Steel Industry Profits: Eye on U.S. Steel, Nucor

For the past two years, unless you had scrap metal nailed down, locked up, dry walled in, or intruders fenced out, it was going to get stolen. The commodities market was so red hot, thieves were taking anything they could find. Gutters, wiring, and even street lights were being stolen. Not anymore.

Crime rates have fallen, but it has little to do with added police patrols or the nation’s criminal justice system. Less stuff is turning up missing because it is worth less. Copper scrap prices have plunged. Aluminum is worth far less. And thanks to a global slowdown in growth, steel prices have fallen and are expected to drop even further.

It is creating an investment opportunity.

With the construction industry at a standstill, it is no wonder steel orders are drastically lower. Less re-bar is needed. Fewer I-beams are necessary. And far less pipes are manufactured. Multiplying the effects of the problem is the inventory reduction process so many manufacturers have initiated.

With the anticipation of a prolonged economic slowdown, few companies want to have expensive raw materials stockpiled in their warehouses. They want to have as little product on hand as possible, so they can restock when prices are even lower.

Value-Based Buying

For U.S. steelmakers, the economic shift will have a dramatic impact on profitability. Companies like United States Steel (NYSE:X) and Nucor (NYSE:NUE) have already seen their share prices plummet.

Shares of U.S. Steel were trading for as much as $196 in June. Today, they are trading for just $87 and are expected to drop even lower.

Nucor shareholders have felt a similar drop, with shares plunging by nearly 50% in just a few months.

Fortunately, the plunge is nothing that was not anticipated for the past few years. When the global economy soars, so do steel companies. When the action slows, the same companies go into a slowdown.

Investors must be aware of this cycle and realize steelmakers are ahead of the curve. Their share prices will reach a bottom before the economy does. The phenomenon is a product of an efficient market. It allows smart investors to make big money.

If you think the economy is close to a bottom, which is an argument that could be made, investing in the steel industry would be a good idea.

I think we have a bit further to drop. So buying is not advisable, just yet. But keep companies like U.S. Steel and Nucor at the top of your watch list. As soon as this mess starts to clear, they will present profitable buying opportunities.

Disclosure: none

Comments

[Urbane Gori...:]

Thanks for the article. In particular, thank you for being bullish on an industry while advising to hold off buying till the price drops. Too many articles seem to encourage buying a stock which is clearly in a downtrend.

jegan ;-)

2008 Sep 30 02:44 PM

[steel magnet:]

I agree it would be a good opportunity, in this market cycle, to buy "if" this mess clears up. Why are you considering X and NUE? Can you give your insight on whether a strong dollar will help or hurt domestic steel?

2008 Sep 30 03:58 PM

[User 276210:]

yes

2008 Oct 09 01:23 AM

[Bama Belle:]

NUCOR is a diversified company. The stock may have not hit it's final low yet. But this I know, buy now, buy soon. NUCOR will rise again. They are a rock solid company. Everyone still needs the Steel. The demand will rise again, as will this stock.
Bama Belle

2008 Oct 11 11:44 AM

[User 282196:]

Nucor has gone into lean manufactoring mode until the stock market calms down. This is not unusual compared to 1982 market lows during the Reagan years. Nucor is a strong diversified company and has not had a year in which they have not paid dividens since 1969. Nucor is set up to be a survivor in global markets and is experienced in lean manufactoring in times of crisis. You can not go wrtong buying Nucor stock and now is the time to buy.

Steelman_12002

2008 Oct 19 07:55 PM