While the equity market gets high off the fumes of Alcoa's optimistic outlook, another industrial bellwether is still reeling from the impact of some noteworthy market softness during its fiscal first quarter of 2012.
The primary culprit here is a nemesis we've seen Schnitzer and its rivals battle before: margin compression. As steelmakers worldwide dialed back their raw-material purchases in the face of considerable macroeconomic uncertainty late last year, prices for scrap iron fell far faster than Schnitzer's average inventory cost. The inherent vulnerability of operating margins to near-term price volatility is precisely why I personally tend to steer clear of the metal scrappers entirely. I prefer to retain my focus at the top of the production chain, where miners like Cliffs Natural Resources can only have their margins squeezed from one end rather than two.
But conceding my own preference for the miners of raw material does not mean the scrappy steel makers can be ignored. Quite to the contrary, my longtime favorite stock in the steel sector has cracked some serious thunder lately with a noteworthy surge accompanied by a powerful dividend kicker! Nucor
Throughout the gut-wrenching collapse in commodity stocks that characterized the latter portion of 2011, I remained steadfast in my view that demand-related concerns would prove a near-term blip within the longer-term trend for growing global demand. So when the investment world was selling shares of Peabody Energy
Within its latest quarterly release, Schnitzer Steel echoed my bullish long-term commodity outlook by stating: "Despite the short-term volatility, all indications are that long-term demand fundamentals in our export markets remain strong, primarily due to expectations for further growth and increasing urbanization in developing economies, and increasing usage of recycled metals globally." Because bellwethers like Alcoa, Nucor, Schnitzer, and others continue to corroborate my view that industrial commodity demand is likely to remain far more robust that last year's equity market dynamics would seem to suggest, I continue to view the shares of quality commodity producers as the most attractive equity sector for 2012.