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POSCO's Steely Resolve

By Christopher Barker - Updated Apr 5, 2017 at 7:59PM

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The South Korean steelmaker bucks the global trend by expanding capacity.

It takes nerves of steel to swim upstream against a torrent of naysayers.

Announcing a bold plan to invest $4.4 billion in 2009 to expand capacity and revamp its furnaces, South Korean steelmaker POSCO (NYSE:PKX) is bucking the prevailing defensive posture of its major competitors. The company hopes to gain market share on the flip side of this global economic downturn.

POSCO was the only major steelmaker to maintain production volumes, even as global competitors like Arcelor Mittal (NYSE:MT) and Russia's Severstal have hurried to hunker down with deep production cuts. Now the company has upped the ante on its contrarian gamble with this 76% increase in domestic capital spending.

The investment will build two new steel mills to produce heavy steel plate, representing a targeted effort to satisfy demand from a booming South Korean shipbuilding industry and its nearly four-year order backlog for vessels. Despite failing in its bid to swim downstream and acquire Daewoo Shipbuilding and Marine Engineering back in October, POSCO continues to look to Korea's world-leading shipbuilding industry to keep the furnaces stoked during this downturn. By securing iron ore supplies through a $1.6 billion loan to Brazilian miner Vale (NYSE:RIO) last month, the Korean government has demonstrated its support of these key industries, much like China has done.

Interestingly, China's leading steelmaker, Baosteel Group, has shared POSCO's contrarian posture toward capex. Baosteel is similarly moving ahead with construction of an $8.8 billion mill. Together, these two Asian behemoths are creating a regional dichotomy in the steel industry, standing in stark contrast to the 50% capacity utilization reported by U.S.-based Nucor (NYSE:NUE), or the mill closure announced this week by United States Steel (NYSE:X). Accordingly, miner Cliffs Natural Resources (NYSE:CLF) is cutting production of iron ore in North America, while leaving Australian operations -- which export to Asia -- alone for now.

I'm developing a contrarian view of my own with respect to Asia. I suspect greater Asia's industrial complex is now poised to burn right through the near-term disruption of global demand, exceeding expectations with sustained activity even as the world at large grapples with severe economic challenges. On the strength of the Chinese stimulus plan, simultaneous worldwide production cuts that appear to have overshot actual demand destruction, and the company's timely move to expand capacity, I believe POSCO will remain the Sheriff of Steel.

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Stocks Mentioned

POSCO Stock Quote
POSCO
PKX
$43.46 (-1.32%) $0.58
Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
CLF
$15.05 (-0.85%) $0.13
Nucor Corporation Stock Quote
Nucor Corporation
NUE
$104.66 (0.06%) $0.06
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$16.89 (-0.79%) $0.14
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$56.80 (-0.85%) $0.48
ArcelorMittal Stock Quote
ArcelorMittal
MT
$21.23 (-2.90%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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