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Subject:  Re: Posco Steel (PKX) Date:  3/7/2006  12:04 AM
Author:  NByz Number:  1914 of 1942

Hmmm. Well the most important thing to Posco has to be steel prices. It looks like they have products accross almost all of the commoditized steel sub-markets. It would be interesting to examine what percentage of their revenue comes from each, but, on first glance, it looks like it's pretty well balanced. I guess it's reasonable to assume that it's profit margin depends directly the aggregate or average steel price.

Looks like ([1] and [2] below) average steel product prices hovered somewhat flatly between pretty tight 2002 and 2003 averages. For example, "Hot Rolled Coil" stayed within the $250 to $350 range between the start of 2002 and the end of 2003. 2004 brought sharp increase in prices across the board, the above-mentioned "Hot Rolled Coil" hitting it's peak above $750. By mid 2005 the market had given back over half of those gains as production caught up with demand, and things have been pretty stable since then.

It was the explosive growth in China that resulted in the big 2004 gain. I remember a lot of talk about the Chinese Government subsidizing and in other way encouraging growth in capacity for Chinese production. I can't find a good source on that though, and I don't have time to do too much research on that right now. Either way, China now produces over %20 of global steel output and it looks like global production/consumption has (one way or another) re-settled on it's most efficient price. I don't think the south korean government is going to do anything to encourage expansion of steel production. They don't have china's low labour costs, and have already made their bet on high-tech.

I think we can expect China to continue to produce enough steel to keep prices low enough to support it's industrialization (which is the big story on these sorts of commodities). I was just reading a couple of days ago about a big government project in India to make use of labour in some undeveloped areas, supplying it's needs going forward. Knowing that this company is a bet on steel prices, there is some limited upside but not a lot of downside in that regard.

'05 earnings have been weaker than '04 (of course), but seem like a reasonable indicator of what's to come if steel prices remain stable.

Reading about this company has taken me back and forth a bit, but I think - on the output side at least - there is enough to justify a higher P/E than it has, even with the recent run-up in price.

Does anyone want to take a look at the input/expense side? I know that many South Korean companies are taking advantage of North Korean labour through 'free-trade zones' along the border? And I have no idea what to expect by looking at iron ore and energy. Might be fun to compare that operating environment with some other countries.

Citigroup report detailing steel prices

Company that sells information about the steel market
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