Over the past several years, steel demand in the U.S. has been at some of the highest levels in a decade. But at the same time, imported steel -- which the U.S. steel industry has argued was largely illegally subsidized by the countries importing it to the U.S. -- has flooded the market, hurting prices, taking huge market share from domestic producers, and reducing output -- and profits -- from North American steel mills.
Yet even in the face of this major challenge, Nucor Corporation (NYSE:NUE) continued to invest in growth, expanding its capacity and the products it could make. Over the past several quarters, aided by a number of tariffs that have started to force illegally dumped steel out of the market, Nucor's profits have surged. So far this year, as we learned when Nucor reported second-quarter earnings on July 20, the company has had its most profitable six months since 2008, the company's earnings peak before the Great Recession.
Let's take a deeper look at Nucor's results, how management has been able bring profits back up, and what investors should expect.
Here's How Nucor has delivered strong profit growth this year
Here's a look at the key numbers for Nucor last quarter:
|Metric||Q2 2017||Q2 2016||Change (YoY)|
|Earnings per share||$1||$0.76||31.6%|
|Operating rate||90%||89%||100 BPS|
|Steel mill total shipments (tons)||6,347||5,930||7%|
|Sales to outside customers (tons)||6,748||6,457||4.5%|
And for the first half of the year:
|Metric||H1 2017||H1 2016||Change (YoY)|
|Earnings per share||$2.11||$1.03||104.9%|
|Operating rate||90%||84%||600 BPS|
|Steel mill total shipments (tons)||12,494||11,577||7.9%|
|Sales to outside customers (tons)||13,332||12,605||
What can we learn from the data above? To start, Nucor's operating rate of 90% this year is one of the highest in the industry (and higher is better). Over the past few years, the industry has averaged closer to 70% in the U.S. and Nucor's rate has been closer to the mid- to low-80% range. This has been largely due to the flood of imports into the market in recent years, much of which, as was mentioned earlier, has been found to be illegally subsidized by foreign governments.
Over the past year, a wave of tariffs have had some impact on reducing imports, which has benefited Nucor and its domestic peers by reducing supply and driving steel prices higher. This is a key reason why Nucor's revenue is up 26% so far this year, even though total steel shipments are up less than 8%. At the same time, increased volume over the past several quarters has significantly improved Nucor's operating leverage. This, along with higher prices, has helped drive Nucor's profits up sharply.
Another major reason why Nucor has managed to increase its profits so much over the past several years, while many of its competitors continue to struggle, is how well CEO John Ferriola and his team have allocated capital, building a steelmaker with one of the best cost curves in the industry. On the call, Ferriola said, since the Financial Crisis, Nucor has "...invested more than $7 billion: Capital spending of $5 billion and more than $2 billion of acquisitions, continuing a long tradition of our company we have invested aggressively to increase our capabilities for delivering value..."
Nucor's investments have generally added capability to the company, not just extra capacity. This is critically important for a steelmaker, as major shifts in the demand cycle can turn the expenses associated with additional capacity into an albatross when demand weakens. Nucor's capabilities are fairly broad across industry and product type, helping increase the company's prospects for growth, while also helping reduce some of the downside risk of overexposure to a single industry.
At the same time, the company has funded much of its capital investments from cash flows. Nucor ended the quarter with over $1.5 billion in cash, and $4.4 billion in very low-cost debt and no major debt maturities in the next several years.
Management warns that imports are creeping back up
While tariffs implemented under the Obama administration had started taking a bite out of illegal steel imports, there's growing evidence that this issue is far from over. On the earnings call, Ferriola said that finished steel imports were up 15% in the first half of the year, and market share reached 29%, matching the highest full-year level reached in 2015, and was at 27% year to date.
The good news for Nucor and steel investors is that the Trump administration appears ready to continue fighting the battle against illegal dumping. President Donald Trump has spoken about this issue numerous times in recent weeks, and more trade cases that are likely to lead to more tariffs are working through the system. These trade actions take time to play out, but historically they have proven relatively effective at forcing foreign governments to end subsidies that create an unfair price advantage.
While its peers have largely struggled, Nucor has been able to leverage up its operating rates and drive its profits higher even as illegal imports continue to pressure steel prices and take market share. This is largely due to management's focus on what they can control, namely keeping expenses low, the balance sheet strong, and allocating capital to projects that will deliver the long-term profits to continue driving that cycle.
Even with the competitive pressures Nucor faces and the challenges ahead, the company is on track for its best year in nearly a decade on the back of high steel demand (even with all the pressure from imports) and the strength of its operations. While it's impossible to say just how long steel demand will be strong, Nucor has proven one of the few steelmakers that can adapt to changes in the market, while continuing to operate profitably and investing in the future of its business.