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It's interesting to note that countries worldwide are scrambling to build new steel mills. It's been reported that by 2016, approximately 100 new mills will be coming online globally. Some of the countries where mills will be added include Bolivia, Peru, Ecuador and Vietnam. The governments of these countries, uniformly, see adding steel mills as a way to cut imports, be able to provide steel to their country's manufacturers and stimulate their industrial development.

Nucor Corp. (NUE), America's second largest steel producer has highlighted the need for industry consolidation and a reduction of global steel manufacturing capacity, as well as what the company sees as problematic additions to global manufacturing capacity. The Wall Street Journal recently quoted the company's CEO, Dan DiMicco as stating, "You see people wanting to build new facilities all the time, all over the world."

This global expansion of steel manufacturing capacity is taking place in what has been a sluggish market for steel since the global economic crisis of 2008. The annual global demand for steel is currently 1.5 billion tons, with an estimated global capacity of 1.8 billion tons. While it's easy to look at these numbers and come to the quick conclusion that there is excess capacity, that there is a need to consolidate the industry, and that some mills need to be closed, a more in-depth look is beneficial.

To a large extent, global demand for steel has been depressed for one main reason. Since the global economic crisis of 2008, economic growth and economic activity worldwide has slowed. This has impacted industrial development, manufacturing and the construction industry, all of which are major users of steel. A substantial increase in global economic activity will increase the demand for steel, and utilize some of this excess capacity.

The top five global steel producers only control a total of slightly over 18 percent of the world's steel supply. There is no question that the industry is ripe for consolidation. The fractured state of the global steel industry is due to the industry's historic role as a primary engine of a country's economic development. Almost every country that became industrialized developed its own steel production capacity. With their new planned steel mills, this is what Bolivia, Peru, Ecuador and Vietnam see as a path to their countries economic development as well.

A Quick Look at Nucor Corp.

Nucor Corp., the second largest U.S. steel manufacturer, has been pushing for consolidation as the American demand for steel has been depressed. This decrease in demand is due to a number of factors, including America's low growth economy and lackluster American manufacturing, both of which have impacted the demand for steel. But, a bright spot in U.S. manufacturing has been America's auto industry. While the U.S. auto industry is no longer the world's largest, having forfeited the title to China, auto manufacturing is a major user of steel.

It's interesting to note that Nucor is trading at a P/E of 26 on a trailing twelve months basis, especially when you take a look at its recent financial performance. But, the company's forward P/E of 14.13 for the year ending December 31, of 2013, more realistically highlights the company's current and likely future financial performance, and is a better metric.

Nucor's net sales for the three months ended September 30th were $4.8 billion, compared to $5.25 billion for the same quarter last year. For nine months, its net sales were $14.98 billion, compared to $15.2 billion for the first nine months of last year.

Earnings are another matter. For the three months ended September 30th, the company's earnings were $191 million, compared to $284 million for the same three month period of 2011. For nine months Nucor's earnings were $633 million, compared to 1.02 billion for the same nine months last year. The recent decline of revenues and earnings can cause one to wonder whether the company should justify a P/E of 26.

A Quick Look at China's Steel Industry

Any discussion of the global steel industry quickly brings one to China, a country which accounts for approximately 46% of global steel output. There is a lack of good data as to the number of Chinese steel mills, but estimates range from 600 to 800, which hints at the need for consolidation as well.

Since 2011 the Chinese government has taken action to close old unproductive and polluting mills, including those who aren't energy efficient. The Chinese government has indicated that it wants the country's top 10 steel producers, who currently produce around 50 percent of the country's steel, to supply 60 percent of its steel by 2015, and 70 percent by 2020.

One has to wonder who the "acquirers" in China will be as the consolidation of the country's steel industry proceeds. Right now I'm focused on one company, China Industrial Steel Inc. (OTC:CDNN), as a possible beneficiary of the consolidation of the country's steel industry.

China Industrial Steel, which is a U.S. company, through its Chinese wholly owned subsidiary produces and sells steel billet, steel plate and steel bar primarily for the domestic Chinese market. The Company has four production lines on approximately 1,000 acres in Handan City in Hebei Province.

The company's steel plate, steel wire and steel bar are primarily used in the construction of buildings and in large scale infrastructure projects, including roads and bridges. Steel plate is also utilized by the ship building industry, and in the construction of pipelines. The Company also manufactures and sells steel billet, a semi-finished product, which is utilized as a raw material by other steel manufacturers.

Of note is the fact that China's steel industry and specifically China Industrial Steel are likely to be direct beneficiaries of the country's most recent economic stimulus, which focused on investments primarily in infrastructure.

China Industrial Steel is definitely a smaller capitalization company, with a stock market capitalization of $87 million. The company has a current P/E of 7.

The company's revenues for the first nine months of this year were $475 million, with a net income of $2.8 million. The revenues and net income were substantially down from the comparable period of 2011, reflecting the overall softness of the Chinese economy earlier this year.

But as China's economy continues to improve, the steel industry will be a likely beneficiary. As the Chinese economy continues to improve, while perhaps a speculative conclusion, it's also a possibility that China Industrial Steel returns to, or exceeds its 2011 levels of revenues of $823 million and net income of $45.8 million.

Conclusion

There is no question that a major consolidation of the global steel industry is likely.

It's uncertain how Nucor with its huge U.S. operations will fare as global consolidation of the steel industry progresses.

There is also no certainty that China Industrial Steel will be one of the acquirers.

But, when one compares the P/Es of both companies, with Nucor's P/E being 26, and China Industrial Steel's being 7, there is a certain attractiveness to China Industrial Steel as an investment. When you add in the factor of China's improved economic growth, which is projected to be 8.4 percent for the fourth quarter of this year, it makes the consideration of an investment in China Industrial Steel as a way to participate in the country's continued economic growth compelling.

Caution

There is no question that investing in smaller-capitalization companies, as well as investing in companies in emerging markets, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk.

China Industrial Steel is definitely a smaller-capitalization company with operations based in an emerging market, specifically in China. But the company is a U.S. reporting issuer, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Source: A Tale Of 2 Companies - Consolidation In The Global Steel Industry