Steel producers play a pivotal role in our society, as steel is a basic material used in everything from automobiles to buildings, among other things. Unlike other industries such as consumer staples or utilities, which are known for stable businesses and extremely reliable results, steel companies are tied to the health of the global economy -- for better or for worse.
Therefore, it shouldn't be a surprise to anyone that steel companies have endured a great deal of punishment in the aftermath of the worst recession since the Great Depression. What is surprising, though, is that even though we're four years removed from the official end of the recession, major steel producers have displayed a concerning lack of progress in their own recoveries. Are industry giants ArcelorMittal (MT 2.23%), U.S. Steel (X 3.77%), and Nucor (NUE 1.89%) performing up to even modest expectations? Or, do these stocks still have pain in store for investors?
Continued lackluster demand
Even as the global economy continues to recover from the financial crisis, steel demand in many developed markets, including the United States and Europe, hasn't kept pace. Recently, ArcelorMittal, the world's largest steel producer, warned its investors that it had over-estimated steel demand and that its results would be adversely affected. Back in February, the company assured investors that 2013 demand would be strong. Unfortunately, management now looks foolish, as these projections haven't materialized.
Due to a combination of factors, including weak coking coal prices and disappointing shipments, ArcelorMittal now projects full-year earnings before interest, taxes, depreciation, and amortization (EBITDA) of $6.5 billion, down from previous expectations of $7.1 billion.
ArcelorMittal is also being hurt by the fact that it isn't heavily exposed to where the global growth in steel demand actually is. China is a global leader in growth in steel demand, evidenced by the fact that its July iron ore imports hit a record high, but the markets that matter most to ArcelorMittal are the United States and Europe, which aren't showing anything but continued sluggish demand.
Not surprisingly then, the major U.S.-based players are also still struggling. Nucor, the largest U.S. steel producer by market capitalization, reported its second-quarter net income fell 25%, due to sluggish U.S. demand and lower prices. The company noted that domestic steel consumption through the first five months of the year fell 7.7%, and since demand is falling faster than production, prices are falling in tandem. The average price of hot-rolled coil, a common steel product, were 10% lower in Nucor's second quarter, year over year.
Meanwhile, U.S. Steel posted a net loss in both its fiscal first and second quarters, due to higher costs and weaker-than-expected demand. After releasing earnings, management attributed weakness specifically to the slow-to-recover European and domestic economies. Going forward, the situation isn't expected to measurably improve. Chief Executive John Surma stated that "total reportable segment...results are expected to be comparable to the second quarter". In other words, investors should expect another loss in the third quarter.
Investors need nerves of steel
`Steel is a systemically important basic material to our society. It serves as a vital component of our very infrastructure. And, slowly but surely, the global economy digs itself out of the massive hole caused by the worst recession in decades. From those perspectives, there are identifiable merits to investing in steel companies. Plainly stated, at some point, you'd figure the bearish raid on steel makers has to end.
At the same time, ArcelorMittal, U.S. Steel, and Nucor are progressing at a frustratingly slow pace. These companies are still struggling to maintain profitability on a consistent basis, even though we are four years removed from the official end of the recession.
That being said, the continued unfavorable economic climate for steel means this trend is likely to continue for the foreseeable future. As a result, only those investors who aren't afraid to be greedy when all others are fearful should consider buying these steel stocks, at least until the underlying industry economics improve substantially.