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What's in Store for These Steelmakers in 2012?

Paul Chi
February 3, 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