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Fog Is Clearing for a Steel Recovery

By Christopher Barker - Updated Apr 5, 2017 at 7:58PM

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Steelmaker Nucor issues guidance under the wire.

The markets are supposed to be forward-looking, but when instability and fear combine to prevent both companies and investors from seeing the horizon, investment capital remains on the sidelines. As the fog begins to lift, though, rallies are born.

When steelmaker Nucor (NYSE:NUE) released third-quarter earnings back in October, the company declined to issue fourth-quarter guidance as the industry scrambled to make sense of a rapidly deteriorating global financial outlook. Some may find comedy in finally receiving guidance with just three weeks remaining in the quarter. I find surprisingly bullish signals for steel both from Nucor's recent press release and from around the world.

Nucor expects to record a barely profitable fourth quarter as steel sales decline by 40% from third-quarter levels. Furthermore, the company expects to have used only 50% of its steel mill production capacity, with the undesirable corollary that higher-cost raw material inventories were not depleted as quickly. The company may have to wait until early 2009 to enjoy cost-savings from today's low raw material prices.

Did the world overreact?
Of the 50%-60% drop in orders witnessed this quarter, Nucor estimates that only half represent demand erosion. The credit crunch has placed a worldwide premium on cash and liquidity, leading clients to pare down inventories and otherwise delay orders. Nucor expects orders to increase going forward as sales more closely track the level of demand. Perhaps a growing realization of this disparity between near-term sales disruption and actual demand contributed to the near-70% rally in Nucor's shares from their November lows beneath $26 per share.

This emerging grasp of real demand is echoed elsewhere as well. Goldman Sachs upgraded United States Steel (NYSE:X) this week, citing a risk that recent production cuts throughout the industry have overshot the reduction in demand. ArcelorMittal (NYSE:MT) revealed that inventories are running very low, and it is looking to reverse some of its production cuts by as early as the first or second quarter of 2009. Major miners like Vale (NYSE:RIO), Cliffs Natural Resources (NYSE:CLF), and Rio Tinto (NYSE:RTP) all slashed production abruptly as iron ore and coal prices fell sharply, suggesting a potential supply shortfall in the making. I believe the heat from re-fired steel furnaces will continue to clear the fog from investors' eyes, and I urge Fools to keep watching closely.

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Stocks Mentioned

Nucor Corporation Stock Quote
Nucor Corporation
NUE
$103.64 (-0.92%) $0.96
Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
CLF
$14.85 (-2.17%) $0.33
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$16.65 (-2.17%) $0.37
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$56.55 (-1.28%) $0.73
ArcelorMittal Stock Quote
ArcelorMittal
MT
$20.98 (-4.03%) $0.88

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