Taking the Commodity Correction in Stride

Just when you thought the commodity correction was an unfortunate heap of crap, along came the miserly steelmakers with boosted profits from scrap.

On a Monday when the markets were in dire need of a pick-me-up, scrappy steelmaker Nucor (NYSE: NUE  ) issued a sizeable positive revision to earnings guidance for the present quarter. Citing strength from acquisitions made over the past 18 months and a lower LIFO charge stemming from cheaper scrap-metal prices, the company now expects third-quarter earnings of at least $2.15 per share. The new target is an improvement of more than 19% over prior guidance, and 11% beyond the average analyst estimate prior to the announcement.

This is an exciting development that leads me to believe fellow steel producers with major inputs from scrap metal will benefit similarly from the favorable pricing environment. I'll certainly be watchful for another potential earnings surprise from Schnitzer Steel (Nasdaq: SCHN  ) and perhaps also from Steel Dynamics (Nasdaq: STLD  ) . Both have seen their shares pounded mercilessly alongside Nucor during this commodity correction.

The big advantage for scrappers here is that while most major steel companies -- such as POSCO (NYSE: PKX  ) and U.S. Steel (NYSE: X  ) -- are required to enter into longer-term contracts to fix prices for metallurgical coal and iron ore, scrap-metal transactions occur on the spot market. Since the drop in commodity spot prices across the board in recent months is likely to yield lower input costs for the scrappy steelmakers compared to those relying more heavily upon iron ore and coal, I expect healthy operating margins to emerge from quarterly results for both Nucor and Schnitzer.

Conversely, these are certainly tough times for companies that specialize in selling scrap metal. From global megascrapper Sims Group (NYSE: SMS  ) to small-capper Metalico (AMEX: MEA  ) , the pain caused by plummeting prices for their products has certainly been palpable. I happen to think these prices will rebound fairly soon, but in this market Fools need to be very careful when trying to predict any kind of a bottom. In the meantime, it appears that solid earnings are on tap for steelmakers purchasing the scrap.

Further Foolishness:

POSCO is an Income Investor recommendation. Try the market-beating, dividend-focused service today via a free 30-day trial.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Metalico. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2008, at 10:52 PM, jhalgren wrote:

    Certainly hope MEA comes back since I was foolish enough to buy it at 12.56 upon hearing Hilary Kramer gushing about the company on the PBS "Nightly Business Report" a few weeks back. Hope she realizes the wrath she has created by her enthusiasm, and I pray she was ultimately right about Metallico. Otherwise, I should have bought GLD!

  • Report this Comment On September 18, 2008, at 8:51 AM, rbcaps wrote:

    I was also foolish enough to buy MEA around the same price. I bought it mainly because the Zacks Elite account I paid for listed it as the number 1 timely buy at the time. I will no longer pay any attention to what Zacks thinks.

  • Report this Comment On September 18, 2008, at 10:53 AM, XMFSinchiruna wrote:

    me 3 :)

  • Report this Comment On January 09, 2009, at 10:41 AM, davidkubica1 wrote:

    If you really wanted to invest in a commodity why not just do so by trading futures and futures options? Personally, if I am interested in gold for example, I would much prefer to have to watch the gold market rather than try to watch over 20 different gold mining companies. It is just easier.

    Besides that, futures allow for much more margin, better tax benefits, and are much more globalised allowing for easier diversification.

    Don't get me wrong. I know that trading with futures isn't all just benefits. For example, futures trading can lose you more money than you actually intended to invest if you do not pay attention.

    There is one more option for investors just looking to diversify their investment: managed futures. Managed futures are basically the mutual funds of the futures industry. Many of them have really good returns due to their ability to trade both the upside and the downside of the markets. Check out www.managedfuturesdepot.com. They have some pretty good managed futures programs available. One of them actually had a return of 128% in 2008 and has averaged a monthly return of over 8% since its inception 5 years ago. The info on that program can be found here: http://www.managedfuturesdepot.com/shadrachprogram.php . REMEMBER: All of the returns of managed futures are regulated by the CTFC and are NET of expenses.

Add your comment.

DocumentId: 730168, ~/Articles/ArticleHandler.aspx, 4/19/2014 4:33:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement