Buffett likes consumer monopoly, why then did he buy POSCO STEEL? PKX

Warren Buffett has allowed leeway in his usual investment strategy by purchasing a 4% stake in POSCO back in 2006. He is well known to hate commodity companies as they do not have monopoly power and they only can compete on prices. The lowest cost commodity company will be the most profitable but only for a short while as the competitors will embarked on huge capital expenditures to lower their operating costs as well.

It is this idea that Warren Buffett loathes investing in any commodity companies. However, it seems that he has made an exception for POSCO STEEL and we shall see why.

Competitive Landscape

Posco Steel competes aggressively with Nippon Steel and Hyundai Steel. ArcelorMittal is also major competitor (largest steel maker).

Among the steelmakers, Posco steel enjoys the highest Gross, Net Profit margins and highest ROE.

This company has the lowest operating cost at the moment and this could be one reason that lured Warren Buffett to purchase this company.

Risk factors

Ability to pass cost of raw materials to steel buyers. South Korea has little to no iron ore, the company is less vertically integrated than ArcelorMittal. This may hurt its future margins should ArcelorMittal lower its pricing.

Posco’s purchase of Daewoo is a major headache for Warren Buffett. Daewoo is yet another commodity business with little differentiation in its products.

Warren Buffett definitely dislike these aspects of Posco Steel.

Investment Thesis

Located in the fastest growing region of the world, POSCO Steel deserves a little consumer monopoly power given its powerful operations.

POSCO joint ventures in emerging markets would be highly profitable in the near future.

Predictable earnings despite the cyclical nature of the steel business. Warren Buffett already has a base earnings for Posco and any upside is just an additional bonus.

Undervalued with a high margin of safety.

Warren Buffett is full

Enough is enough. Warren Buffett does not wish to expand his stake in Posco Steel as the price has already doubled since he had first purchased the behemoth. The margin of safety has shrunk and considering the highly commoditized nature of this company, Warren Buffett has a fat stomach already.

That’s it for Warren Buffett’s wisdom for the time being, we will be discussing the intelligence of another great investor – Peter Lynch.