Just when you thought the commodity correction was an unfortunate heap of crap, along came the miserly steelmakers with boosted profits from scrap.
On a Monday when the markets were in dire need of a pick-me-up, scrappy steelmaker Nucor (NYSE:NUE) issued a sizeable positive revision to earnings guidance for the present quarter. Citing strength from acquisitions made over the past 18 months and a lower LIFO charge stemming from cheaper scrap-metal prices, the company now expects third-quarter earnings of at least $2.15 per share. The new target is an improvement of more than 19% over prior guidance, and 11% beyond the average analyst estimate prior to the announcement.
This is an exciting development that leads me to believe fellow steel producers with major inputs from scrap metal will benefit similarly from the favorable pricing environment. I'll certainly be watchful for another potential earnings surprise from Schnitzer Steel (NASDAQ:SCHN) and perhaps also from Steel Dynamics (NASDAQ:STLD). Both have seen their shares pounded mercilessly alongside Nucor during this commodity correction.
The big advantage for scrappers here is that while most major steel companies -- such as POSCO (NYSE:PKX) and U.S. Steel (NYSE:X) -- are required to enter into longer-term contracts to fix prices for metallurgical coal and iron ore, scrap-metal transactions occur on the spot market. Since the drop in commodity spot prices across the board in recent months is likely to yield lower input costs for the scrappy steelmakers compared to those relying more heavily upon iron ore and coal, I expect healthy operating margins to emerge from quarterly results for both Nucor and Schnitzer.
Conversely, these are certainly tough times for companies that specialize in selling scrap metal. From global megascrapper Sims Group (NYSE:SMS) to small-capper Metalico (AMEX:MEA), the pain caused by plummeting prices for their products has certainly been palpable. I happen to think these prices will rebound fairly soon, but in this market Fools need to be very careful when trying to predict any kind of a bottom. In the meantime, it appears that solid earnings are on tap for steelmakers purchasing the scrap.
Further Foolishness:
- Major steelmakers are working hard to control costs.
- I've learned my lesson shunning POSCO.
- Despite further losses, I still think scrap will rebound.
