Steel yourself for this: The boom times might be over in the steel sector.
You would need more than steel girders propping up your portfolio these days if the steel sector made up any significant portion of it. After enjoying insane demand for steel products in everything from construction to cars, it looks as though capacity may have been reached for demand. Indeed, it could have exceeded demand, and when one considers worldwide production levels, it's tough to draw any other conclusion.
Investors seem to have realized that it was probably a good time to take in some of the profits that the steel companies have been making. For those willing to see, the warning signs have been around for a while now. For example, Canadian steel processor Novamerican Steel
Steely-eyed investors would have noticed that around the beginning of March, stock prices in the sector peaked and have been sorely tested of late. Schnitzer Steel
Despite reporting record earnings and profits, steel producers are forecasting uncertain futures. China alone is seemingly spitting out more steel than the market can handle. It posted a net increase of 30 million tons in 2004 while expecting 2005 to realize increases of 50 million tons. Imports from China and other foreign producers to the United States account for 30% of the market, and domestic producers are adding capacity.
Pricing by steelmakers remains strong, but that may just be a lagging indicator for the sector. As supply has crept ahead of demand, the pricing should soon correct. And though it may provide some cold comfort to the domestic steel industry that tariffs will remain high, since the U.S. International Trade Commission moved to extend duties on imports, it will likely not offer benefits to consumers and could lead to retaliatory actions by foreign governments on other products.
Cycles, however, come and go. As companies ultimately cut back, retrench, and prepare for the next boom time, investors would be wise to wait until things look gloomiest in the sector and then pounce on the companies offering the greatest value. As Warren Buffett has wisely noted, "Be fearful when others are greedy, and greedy when others are fearful." It will be in the darkest hours of the steel cycle when the greatest profits will be made.
For other Foolishness on the steel industry:
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article.
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