Don't Be Tempted by Illusory Steel Demand

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I understand the temptation. Every time we see a modest increase in activity in a sector we follow, we'd like to conclude that we're on the road to recovery. For U.S. steelmakers, however, I think this road leads nowhere -- for now.

As shipping industry executives assess their own challenges in a separate forum, representatives of major steelmakers have also gathered in the Big Apple for a conference. Lakshmi Mittal of ArcelorMittal (NYSE: MT) pointed to green shoots of demand from China, and U.S. Steel (NYSE: X) CEO John Surma offered a likely rekindling of a blast furnace in Illinois as further indication of modest improvement. Daniel Dimicco, the CEO of U.S. steelmaker Nucor (NYSE: NUE), finds those views overly optimistic, adding: "You don't know if those green shoots are poison ivy or corn." If the steel executives disagree, what is a Fool to conclude?

Thankfully, Texas-based metals conglomerate Commercial Metals (NYSE: CMC) released its earning this week. Commercial Metals surprised analysts with a loss of only $0.10 per share from continuing operations, although the result included a $0.26 per-share boost from last-in, first-out inventory accounting.

The company reported domestic steel production at 58% of capacity in its fiscal third quarter, up from 55% in the second quarter and comparing favorably to the 45% reported by the likes of Nucor and U.S. Steel when we last checked in. Furthermore, the company expects domestic mills to run to  near 65% of capacity in this quarter. Sounds like the furnaces are heating up, right?

Not so fast, Fools. Commercial Metals CEO Murray McClean has his own green-shoots-busting remarks: "Any volume improvement in the quarter was seasonal and not reflective of any stimulus effect. Destocking appears to be in its last stages; however, end-use demand remains weak." He sees no evidence of the federal stimulus package boosting steel demand in 2009, but hopes that will change in 2010.

On a more positive note for scrap metal recyclers, for whom  Commercial Metals is a major player, McClean sees prices increasing for ferrous scrap metal on improving exports and some pickup in domestic demand. For scrappers like Metalico (AMEX: MEA) and Sims Metal Management (NYSE: SMS), then, some relief could be on the horizon.

For the domestic steel industry, though, I see no major signs that those stone-cold furnaces are preparing to thaw.

Further Foolishness:

• How is steel looking south of the border?
• Asian steelmakers are a different story altogether.
• The Schnitz is still hitting the fan.