What's in Store for These Steelmakers in 2012?

Steel plays a very important role in the global economic landscape. There are all sorts of end uses for steel, but two of the major ones are the construction and automobile markets. Because those are two very important and closely watched markets, many people who watch general manufacturing numbers are also very interested in steel production across the globe.

According to the World Steel Association, global crude steel production in 2011 reached 1,527 megatonnes for the full year, a 6.8% increase compared to 2010. Aside from Japan and Spain, all major steel-producing countries showed growth in 2011, including a whopping 7.1% year-over-year increase from the United States. That growth showed through in the financial results of companies in this space.

U.S. Steel (NYSE: X  )
In the fourth quarter, U.S. Steel posted a net loss of $226 million, or $1.57 per diluted share on sales of $4.8 billion and shipments of 5.4 million tons. The company's tubular segment was its lone bright spot, posting operating income of $119 million for the quarter. To put that into perspective, the overall operating loss of the company was $194 million during the quarter.

Despite somewhat disheartening losses, things appear to be improving. The company just posted a narrow loss of $68 million for 2011, and its annual net loss has trended down significantly since posting a huge loss in 2009. In fact, if steel consumption continues to grow at the mid-single digit clip mentioned earlier, the company should be able to produce a profit.

The company expects every significant flat-rolled segment to improve in 2012, led by an automotive segment projected to reach 14 million cars next year. That would represent a hefty 1 million car increase over 2011 if achieved, and would help automotive steel providers. Currently, the consensus analyst estimate calls for 2012 earnings per share of $2.69, a marked improvement over the company's posted loss of $0.46 per share in 2011.

Nucor (NYSE: NUE  )
In stark contrast to U.S. Steel, Nucor actually increased earnings sixfold in 2011 to $778 million, up from $134 million in 2010. That was despite a capacity utilization rate of only 74% for the year. If the steel market continues to improve, the company can run at a higher utilization rate and realize additional profit at low incremental cost.

How does Nucor create value? The company cites financial strength and operational flexibility as some of the ways that it grows stronger during economic distress. Downturns represent great times for strong companies to build value by scooping up assets on the cheap, and Nucor is no exception. In fact, from 2008 to 2012, the company invested more than $6 billion of capital, something only a healthy company with a strong balance sheet could do. That quality balance sheet also allowed Nucor to increase its dividend in December for the 39th consecutive year. Over just the past 11 years, the dividend has increased almost tenfold.

Going forward, the company projects capital spending of $1 billion in 2012, up from $441 million in 2011. While other steelmakers struggle to stay afloat given the low utilization rate, Nucor continues to ramp up its spending so that it will flourish in good times. Like U.S. Steel, the company is expected to increase its earnings next year. The consensus analyst estimate calls for earnings per share of $3.18 in 2012, up from $2.39 in 2011.

ArcelorMittal (NYSE: MT  )
As the largest steel producer in the world, ArcelorMittal has a different set of concerns. It's concerned about the supply and demand in all markets, not focusing the majority of time on any one region. As of the third quarter, the company was convinced that the U.S. was not slipping into recession and that Europe looked like it was avoiding a crisis. The European situation obviously changes very quickly, so I'll be interested to see the steel giant's latest take when it releases earnings on Tuesday, Feb. 7.

Besides the U.S. and Europe, ArcelorMittal also continues to monitor China, where it views a soft landing as the most likely scenario rather than a crash landing, though the risk has definitely increased. All told, the company is cautiously optimistic about the 2012 picture.

Despite being a big presence in all of its markets due to its scale and scope, the company continues to pursue vertical integration through ownership of mines. Over the next two years alone, ArcelorMittal expects to double the EBITDA earnings power of its mining segment, which should help supply its furnaces with plenty of iron ore.

The average analyst earnings estimate for ArcelorMittal in 2011 is $2.12 per share, followed by $2.25 in 2012. Unlike the U.S. producers profiled earlier, ArcelorMittal is much more globally diversified and quite vertically integrated. That provides for a smoother earnings picture, though it could also mean a bit less upside when things are booming. Still, boom times are likely to treat everyone well, so slightly muted upside is hardly a big concern.

Foolish bottom line
A sustained economic rebound might be a long time coming, but these steel producers are slowly improving their results. The World Steel Association predicts 4.5% steel demand growth in 2012 on top of the 6.8% growth from 2011. That's less than the 5.4% previously forecast, but it's still a positive trend for steelmakers. If steel demand continues its way up, producers should have no problems raising their utilization rates to accommodate the increased demand, and their bottom lines should improve.

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Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul does not own shares in any companies mentioned.

The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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