However, ArcelorMittal (ADR) (NYSE:MT) and POSCO (ADR) (NYSE:PKX) are in a much better position as compared to Nucor Corporation (NYSE:NUE) steel, since both the companies have expanded with the passage of time, moving into various different parts of the world to capitalize on the cost advantages and the local demand these countries offer. In the following article I aim to analyze how POSCO (ADR) (NYSE:PKX) is better than its competitors in terms of its performance and strategies.
Recent Events
ArcelorMittal (ADR) (NYSE:MT) has been very active while investing in the emerging markets, since it realizes that a presence in these growing markets is essential for survival and growth. Amid weak demand for steel, the U.S. manufacturing sector is still growing, supported by the robust automotive market. ArcelorMittal (ADR) (NYSE:MT) continues to pursue its Greenfield investment project of $18 billion in India, to take advantage of an increased demand for steel there, since the Indian economy is growing at a rapid rate, though ArcelorMittal (ADR) (NYSE:MT) is stuck in government regulations to acquire environmental licenses and iron ore leases.
The company has also made its way into Chins, where its joint venture with Valin Steel Co., known as VAMA, will soon be producing steel sheets for cars. Chinese auto steel demand is growing at a rapid rate, providing an opportunity to tap the growing demand from Chinese auto makers.
POSCO (ADR) (NYSE:PKX) is following ArcelorMittal (ADR) (NYSE:MT) trying to set up a $12 million steel mill in India. The company is to get an iron ore prospecting license soon, however the land acquisition has been completed. On the other hand, the company has dropped one other project in India due to the difficulties it faces in land acquisition.
To the downside, its reliance on South Korean market where it generated nearly 60 percent of its sales volume leaves the company exposed to competition from smaller producers like Hyundai Steel Co., which is backed by Hyundai Motors. To counter that, the company seeks to expand overseas; it is planning to start production at its 3 million tones steel mill in Indonesia by the end of this year. Moreover, POSCO (ADR) (NYSE:PKX) is partnering with Brazilian Vale and Dongkuk Steel mill Co. for another 3 million tones mill to produce steel slabs by 2015.
Nucor Corporation (NYSE:NUE) has been struggling with sales in its first half of the year. The earnings for Nucor Corporation (NYSE:NUE) fell by as much as 24% in the second quarter, mainly due to a decline in steel prices in the U.S.. The main reason for declining prices is a rise in imports from China, which are considerably cheaper. Nucor Corporation (NYSE:NUE) is at a disadvantage in terms of pricing due to its location. Steel makers in India, China, Thailand, Vietnam, Taiwan, Ukraine, South Korea, Philippines and Saudi Arabia also enjoy subsidies that allow them to sell at cheap prices in the US. Thus Nucor Corporation (NYSE:NUE) is operating at meager margins.
However, Nucor is taking advantage of unforeseen events such as work lockouts in Ontario and blast furnace outages in Ohio which have shrunk U.S. capacity by 4 %. Due to these capacity shrinkage prices have recovered a bit at least of now, which has helped Nucor improve its earnings.
Dividends and Free Cash Flow
POSCO (ADR) (NYSE:PKX)’s dividends have been rising sharply with a modest and decent payout ratio of 27%, a low payout ensures that the company is retaining enough cash to fuel its growth prospects, as evident from its overseas expansion.
Its free cash flow has, after a slight decline, also picked up with rising at a constant rate. On the other hand, Nucor has highly negative free cash flow and a very high payout ratio of 112%, which does not allows the company to retain anything at all to invest in long term growth projects. Lastly, ArcelorMittal, provides the lowest dividend among all but a constant one, unlike Posco’s volatile dividend returns, which still are above the ones provided by its rivals, even during the lows. ArcelorMittal’s is experiencing a downward slope in its free cash flow trend line, since the company struggles with debt.
Final Thoughts
Here in this industry the location from where the companies operate can be a deciding factor, since certain countries provide subsidies to the steel makers, helping them keep costs low. ArcelorMittal and Posco operating from Luxembourg and Korea respectively have an advantage over its U.S. based competitor Nucor in term of pricing; both the companies can competitively price their products considering both of these have plants at least in one of the subsidized locations. Posco stems from the country which is famous for providing huge subsidies to steel makers, which is Korea, whereas ArcelorMittal also has certain plants in subsidized locations, for instance China but Nucor is totally operating in a non subsidized North American region. Moreover, both of them are pushing very hard to obtain licenses and mining leases in India, which is the next big market in terms of demand, as it is a major growth market. So that completely rules Nucor out of the equation, at least for now.
Posco outperforms ArcelorMittal in a number of ways, one ArcelorMittal is struggling with debt and is looking to sell off a few assets and secondly Posco is a little closer to getting licenses and leases in India, since they have already acquired the land. Apart from that most recently its collaborations with the Brazilian mining giant and Korea’s leading shipbuilding company lays the foundation of its success and growth and being able to provide its investors with great returns. The only risk attached with Posco is its reliance on the Korean market, which the company now has mitigated by rapidly expanding overseas. So, if you are looking for decent returns in future, Posco stands out among its rivals.
Zain Raza has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool owns shares of ArcelorMittal. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Global Steel Producers Might Provide You With Solid Returns originally appeared on Fool.com is written by Zain Raza.
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