Like MacGyver without a paper clip, steelmakers find themselves caught between a rock and a hard place ... with no apparent means of escape.
Domestically, the challenges are well known. Nucor
Over in Asia, the hottest regional furnace in the world's growth mill, the steelmakers are churning out plenty of volume to quench healthy industrial demand. Even in this relative hotbed of global demand, however, the producers are struggling to make a buck. South Korean steelmaker POSCO
Caught between cost-sensitive buyers on the one hand (whom POSCO considers incapable of absorbing substantial hikes in steel prices), and abruptly rising raw material costs on the other, POSCO is wedged in the middle of a classic margin squeeze. About 70% of POSCO's sales go to South Korean buyers, with automobile manufacturers and shipbuilders carrying the heaviest loads. With China already wooing global customers with loans supporting vessel construction at Chinese shipyards, Korean shipyards like Samsung Heavy Industries likely face elevated price sensitivity when securing contracts like the multi-vessel drillship order that Samsung is presently building for DryShips'
Due largely to China's seemingly insatiable hunger for imported iron ore and metallurgical coal, prices for these steelmaking ingredients have risen sharply in recent months. Disruptions to met coal exports from Australia due to an historic flood event are showing signs of abating sooner than anticipated, Miner Peabody Energy
Even with worldwide steel production slated to expand by 5% or more during 2011 -- and perhaps as much as 30% over the next several years -- I do not view steel as an attractive industry for investment at the present time. China's steel industry overall saw a profit margin of only 3.5% in 2010, and one of its leading producers is diversifying into sales of food products like olive oil and wine (of all things!) to chase higher-margin operations. I expect rising input costs to continue exerting pressure upon profitability, and therefore I recommend that Fools move up the supply chain into raw materials like met coal and iron ore.
- Add POSCO to my watchlist
- Add Peabody Energy to my watchlist
- Add Cliffs Natural Resources to my watchlist
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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of DryShips and Peabody Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.