When the Schnitz Hits the Fan

Is 2009 over yet? With investors moping around over trillion-dollar deficits and rising unemployment, some are undoubtedly wishing we could fast-forward to 2010.

Not so fast! The more dire things look, the more likely we are to see the stimulus package from the incoming Obama administration reach truly massive proportions. For scrappy steelmakers like Schnitzer Steel (Nasdaq: SCHN  ) , federal stimulus must increasingly be seen as the difference between a year to remember ... and a year to forget.

Schnitzer Steel released earnings this week for the fiscal first quarter of its fiscal 2009 year, and the numbers were not pretty. After inventory writedowns of $52 million, the company posted a net loss of $34 million, compared to a record gain of $126 million just one quarter ago. With steel prices remaining below the average realized price for the quarter, the outlook for the next quarter looks grim indeed. Responding to the "unprecedented drop in demand", the company announced plans to reduce its workforce by 10% and curtail output by a massive 40%.

When it comes to absorbing bad news, I'm a big fan of keeping things in context. For example, while these results look horrendous compared to the previous quarter, when metal prices were through the roof, a look at the prior year's comparable results proves far more insightful. Even as painfully low scrap metal prices ravaged shares of leaders like Commercial Metals (NYSE: CMC  ) and Sims Group (NYSE: SMS  ) , Schnitzer's revenue from scrap metal operations -- by far its largest business segment by revenue -- fell by less than 17% from the prior year. 

Secondly, when considered alongside major production cuts from larger competitors like Arcelor Mittal (NYSE: MT  ) and United States Steel (NYSE: X  ) , Schnitzer's 40% output reduction should dramatically reduce the company's exposure to negative margins, helping to slowly build critical support for prices.

Unfortunately, Schnitzer's earnings release offered no confirmation of fellow scrapper Nucor (NYSE: NUE  ) 's contention that only about half of the visible demand disruption represents actual demand erosion. Meanwhile, Asian steelmakers like POSCO (NYSE: PKX  ) have garnered all of this Fool's attention; I'm curious about whether China's stimulus plan can keep the fires of Asian industry sufficiently stoked to weather the storm. 

While I wouldn't be clamoring for shares of domestic steelmakers at this stage, I nonetheless recommend that Fools keep watching these important bellwether companies very closely.

Further Foolishness:

If you believe that China will be a keystone to recovery for countless companies with exposure there, then consider taking the Motley Fool Global Gains newsletter service for a test-drive for 30 days. The Global Gains team watches China carefully as part of its search for exciting and Foolish investment opportunities around the globe. POSCO is an Income Investor recommendation.

Fool contributor Christopher Barker has a head as thick as a double-hulled steel tanker. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. The Motley Fool has a stainless disclosure policy.


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