The U.S. steel industry is ablaze this month in a cauldron of molten whispers about purported takeovers. Meanwhile, the pace of noteworthy developments that are verifiable has quickened faster than Rosie the Riveter on a wartime assembly line.
New mitts for Nucor
One could feel the excitement start to build last week when Nucor (NYSE: NUE ) scored a joint venture with the U.S. subsidiary of Japanese conglomerate Mitsui. The entity thus created, called NuMit, targets investments in steel-related assets worldwide … but its inaugural asset is Mitsui's Steel Technologies. Nucor now holds a 50% stake in Steel Technologies, which operates 23 processing facilities for flat-rolled steel products throughout North America with $1 billion in annual sales. Nucor's planned construction of a similar processing facility in Mexico will now be executed through this joint venture.
Perhaps of even greater interest to Nucor shareholders, however, is the improved facility (provided by this relationship with Mitsui) for strategic investment exposure within foreign steel markets that are less structurally impaired than those closer to home.
Dynamic days for Steel Dynamics
Fellow scrappy steelmaker Steel Dynamics (Nasdaq: STLD ) raised more than a few eyebrows Tuesday when it issued a relatively healthy first quarter earnings forecast of $0.22 to $0.27 per diluted share. The upbeat outlook comes amid encouragingly "robust order entry activity," rising product prices, and improving profitability from metals recycling operations. These thawing conditions likely prompted one analyst's decision to raise full-year guidance for Steel Dynamics' profit by 40% to $1.40 per share.
Another slice of Steel Dynamic's optimistic pie comes in the form of a recently implemented capacity to produce enormous lengths of railroad tracks. We all know what Warren Buffett thinks of the long-term outlook for American railroads, and Steel Dynamics is now well positioned for a build-out in railroad infrastructure with a facility that can efficiently produce 1,600-foot lengths of "continuously welded rail." Although the company continues to note pronounced weakness within structural steel and some value-added product lines, this new rail facility has enjoyed a "dramatic increase in orders for welded rail."
Commercial weakness for Commercial Metals
As long-anticipated weakness in commercial real estate has finally piled atop relentless softness in the residential home construction market, the end result has driven Commercial Metals (NYSE: CMC ) right out of one construction-related business segment. Commercial Metals recently announced it will shed its joist and deck business entirely; either through a sale of the segment or outright closure of the relevant facilities. Citing unacceptable losses from a business with a weak outlook, the move will trigger second-quarter write-downs on the order of $35 to $50 million. The separate closure of a metals recycling plant in Nevada highlights an operational contraction that stands in stark contrast to the growth initiatives emerging from competitors like those noted above.
With all this unfortunate news dropping onto investors like an anvil, why on Earth are shares of Commercial Metals soaring in recent days? The answer appears to have more to do with the rumor mill than any steel mill. First during late February, and then again Tuesday, shares of Commercial Metals surged on reported takeover speculation … with Nucor and Gerdau Ameristeel (NYSE: GNA ) offered up as potential suitors. Although the rumor took to the airwaves, no official confirmation of any deal has surfaced as yet.
Shooting up the tape … AK-Style
Not to be outdone, AK Steel (NYSE: AKS ) saw its shares bid higher last week amid swirling speculation of a potential buyout by Brazilian steelmaker Companhia Siderurgica Nacional (NYSE: SID ) . As in the case of Commercial Metals, no verifiable confirmation of such a deal can be found. Meanwhile, on the heels of a juiced-up quarter that delighted analysts back in January, Goldman Sachs removed AK Steel from its "buy" list Monday and replaced it with U.S. Steel (NYSE: X ) . With input costs set to increase across the board (including coking coal, iron ore, and scrap metal), Goldman sees more vertically integrated operators like U.S. Steel as best-positioned to weather the resulting margin pressure.
I have documented several of the long-term fundamental drivers that are conjoining to send prices for iron ore and coking coal substantially higher going forward. While I agree that vertical integration up the material supply chain presents an important buffer against such profitability constraints, I continue to view the adaptability to market dynamics inherent in the arc-furnace operators and a potential surge in scrap metal supply from programs like Cash for Appliances as compelling equalizing factors. Since I believe that margins are likely to remain tight for all domestic operators, I continue to highlight Nucor as the best in the business. With its celebrated corporate culture, well received market insight, and an exciting new joint venture that could open doors to key foreign markets, Nucor still strikes this Fool as the hottest name in domestic steel.