Solidity in Steel

I am starting to become really fond of Schnitzer Steel Industries (Nasdaq: SCHN) -- and not just because of its funny name. Schnitzer is situated squarely in the middle of one of the nastiest industries you can find, which combines high capital expenditures with labor union complications, vicious cyclicality, and unexpected exposure to demand and supply risks from places as far away as Russia, China, and Brazil. Yet Schnitzer still manages to earn itself, and its investors, a profit.

In yesterday's earnings release, the company announced fiscal third-quarter 2004 profits of $1.37 -- nearly triple its year-ago numbers. Over the last nine months, Schnitzer's profits of $2.36 were more than twice the $0.92 it earned in the first nine months of fiscal 2003. Impressive stuff. Even if every other steel company and its brother -- from newcomers to the profitability game such as AK Steel (NYSE: AKS) and US Steel (NYSE: X), to more consistent performers Reliance Steel (NYSE: RS) and Steel Technologies (Nasdaq: STTX), to actually decent companies Nucor (NYSE: NUE) and Textron (NYSE: TXT) -- has been doing similarly well in recent months.

That's great for the steel brotherhood and its investors alike. But the real reason I like Schnitzer is personal: I like the helpful "asides" it provides in its earnings announcements. Pseudo-insider information helps investors like me, who are sort of interested in the industry and would like to know what is going on but don't have a whole lot of time to research scrap-steel tonnage rates, the status of litigation over surcharges imposed on steel deliveries, and similar details.

In its latest earnings release, Schnitzer reveals that in the third quarter of 2004, its cost of shipping steel abroad rose 80% over fiscal 2003 costs "due to record ocean charter rates." The cost of delivery, therefore, cut into the profitability of the higher-than-normal rates Schnitzer was able to charge for its product last quarter. However, China's economy seems to be slowing down somewhat, and with the resultant slackening Chinese demand for imported raw materials, shipping rates are starting to subside.

This suggests two things. First, Schnitzer and other U.S. steel companies will be able to keep more of their profits next quarter, spending less on delivery costs. Second, we may be cresting the steel cycle. If shipping costs come down, that will free up more carriers to import steel into the U.S. Add that increase in supply to the steel industry's desire to increase its production capacity, and we could soon be looking at a steel glut.

Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.