Despite the challenges currently facing steel producers, Nucor (NUE 1.25%) has maintained profitability and boasts a solid balance sheet. However, its operational performance has not translated into an increase in the share price this year. What's more, it looks like any upside remains limited for Nucor.
Solid performance is already reflected in the share price
Not surprisingly, Nucor trades at a premium to its peers United States Steel (X 1.28%) and AK Steel Holding Corp (AKS). AK Steel's first quarter was tough due to severe winter weather and outages at the company's Ashland Works blast furnace. As a result, AK Steel swung to negative operating cash flow. U.S. Steel managed to finish the first quarter with a profit, but the outlook for the company remains muted. In fact, U.S. Steel is expected to post a loss in the second quarter.
Nucor also felt the effect of severe winter weather and the related rise in costs in the first quarter, but it was not as pronounced as in AK Steel's case. Unlike U.S. Steel, Nucor is expected to post a profit in the second quarter. The only problem is that all of this is already reflected in Nucor's share price.
No help from the steel markets as imports pressure prices
Improvements in the steel market could have been a big upside catalyst for steelmakers' shares. However, pressure from cheap imports continues to affect prices. Nucor stated that imported steel's share of the U.S. market increased from 25% in 2009 to 30% in 2013. What's more, imported steel's share increased to 36% in the first two months of this year.
On the bright side, iron ore pricing remains soft, which helps contain costs. Nucor gets iron ore from suppliers in Brazil, Canada, and even Sweden, with pricing based on three-month contracts. Because of this, the softness in iron ore prices will soon be reflected in the company's costs. However, low iron ore prices are not a major help while steel prices remain pressured by cheap imported steel.
The shift to value-add products could be a solution to the problem, but it won't happen overnight. Nucor expects to grow its exposure to the value-add auto market by 4%-5% next year. This is an ambitious target, as aluminum producers like Alcoa (AA) also have big plans on the auto front. Although it's early in the game, lightweight steel will ultimately clash with aluminum in the battle for auto production.
Bottom line
Nucor continues to demonstrate solid performance, but it lacks catalysts to push its shares higher. The pressure from cheap imported steel hurts the company's bottom line. There is no confidence that the government will make moves to protect domestic producers from subsidized imported steel. For example, the U.S. Department of Commerce rejected part of a complaint about imports from Turkey back in February.
It will be difficult for Nucor to increase profitability in the current price environment. The stable 2.8% dividend will provide support for the shares; but without improvements on the price front, Nucor's upside is limited.
