Someone! Quick! Call 911! There appears to be an epidemic of insanity sweeping our nation's steelmakers. The strange thing is, it appears to affect only management (maybe fumes from the smelters rise to the top?).
According to a recent Wall Street Journal article, the huge profits that steel companies, such as U.S. Steel (NYSE:XSS), RelianceSteel (NYSE:RS), Steel Technologies (NASDAQ:STTX), and Steel Dynamics (NASDAQ:STLD), have been raking in over the past few quarters have convinced them that America needs to expand its steel production capacity. Yes, you read that right. Never mind that everyone from China to Brazil is already busy building steel mills, or that world steel production is expected to reach a record 1 billion metric tons this year. Or even that U.S. steelmakers such as Nucor (NASDAQ:NUE) are beginning to drop the surcharges they have been imposing on steel customers lately.
The same guys who just two years ago demanded that President Bush levy tariffs against foreign steel, to protect them from the floods of excess steelmaking capacity that were washing up daily on our shores, now say there is not enough steel to go around. That is what is causing steel prices to go up and, therefore, we need to increase our production capacity in order to grab as much of the profits as possible.
Er, um, I mean, to bring supply and demand into balance for the benefit of steel consumers. (Yeah, that's the ticket.)
To this Fool, the steelmakers' plans sound like the very definition of insanity. The Journal piece quotes one analyst's assessment: "[The steelmakers] realize there are capacity problems in the industry and expansion is very risky." Yet they are going to go ahead and expand anyway. In legal circles, we refer to this as the "irresistible impulse" test for insanity -- knowing something is wrong and you should not do it, but being incapable of controlling yourself.
The idea of expanding capacity in a cyclical industry at the top of a demand surge would be laughable if the consequences were not so dire. Consider what could happen if debt-laden companies such as Middletown, Ohio's AK Steel (NYSE:AKS) pile on more still more debt to build steel mills. What will happen when today's fluke steel deficit becomes tomorrow's renewed steel glut? Layoffs for employees. Bankruptcies for companies. Losses for shareholders.
Steelmakers of America, I implore you: Put down the Kool-Aid.
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Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.
