Dan DiMicco's proactive vision for a sustainable path to recovery for the U.S. economy has earned him the Foolish moniker: Captain America. As difficult as it is to forge a profit in the steel industry these days, perhaps every steelmaker could use a superhero at the helm.
Nucor's (NYSE: NUE) fourth-quarter loss of $11.4 million, or $0.04 per share, came in substantially below the $0.10 to $0.15 (per-share) hemorrhage that investors braced for following the company's December guidance. Then, as now, both residential and non-residential construction demand remains acutely anemic. Fools need look no further than recent earnings from wallboard manufacturer USG (NYSE: USG) or homebuilder D.R. Horton (NYSE: DHI) for a speedy diagnosis. There is simply no pulse.
Thankfully, most other demand segments have continued to show improvement, and Nucor's 15% increase in fourth-quarter steel shipments by tonnage supported a healthy 31% surge in net sales to reach $3.85 billion. Capacity utilization for the full-year 2010 improved mightily from 54% to 70%. Pressed by inputs like a 30% year-over-year rise in fourth-quarter scrap metal prices, Nucor's gross margin contracted dramatically from 7.5% to 3.4% despite the meaningful uptick in production scale. AK Steel (NYSE: AKS) saw its gross margin erode even more severely, from 14.3% in the fourth quarter of 2009 to a mere 1.2% one year later.
As rivals all over the globe are discovering, making more steel does not necessarily equate to making more profit in this environment of rapidly rising raw material prices. POSCO (NYSE: PKX) is certainly feeling the pinch, and ArcelorMittal (NYSE: MT) has reinvigorated its move up the supply chain with a bid for iron ore assets in the Canadian Arctic. For its part, Nucor is moving forward with the $750 million first phase of a potential $3 billion complex in Louisiana. The project is centered around a direct reduced iron facility that will use natural gas to remove impurities from iron ore pellets. This yields a high-quality iron that is essential for specialty steels, and because it employs plentiful natural gas instead of metallurgical coal, the plant promises to be a substantial cost saver. Meanwhile, Nucor reports the termination of its joint venture with Rio Tinto (NYSE: RIO) that produced pig iron in Australia, incurring closure costs of $10 million in the quarter.
Looking forward, Nucor and its shield-wielding CEO see a return to profitability for the first quarter of 2011, but reminded Fools that some portion of the improvements in steel demand going forward will represent buyers grabbing supply before further price increases kick in. I have every confidence that Nucor, under its enigmatic leadership, will continue to countenance this challenging operating environment with considerable poise. I encourage Fools to watch this and other steelmakers carefully for no-spin glimpses of economic activity, but with margins pressed this thin, I think it best for investors to avoid the sector until we know demand can withstand the inevitable price increases.
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