baosteel Group, is forecasting 24% output growth this year and a doubling of capacity within five years.
Between rising input costs and downward pricing pressure from competitors, POSCO may have a tough slog ahead. That said, the company's strong balance sheet and low-cost operations will prevent it from simply rolling over in the face of adverse market conditions.
