Nucor: 'The Segment of the Economy We Serve Is Not Improving'

We do not believe that real demand…has really improved much since the end of last year, and we don’t see things in the economy from a flat roll standpoint or long product standpoint whether you’re talking automotive, construction, housing, non-residential construction, oil county[sic] goods or what have you, we don’t see that there is a real uptick in the demand…despite what a lot of people like to talk about in the press and maybe Wall Street, the segment of the economy that we serve which is the real core of the economy is not improving. – Dan Dimicco, Chairman, Chief Executive Officer, and President, Nucor Corporation (Q3 2009 Earnings Call, October 22, 2009)

Steel producer Nucor Corporation (NUE) typically includes colorful commentary on economic conditions in its earnings conference calls, and last week’s gathering did not disappoint. Dimicco in particular described an American economy that remains fragile where “…real demand is in for a long slow recovery.” (All quotes from Seeking Alpha transcripts). These dour expectations stand in stark contrast to the more upbeat tone of The World Steel Association who forecast that global steel demand in 2010 would recover to 2008 levels. Since NUE only exports a small portion of its total shipments – 10.5% year-to-date and 12.5% in the third quarter – it is not benefiting much from the more robust demand that appears to exist outside the U.S.

The news from NUE also stands in stark contrast to the upbeat headline news coming out of many big-cap technology companies like Intel (INTC). If we assume that NUE’s bad news about the American industrial economy represents what is happening to the core of the economy, then even those companies enjoying good results today are headed for sharp disappointment in the coming quarters, at least in their U.S. businesses.

NUE partially balanced the bad news about the economy with the good news about its own performance given the poor economic conditions.

I will start with the good news:

1. “We have maintained Nucor’s strong financial position without laying off a single Nucor employee through this unprecedented downturn” (part of a no-layoff policy for over 40 years.)
2. “Third quarter steel mill capacity utilization….third quarter rate of 69% is up from 46% in the second quarter…utilization rates were up in all products, but most dramatically in sheet and plate.”
3. “Third quarter 2009 total steel shipments and production increased by more than 40% from second quarter 2009 levels.”

And now, the bad news. (Note well that customers have taken full advantage of very short lead times at steel mills by delaying orders as long as possible. This behavior has greatly reduced visibility into customer demand and increased uncertainty in forecasts).

1. “…there has been no meaningful real improvement in end-use demand…Our expectation is for no significant improvement in end-use demand over the balance of this year.”
2. “Steel demand remains weak across all product…”
3. “We may have experienced a peak in pricing at the end of the third quarter and beginning of the fourth when it comes to flat rolled, whether it be hot rolled, cold rolled, or galvanized.”
4. “The so-called stimulus has been extremely disappointing from the standpoint of steel consumption and infrastructure work, and whatever has been ballyhooed in the press has really been of insignificant nature, and our customers will second and third that.”

Dimicco also warned analysts that the cash for clunkers program only provided a temporary boost to demand for cars, and “…it is already apparent that heavily indebted consumers are again staying away from the automotive showrooms.” Finally, Dimicco stood on his soapbox to plead with the government (Democrats and Republicans) to focus more on job-creation. You can watch him discuss this issue in detail in an interview with Jim Cramer on Mad Money:

The difficulty in NUE’s business is reflected in a stock that is now down 12% on the year (the S&P 500 is up 17% this year). While NUE remains trapped in an 11-month trading range, the stock has experienced selling intensity following last week’s earnings release not seen since the February/March lows. The stock now looks set to go even lower over the next several weeks. I have posted the current chart below:

NUE remains stuck in a multi-month trading range

*Chart created using TeleChart

Be careful out there.

Full disclosure: no positions

Comments

[optionsgirl:]

You are right, NUE is falling. For those of us who are thinking industrials look good for the 4th quarter, here's the flip side.

Additionally, they made a statement regarding climate control legislation a few days ago. Here it is:
News Story
US Steelmakers Say Senate Climate Change Bill Is Unacceptable
4:31 PM EST October 27, 2009

DOW JONES NEWSWIRES

U.S. steelmakers warned Tuesday that the Senate's revised climate change bill would lead to further erosion of America's manufacturing base unless significant changes were made before it was enacted.
"Unless the Senate makes important modifications in the areas of emission allowances, energy cost impacts and border adjustment, U.S. steelmakers and our workers will be at a significant competitive disadvantage in the global marketplace, which will result in extensive job loss and emission migration to overseas markets," said Thomas Gibson, president of the American Iron and Steel Institute, in a statement.
After months of delays, Democratic Sens. Barbara Boxer of California and John Kerry of Massachusetts unveiled Friday a more detailed version of their climate legislation. The version of the bill, which would seek to cut greenhouse-gas emissions by 20% below 2005 levels by 2020, includes new provisions intended to hold down costs to consumers and certain industries.
Democratic Sens. Arlen Specter of Pennsylvania and Amy Klobuchar of Minnesota have worked to increase the percentage of allowances available to energy-intensive industries in the first two years of the cap-and-trade emissions program and for creating an allowance reserve for intensive energy industries, but Gibson said it wasn't enough.
Steelmakers would still face stiff competition from their peers who produce steel in countries where environmental rules are less stringent; U.S. steelmakers would face a barrage of cheap imports as a result, he added. Furthermore, the cap-and-trade emissions program would lead to higher energy costs for steelmakers since utilities and energy companies are likely to pass on the additional emission costs to their customers.
"The Senate's revised Boxer-Kerry bill does not contain sufficient allowances to address the costs associated with emissions that our industry would face under the bill," Gibson said. "In fact, the Senate bill provides fewer allowances than in the" House of Representatives bill.
He said much more work needs to be done to make the bill acceptable.
"If we don't get climate legislation right, the economic burden would be borne by American manufacturers and American workers," Gibson said.
The cap-and-trade provisions of the House climate bill would cut the nation's gross domestic product by as much as 0.75% by 2020 and between 1% and 3.5% by 2050 and lead to substantial job losses in energy-intensive industries, the AISI said, citing comments from Congressional Budget Office Director Douglas Elmendorf who testified before the Senate Energy and Natural Resource Committee.
AISI's members represent about 75% of U.S. and North American steel capacity and include steelmakers such as the US Steel Corp (X) and Nucor Corp. (NUE).

Company Web Site: www.steel.org

-By Alex MacDonald, Dow Jones Newswires; 44 20 7842 9328; alex.macdonald@dowjone...

Nov 02 01:19 PM

[Jason Court...:]

I am a Nucor employee in Hertford County NC. Those numbers for the China sales is unbelievable! This is exactly the reason the US is seeing job losses, because companies would rather save a few dollars and buy cheap imports instead of upping the demand for US made products! By buying US products, we would create US jobs! It just doesn't make sense to me and I can't believe that the government isn't doing anything about it. When the "Buy America" thing was going on and China argued that it was against trade agreements, it made me sick! The biggest reason is because of China's currency manipulation. If anything, we should argue that China is faulting on fair trade. We should stop trading until they straighten up their acts! Im getting a little frustrated now so I'm going to publish what I have written and go, but thanks for the good words about Nucor and thanks for buying, you wont regret it!
-Jason Courtright

Nov 02 01:29 PM