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:

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He owns no shares in any companies mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 26, 2009, at 8:44 AM, fred1313 wrote:

    People like is what is the keeping anything positive from happening in the market on a consistent basis. You are now keeping company with the Idiot(Cramer) who thinks the world revolves around his portfolio. This market will never turn around completely when you have the "Guru's"

    and the clueless President we have opening their mouths. It is ashame that are markets are being manipulated by all the greedy people. I didnt say the rich people like all the Obama backers. I am not rich, nor poor I am in the middle of the road. I dont want a hand out but I also want a chance to do better. But the market has no sense to up and down swings because of poor speculation by know it alls.

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