No End in Sight for Steel Profits

John Wolz

Once dismissed as economic dinosaurs, steel companies are outshining nearly every other sector of the stock market. Steel stocks, including Nucor Corp., U.S. Steel and Allegheny Technologies Inc., have jumped from 30% to 50% recently, according to Bloomberg News.
The reemergence of steel took a long time, but demand has soared as the economies of the U.S., Europe and China have improved. The recent consolidation of the domestic steel industry means fewer companies are now competing for a growing market.
Over the last five years the number of major steel producers declined from eight to three. Since 1999 there have been 40 bankruptcies and about 17 liquidations. Those steel producers who survived the shakeout emerged leaner and more cost-efficient. The industry reorganization eliminated 54,000 jobs and trimmed pension and health care benefits for much of the remaining workforce. In addition, capital costs were reduced.
Those conditions have dramatically improved profits for steel manufacturers. Nucor saw its quarterly net income increase from $8.4 million in the second quarter of 2003 to $251.4 million in the same period this year, with a corresponding sales increase of 82%, Nucor”s stock price reflects these gains, rising from about $50 a year ago to about $80. Nucor recently said that with steel prices rising and demand strong it expects third quarter earnings to be 20% higher than analysts” forecasts.
The steel industry also got a boost from the weaker U.S. dollar, which makes foreign steel more expensive relative to domestic steel.
Three years ago the U.S. imported about one-third of its steel needs, but imports have declined to about 25% in the past year. In essence, the weaker dollar has functioned as an unofficial trade barrier.
Some analysts have questioned whether momentum will continue, given the steel industry”s uneven history of earnings, demand and labor relations. Others, such as stock analyst William Selesky, predict steel profits will continue.
“It all comes down to global demand,” Selesky noted. “If demand keeps rising, they can charge a better price. It”s as simple as that.” \ �2004 FastenerNews.com