Less than six months ago, Schnitzer Steel
Schnitzer warned the market Monday that earnings for its fiscal first quarter of 2012 will come in at a lowly $0.18 to $0.25 per share, citing "weaker than anticipated global market conditions for recycled metals." As Europe's troubling debt crisis grew ever more acute during the period, it triggered a "significant slowdown in buying patterns" that promptly crushed sales prices for ferrous scrap metal.
Because that deteriorating price environment moved far faster than corresponding inventory cost inputs, Schnitzer's margins have suffered far worse than anticipated, and the company's operating income per ferrous ton is now seen contracting by 50% from the prior-year mark of $21 million.
Schnitzer is certainly not alone in supplying the equity market with signs of a rapidly eroding outlook for business activity within key industrial segments. But a few bright spots might be well worth noting:
- Although I perceived some very hopeful signs within Joy Global's
(NYSE: JOY)always-valuable snapshot of commodity demand, the company's admission that "slowing global growth is tempering the demand for mined commodities" seemed to further rattle a nervous equity marketplace.
(NYSE: NUE)expects a sequential earnings contraction of between 53% and 61% for its fourth-quarter result, but the steelmaker finally observed "some real demand improvement" from automotive, heavy equipment, energy, and general manufacturing end-users. I consider it particularly noteworthy that this encouraging observation emerges from the same company that has been routinely mischaracterized as having been excessively bearish on the prospects for real demand recovery.
(NYSE: CMC)took a large hit last quarter, when it opted to discontinue its steel operation in Croatia, but that hasn't prevented investor Carl Icahn from perceiving a compelling opportunity in the shares and launching a $1.73 billion hostile tender offer.
- Aluminum giant Alcoa
(NYSE: AA)may be struggling to peek its head back above the $10 mark, but this might be an appropriate moment to recall that Alcoa reiterated just over two months ago that it expects to see global aluminum demand double by 2020! Similarly, Peabody Energy (NYSE: BTU)is languishing near its own 52-week low but continues to state that the world is in the early stages of a long-term supercycle for coal demand.
By no means do I seek to portray the outlook for industrial activity in a way that ignores or glosses over the very significant headwinds and risks that lie ahead. To the contrary, I have been a consistent voice of caution in that regard since the financial crisis first struck back in 2008. But because I am always on the lookout for periods when prevailing market sentiment may yield a fundamental disconnect from rational share valuations, I find it just as important to consider the bright spots when the masses are fraught with panic, as I do to consider the warning signs when the masses are energized with hope.
I don't want to own Schnitzer steel here while margins are compressing, but I do intend to continue watching this and other bellwether industrial stocks in order to constantly attune my assessment of prevailing share valuations to the key fundamental indicators of global economic activity that these bellwethers well provide. Because I remain doggedly bullish on long-term global demand for bulk commodities like copper and coal, for example, I do perceive such a disconnect emerging in the shares of Joy Global as investment capital systematically flees from anything associated with commodities.