by David Fessler, Investment U’s Energy and Infrastructure Specialist
Friday, April 8, 2011: Issue #1487
As we approach the one-month anniversary of one of the worst natural disasters in modern times, Japan is slowly turning its efforts to the daunting task of rebuilding hundreds of kilometers of devastated coastal towns and public infrastructure.
The Herculean effort will cost more than $300 billion by some estimates. That number could jump even higher depending on what happens with the Fukushima Dai-ichi nuclear power plant. The world is on watch, and so are investors. Several industries stand poised to make big gains as they assist in the reconstruction of northern Japan.
There’s no question that Canada will be one of the big benefactors of the rebuilding effort. Its struggling lumber industry will be the primary supplier of the dimensional lumber needed to reconstruct homes and other structures destroyed by the tsunami.
With an estimated 260,000 people still homeless, and countless numbers of businesses either damaged or totally destroyed, a great deal of lumber will be required.
But there’s another raw material that will be in even greater demand as reconstruction gets underway in earnest…
Steel Demand Will Rise as Japan Begins Reconstruction
Japan has the second-largest steel industry in the world after China, but the tsunami knocked a portion of the country’s manufacturing capacity offline. Many steel plants were forced to close from earthquake damage, or from the rolling blackouts that are now commonplace in the wake of Fukushima being offline.
The post-quake rebuilding effort is expected to create incremental demand of three million tons. And there’s also expected to be a shortage of high-quality flat steel, so much of this will need to be imported, as well.
Posco “is an incredible steel company,” said Warren Buffett last week about the fourth-largest steelmaker in the world. And he should know. After doing his own due diligence, Buffett’s Berkshire Hathaway (NYSE: BRK-A) acquired a 4.6% stake in the company.
While Buffett is sitting on a tidy 85% profit on his shares, there’s still plenty of upside to Posco. The company currently sells 65% of its steel to the Korean market, with the Korean auto industry, shipbuilding and construction firms as its largest domestic customers.
But while domestic auto production has been great for Posco over the last 12 months, the company has big international expansion plans…
Posco’s Steel Industry Expansion
Over the next several years, Posco plans to spend more than $30 billion to build steel plants in Vietnam, India and Indonesia. It’s also buying a stake in an Australian iron-ore mine, in order to ensure an uninterrupted supply of raw materials. And it already owns stakes in several other iron ore and coal mines.
Posco’s share price shot up 15% since the Japanese mess, but it’s still down 2% over the last year. The longer it takes for the Japanese mills to return to production – and we’re talking many months – the better the results for Posco within the steel industry. One key sign of revenue growth came last week when the company announced that the average prices for its key products will increase by 15% to 20% for the remainder of the year.
But the real upside for Posco is that Wall Street hasn’t caught on to the fact that company shares are still cheap, trading at just 7.6 times this year’s estimated earnings, and at 6.9 times those estimated for 2012. Both figures are well below Posco’s peer companies.
Rebuilding the Japanese infrastructure will take years… perhaps as long as a decade. And with global economic growth continuing, Posco is a steel company that will be the primary steel supplier to much of China, India and Southeast Asia.
That has it poised for some significant growth in the months and years ahead. Owning a few shares might just do the same thing for your portfolio.