When it rains, it pours. And with the latest cloudburst coming in the form of falling steelmaker shares, I'd recommend you carry an especially sturdy umbrella this week.
Over the last couple of days, two of the biggest names in steel put out a pair of earnings warnings that shook their market. First came Nucor (NYSE:NUE), whose prediction of flat year-over-year profits (and a comparatively worse 35% sequential drop) helped knock a good 7% off its market cap on Tuesday. Next, rival Steel Dynamics (NASDAQ:STLD) released news that was at once very similar to Nucor's, and completely opposite from it. Predicting per-share profits numbers almost identical to Nucor's, at $1 to $1.05 per share, Steel Dynamics' news represented about a $0.05-per-share walkback from last quarter's guidance. Viewed from another perspective, it showed a mirror image of the trend at Nucor: 65% improvement year over year, but roughly flat sequential earnings.
More important than the announcements' temporary effects on those stock prices, though -- and the follow-on effects on peers like Mittal (NYSE:MT) and U.S. Steel (NYSE:X), each of which now trades about 3% lower than before their rivals' warnings -- was the news itself. It's especially significant because of what it portends for the future, and for the different pictures of the steel market that Nucor and Steel Dynamics painted. Specifically:
Sheets and bars
Both companies cited continued strong demand for steel, but Nucor highlighted the markets for sheet steel and steel bars as commanding unexpectedly weak pricing.
Raw materials (scrap)
They're headed south. Steel Dynamics says its margins have benefited as "scrap prices have trended down." Nucor echoed this sentiment but spun it differently, grousing that "scrap prices have not decreased as much as anticipated" [emphasis added] and blaming its earnings warning in large part on margin pressure from these not-falling-fast-enough raw material prices.
Inventories and imports
Nucor blamed the rest of its warning on "continued high customer inventories and record levels of imports." The former decreases sales and hurts steelmakers' pricing power. The latter steals away sales by undercutting Nucor on pricing -- again hurting pricing power. Nucor noted that "domestic production cutbacks," such as Mittal's decision to idle two U.S. plants back in October, may help erase the steel glut, but only if we also see "a significant reduction of import volumes from current levels, particularly from China." Steel Dynamics echoed the sentiment, opining that "the market softness will be short-lived, provided that imports decline, allowing inventories to be worked down."
Guidance
Both companies expect 2007 to be a "strong" year for steel, which is certainly good to hear for steel investors. But this Fool can't help noticing that both companies verbally placed their fate in the hands of foreign competitors motivated to steal U.S. market share. In my opinion, things may be even worse than a couple days' worth of earnings warnings suggest.
You've heard from Nucor and Steel Dynamics. You've heard from us. Want a fourth take on the future of steel? Get it straight from the horse's mouth in our interview with Novamerican Steel's (NASDAQ:TONS) president Scott Jones.
Mittal is a former Motley Fool Inside Value recommendation. Discover Fool value guru Philip Durell's full list of active bargain-priced picks with a free 30-day trial subscription.
Fool contributor Rich Smith does not own shares of any company named above.
