Although decoupling could just as easily be a catchy new name for divorce, I refer here to the diverging fates of the U.S. economy and the emerging markets of Asia; particularly China. Sure, Chinese and neighboring equity markets have been trimmed substantially since the credit crisis began in the U.S., but many indicators point to continued growth in economic activity in the region, and Korean steelmaker POSCO
POSCO's quarterly earnings announced earlier this week were up 44.6% sequentially and 5% higher year over year against revenue climbs of 11.6% and 6.4%, respectively. Mission accomplished on absorbing higher input costs thus far, but the outlook for the remainder of the year appears mixed.
Despite having raised its prices by double-digit percentages twice over the past two months, POSCO has shown some reluctance to raise prices sufficiently to offset rising prices. Fearful of threatening long-term relationships with some key regional customers, POSCO is opting to take a portion of the hit to its bottom line. The company may be betting that it will be rewarded in the long run with improved market share for sharing some of the pain associated with increased commodity prices.
For investors with a long-term time horizon, such a strategy could set up an interesting opportunity. I have stated before that I am cautious on most steelmakers precisely because they risk being squeezed through high-pressure profit rollers like those on their production lines. I continue to prefer related plays at the top of the metals supply chain like Vale
However, I recognize that POSCO is down 40% from its highs last October, and I feel that management is focusing on all the right areas like acquiring mining assets. For the Fool in search of a high tensile-strength investment, I can cautiously condone taking a nibble at these levels. One can hope for further dips, but as far as Asian equities have come down, it's any Fool's guess when those markets will stoke the furnace again.
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