POSCO May Be Near A Bottom, But Sluggish Demand Remains Problematic

Like most carbon steel manufacturers, I believe there's a good chance that POSCO's (PKX) EBITDA/tonne will bottom in the near future, quite possibly in the third or fourth quarter of 2019, but I also see relatively limited prospects for a sharp near-term turnaround. While key inputs like coal and iron ore have been getting cheaper, global steel demand forecasts continue to decline, and I don't see weakening economies in the U.S. and Germany, nor the ongoing U.S.-China trade dispute, as especially supportive of a near-term improvement in steel demand.

Also like many steel companies, POSCO shares look undervalued based on long-term norms for the sector. Unfortunately, investors often ignore those norms at the tops and bottoms of the cycle, and there's a lot riding on steel companies showing that conditions have, in fact, bottomed over the next few quarters. Although I do think POSCO shares are undervalued, investors have plenty of options in the steel sector and ought to shop around carefully, particularly as POSCO doesn't have a great track record with respect to value-added reinvestment of shareholder capital.

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POSCO May Be Near A Bottom, But Sluggish Demand Remains Problematic