For every action, there is an equal and opposite reaction. Newton's third law of motion applies to the fundamentals of supply and demand as well, where rising costs ultimately are met by the reaction of eroding demand. For example, a recent informal poll conducted by The Motley Fool suggested that the majority of Americans may be taking steps to consume less gasoline. As reported by TIME Magazine, the Fool poll influenced fund manager Richard Rainwater's decision to target some investments accordingly.
Just as $4-a-gallon gasoline is showing signs of eroding demand in the U.S., the steep rise in worldwide prices for steel products in recent months has some steel producers facing similar concerns.
South Korean steelmaker POSCO (NYSE:PKX) has lagged global competitors in passing along rising input costs to customers. With prices for energy, iron ore, and coking coal rising relentlessly, though, the company finally decided to raise prices in line with global competitors.
By all accounts, POSCO's decision was not taken lightly. The day before this announcement was made, the company denied reports in Korean newspapers that price increases were imminent. Highlighting the company's attempts to maintain lower prices despite a painful squeeze on costs, POSCO President Yoon Seok-man stated, "We are studying if automakers and electronics companies could bear (price hikes)." In the final analysis, it appears that the input costs posed too great a threat to profitability.
POSCO's reluctance to raise prices serves to remind this Fool that the meteoric rise in prices for nearly every product required to drive the engine of global industry must ultimately approach a critical mass.
Since the ability to absorb higher prices varies by country and sector, and each commodity has its own supply/demand profile, there won't be a single, identifiable moment when this critical mass is reached. Thus far, the demand for industrial materials from emerging markets has seemed insatiable, but every hunger has its limits. Fools can monitor growth rates of emerging economies for early signs that price ceilings may be looming.
Nonetheless, global demand for steel products remains extremely robust. Because input costs remain the greatest challenge for steel makers, I continue to recommend only those companies with the advantage of substantial in-house supplies of raw materials, such as Brazil's Companhia Siderurgica Nacional (NYSE:SID) and Russia's Mechel OAO (NYSE:MTL).
Further Foolishness:
- Mechel beats the heck(-el) out of POSCO.
- Siderurgica could be your new favorite word.
- Coking coal prices are up 200%.
