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COVID-19 Pushes POSCO's Steel Business Into The Red, But A Cyclical Bounce Will Come

Aug. 06, 2020 7:56 PM ETPOSCO Holdings Inc. (PKX)
Stephen Simpson profile picture
Stephen Simpson


  • POSCO announced what might be its first quarterly loss in the steel business, as COVID-19 shutdowns hammered volumes, realized prices, and margins.
  • Weaker sales of value-added products like auto sheet and plate are really hurting, and plate-consuming markets like energy and shipbuilding aren't looking good, but auto should recover soon.
  • Steel has yet to follow the turn toward an industrial rebound, but POSCO shares look attractively priced as a speculative play on that eventual turn.

Investors warmed up to the idea of upcoming recoveries in many industrial markets in the second quarter, but that love didn't extend to the steel sector to nearly the same extent, even though mining companies like Rio Tinto (RIO) and BHP (BHP) have done quite well. I think there are valid reasons for this (overcapacity, weak pricing power, input cost pressures, et al), but I do think sentiment should start to bottom out relatively soon.

I had mixed feelings about POSCO (NYSE:PKX) after the first quarter. I think this is a pretty good steel company, and the shares looked considerably undervalued. Still, I was worried about that sentiment issue. Since then, POSCO has done better than most other steel companies (including ArcelorMittal (MT)), but not as well as the S&P 500, and certainly not as well as the miners. At this point, I like the prospects for meaningfully better financial results in 2021 and 2022, and I don't think that's reflected in the share price. This will never be a buy-and-hold call, but I think this is a time to consider the name as cyclical rebound story.

Weak Results In A Tough Environment

No steel company is reporting good results now, and POSCO is no exception, as the company has had to deal with COVID-19 shutdowns, protectionism, and a volatile input cost landscape. While consolidated results were considerably better than expected (a 60%) beat, the steel business generated its first loss in decades (possibly ever; I couldn't find reliable numbers beyond a couple of decades), and the loss was quite a bit bigger than the sell-side had expected.

Revenue at the unconsolidated (parent company) level declined 21% yoy and 16% qoq on volume declines of 11% and 10%. While POSCO has been trying to upgrade its mix and shift more business to Korea during this period

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

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