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

Includes: NUE, X
by: Andrew Snyder

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