ArcelorMittal (ADR) (MT), POSCO (ADR) (PKX): Global Steel Producers Might Provide You With Solid Returns

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ArcelorMittal (ADR) (NYSE:MT), POSCO (ADR) (NYSE:PKX) and Nucor Corporation (NYSE:NUE) are the largest steel producers in the world, meeting most of the world’s demand in all domains of steel products. Thus these companies are able to make good profits each year.
ArcelorMittal (ADR) (NYSE:MT)

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.

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