Nucor's News Is Negligible

Shares of mini-mill steelmaker Nucor (NYSE: NUE) took a mini-plunge today upon news that the company will miss analyst estimates for the second quarter. The company is facing something of a triple-whammy, in the form of higher scrap metal prices, weak housing and automotive demand, and foreign competition. Let's look at each of these issues in turn.

Because Nucor produces steel by recycling scrap metal, its operating costs are very sensitive to the price of scrap. As I noted in my review of Metal Management's (NYSE: MM) quarter, scrap pricing has gotten "goofy," in the words of that firm's CEO. This goofiness is most unwelcome for Nucor. Structural steel pricing remains relatively solid, but the company is failing to raise prices in line with its costs. Why?

China.

OK, I suppose that explanation deserves a little fleshing out. According to the Chinese Ministry of Commerce, steel exports rose over 116% year over year through May. That kind of import surge absolutely demolishes the pricing power of domestic firms like Nucor and U.S. Steel (NYSE: X). The silver lining here is that a new export tax was levied on Chinese steel exporters in late May, meaning the import tide should ebb from here.

I think the weakness in domestic consumption, particularly housing, shouldn't surprise anyone. Even housing's biggest cheerleader has conceded that "we're in a real estate recession." Nucor's interesting joint venture with Lennar (NYSE: LEN) to provide steel frames for homes won't likely dazzle investors anytime soon.

All of these situations are unpleasant, but Nucor is an incredibly well-managed and well-financed entity. My Foolish colleague Anders Bylund has alluded to the company's "share the pain, share the gain" philosophy, but I would like to add the anecdote that the almost-$20 billion company wrote a letter to employees justifying the purchase of a corporate aircraft. That is remarkable.

If you take the long view here, Nucor's zero net indebtedness both positions the firm to withstand a sector downturn better than Steel Dynamics (NYSE: STLD) or Arcelor Mittal (NYSE: MT) and to continue its run of picking up acquisitions at reasonable prices. Acquisitions have provided half of the firm's growth, so you should probably be eager to see more buying opportunities arise. If you're a long-term Nucor investor, there's no reason to run away today.

Related Foolishness:

• Foolish Forecast: Sing It, Nucor!
• U.S. Steel Bags a Good One
• Posco: Strong As Steel

Fool contributor Toby Shute doesn't own shares in any company mentioned. The Motley Fool's disclosure policy shares the gain, but with none of the pain.