Nucor Corporation (NYSE:NUE) has managed its way through a long steel industry downturn in relative stride, expanding its streak of annual dividend increases to 44 years. However, don't look at the company's second-quarter earnings strength and continued dividend hikes and think that it doesn't face the same threats every other U.S. steel maker has to deal with. One of the big issues recently has been overcapacity, which is an issue that hasn't gone away even though the U.S. steel industry has rebounded.
Like most U.S. steel mills, Nucor struggled at the tail end of the deep 2007 to 2009 recession. That was basically the start of a long steel industry downturn in the United States. As you would expect in a recession, falling demand was a big issue. Nucor's steel shipments fell 33% between 2008 and 2009. It was so bad that Nucor was pushed into the red, losing $0.94 a share in 2009.
Nucor is a flexible company, though, and was quick to adapt. For starters, its business is based on electric arc furnaces that are, to simplify a little, easier to ramp up and down than the blast furnaces that underpin the operations of peers like United States Steel Corporation (NYSE:X) and AK Steel Corporation (NYSE:AKS). Nucor's pay structure also makes heavy use of profit sharing, which helps protect the bottom line in bad times.
Nucor got itself back into the black in 2010, as shipments recovered, and has remained there every year since. AK Steel has lost money every year since 2009, while U.S. Steel has bled red ink in all but one of those years. But it wasn't just demand that caused all of that trouble -- supply was an issue, too.
Too much flowing in
After the financial downturn, extra steel from foreign markets, most notably China, began to flow into the United States, with a real flood of cheap imports hitting the market in 2011 after the Chinese commodity boom petered out. That resulted in continuing price pressures despite relatively strong domestic demand (which is why foreign steel was finding its way to the U.S. market).
The U.S. steel industry complained bitterly that much of the imported steel was being sold at below production costs, also known as dumping. Over the past few years, the U.S. government has been imposing duties on imports that it believes have been dumped. That's helped somewhat, but imposing such levies is a slow process and, frankly, hasn't stopped the problem. And the impact has been very real, especially for Nucor shareholders -- over the trailing one-, three-, and five-year periods Nucor's annualized dividend growth has been just 0.7%, well below the historical rate of inflation growth.
Nucor's second-quarter results were the company's best since 2008, which is good. But it noted pressure in several businesses because of imports, notably finished steel products, where imports were up 15% year over year in the quarter. According to the company, imports made up around 27% of the U.S. steel market in the second quarter. As long as cheap imports flood into the market, Nucor and its peers will be dealing with a major pricing headwind.
Dealing with the problem
Nucor's business is robust, supported by flexible costs and significant diversification. That's one reason the steel maker has been able to stay profitable while peers have fallen on hard times. However, there's more to the story.
For example, one of Nucor's goals is to increase its exposure to higher-margin specialty products that are less susceptible to the commodity products driving the import troubles. Another goal is to remain financially conservative so that downturns can be used to opportunistically grow the business. To give you an example of that interplay, in late 2016 and early 2017, Nucor bought several companies to establish a new business in the tubular steel segment of the industry.
The push into tubular steel is just one example -- Nucor been very active throughout the downturn. But even after billions worth of investment, the company remains one of the least leveraged mills in the steel industry. The goal of being financially conservative and using downturns to grow the business work well together and help make Nucor an industry leader -- as well as a robustly profitable company while many peers were struggling.
Keep an eye on this issue
Nucor is doing relatively well lately and is strongly positioned to deal with low-priced imports. That doesn't make dumping go away. Yes, Nucor's second quarter and first half 2017 results were impressive, but you still need to keep an eye on imports. They will continue to be an important headwind until global overcapacity is worked off or closed down. And when you look at the big picture, that's the real problem facing this Dividend Aristocrat today.