Nucor (NUE +1.09%) earnings came out this morning, and the news was not good.
Sales for the fiscal second quarter dropped nearly 9%, to $4.7 billion. Earnings, at $0.27 per diluted share, were down 23%, due primarily to the reduction in revenues, and exacerbated by an increase in monies spent on marketing, administrative, and other expenses.
Yesterday, rival mini-mill operator Steel Dynamics (STLD +1.84%) reported weak pricing in its steel, and similarly eroded earnings.
At Nucor, the steep slump in sales arose from a combination of factors. For one, shipments were down. Tons of steel shipped slipped 1% in comparison to last year's Q2, owing to lower demand from customers. Adding to Nucor's woes, and hurting Nucor earnings, the company noted that while steel prices have firmed up somewhat since Q1 of this year, they remain down 8% in comparison with last year's Q2.
Result: Less steel shipped, and at far lower prices, added up to a 23% reduction in profit earned.
The future
Looking at the recent firming in prices, Nucor is telling investors that brighter days lie ahead. Management forecasts "modest improvement" in earnings on the back of higher prices for sheet steel -- and it may be right about that.
You see, there are two main dynamics at play for companies like Nucor and Steel Dynamics, which rely on supplies of scrap steel to smelt their new steel. Scrap steel specialist Schnitzer Steel (SCHN +0.00%) is also suffering from weak profits, which is bad news for it, but could be good news for Nucor, which views scrap steel as an input cost. Nucor says that "average scrap and scrap substitute cost per ton used in the second quarter of 2013 was $377 ... a decrease of 12% from $427 in the second quarter of 2012."
In a way, that's good news for Nucor earnings, because it lowers its cost of doing business. On the other hand, weak scrap steel prices also suggest oversupply in the market, and weak demand for steel, period. And this could in turn put a lid (a steel lid, one suspects) on Nucor's hopes for improvements in steel pricing in Q3.
Next up
Looking for more clarity on where the steel market is heading? U.S. Steel is next in line to report earnings, on July 30. After that, it will be Luxembourger steelmaker ArcelorMittal, probably reporting in August. Stay tuned.
