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Striking deep into the heart of American industry, reverberations from the ongoing economic calamity continue to douse the flames of America's iconic steel and aluminum manufacturers. This directional shift from boom to bust is news to no one, but the deepening scope of the malaise commands the attention of every Fool.
With Chrysler on the ropes and General Motors (NYSE: GM ) retiring the beloved Pontiac brand, we look to earnings results from steelmakers like Nucor (NYSE: NUE ) and Steel Dynamics (Nasdaq: STLD ) not with expectations of profit, but with hopes of mapping the confines of the downturn as it matures. Of course, automakers form an important component of domestic demand, but it requires a simultaneous hit to diverse client categories to slice an entire industry in half.
Steel is not looking so stainless
The domestic steel industry has been parted down the middle, with both Nucor and Steel Dynamics confirming last week that operations are running at about 45% of capacity in response to weak demand. This scale of demand deterioration, recently highlighted by coal miner Peabody Energy (NYSE: BTU ) , has persisted for months now. Steel Dynamics sees "no clear sign" of demand recovery, while Nucor observed a pattern of deterioration during each succeeding month from September 2008 to March 2009.
As a result of reduced production volumes, both steelmakers incurred write-downs of iron inventories. Higher-cost scrap metal acquired before prices collapsed last year continues to gather dust. The capacity to make steel from scrap iron, which promised a competitive edge to these steelmakers when prices were soaring, is now biting at the bottom line at the other end of the price spectrum. Steel Dynamics incurred an $83 million inventory charge, while Nucor took a $60 million hit (offsetting much of the company's $105 million LIFO lifeline). Nucor swung from strong fourth-quarter profits to a first-quarter loss of $190 million, while Steel Dynamics turned in its second consecutive loss of more than $80 million. Operationally, these companies are painting with the same brush, but the parallel ends as we look to liquidity.
While Nucor is a model for moat-builders everywhere, Steel Dynamic's status is more … dynamic. Nucor boasts a $1.9 billion cash balance atop a $1.3 billion credit line, which in this Fool's opinion renders the company best-positioned to ride out even a protracted downturn to emerge as an iron-clad behemoth. Furthermore, I continue to encounter high praise of Nucor's management culture, whether from fellow CAPS members like blogger Dividends4Life or from enthusiastic Nucor employees themselves.
The impact of steel's cooling furnace, meanwhile, has impaired Steel Dynamics' liquidity position to a far greater degree, leading the company to warn that it might breach some loan covenants in the months ahead. Nonetheless, CEO Keith Busse conveyed confidence that debt waivers would be obtained as needed, which would mirror recent experiences from other debt-laden commodity plays like Teck Cominco and DryShips (Nasdaq: DRYS ) . Intrepid investors are learning that covenant breaches don't necessarily lead directly to default.
Steel's softer cousin
Although aluminum production has not been curtailed as aggressively as steel, that marketplace is not looking much healthier. After striking out in the first quarter, Alcoa (NYSE: AA ) is reportedly considering additional cuts beyond the 20% already executed, citing persistent weakness in automotive, commercial construction, and aerospace end-markets.
From within the rubble where a former aluminum sensation once stood, Century Aluminum (Nasdaq: CENX ) continued a tragic comedy of errors last week with another earnings disappointment. The $115 million loss became even more difficult when CEO Logan Kruger indicated a willingness to expand existing production curtailments of 28% as market conditions warrant. If any other Fools are watching the indicators I'm tracking, you'll understand why I consider those added cuts a foregone conclusion.
Following the untimely removal of aluminum hedges, economic collapse in Iceland (where the company maintains operations), massive share dilution, class action lawsuits, and a jaw-dropping 96% retreat from the stock's 52-week high, the latest earnings miss writes one more horrid chapter in Century Aluminum's tasteless novel. With an estimated 1.4 million-tonne global aluminum surplus, and prices leaving little to no room for profit, I am concerned that similar tales have yet to be told.
The bigger picture
Without setting out to do so, my last several articles collectively have painted an undeniable portrait of an American industrial base being pressed further and further into the ground by the weight of this crisis. From decreasing freight volumes on the nation's railways, to worsening outlooks from leading coal miners, indications are mounting that the second quarter could be even uglier than the first. Corroborating observations from automakers, housing and commercial construction, oil and gas services, equipment manufacturing, and of course the makers of steel and aluminum have this Fool sounding the alert that a deeper wave of contraction awaits this beleaguered American economy.