A Slumping Global Steel Industry is Not Equal Across Regions
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Like many industries around the globe, the Steel industry has been hit hard by unstable economic conditions in different regions of the world. It is interesting though how certain bottoms can be seen (North America) and others have yet to see bottom (China). Let's take a look at where they are presently and what is influencing them.
The Steel Industry as a Whole
The steel and iron industry has struggled this year. The World Steel Association states that production of the metal was up an anemic 0.9% this year compared to a year ago. Hurdles like Europe and the drop in flat roll pricing have caused companies to struggle. This has been especially true for companies like Steel Dynamics (NASDAQ: STLD). Look at its production levels year over year this quarter. Net income was $44 million this year verses $99 million in 2011. Sales were also down $0.2 billion from the previous year. The decrease in flat roll pricing on the supply-side was caused by import pressure and an increase in domestic capacity. Thus margins decreased compared to 2011 in a time when historically high margins are achieved. US Steel (NYSE: X) saw the same affects in the industry. Net income fell 55 percent to $101 million, or 62 cents a share, from $222 million, or $1.33, a year earlier.
Not all is bad on the US Steel industry front though. On the bright side for the company, operating profit at U.S. Steel’s tubular segment more than tripled to $103 million. Shipments of the steel tubes used in drilling climbed 16 percent to 493,000 tons as the segment’s average realized price rose 9 percent to $1,706 a ton.
Nucor Corporation (NYSE: NUE) is another US Steel maker with falling profits while sales rise. This second quarter sales rose 1% to $5.1 billion, but profits fell to $112.3 million from $229.8 million the previous year. But the company is looked upon favorably by some analysts. Apparently certain steel companies can be a good defensive way to play a recovery since buying the steel is a sign of a beginning recovery. Scrap metal steel prices that dropped so steeply have leveled out. So we shall see which way the metal prices will move. But the corporate moves that Nucor has made:
- Recent Skyline acquisition (which we estimate to be accretive starting in 2013)
- The completion of the DRI plant which is on target for 2013
- The ongoing upgrades to existing mill capacity aimed at increasing the value added product mix
With these changes taking place analysts believe that the conservative third quarter may be the bottom of the earnings barrel and the company will start to become more profitable. It is interesting that while light can be seen at the end of the United States Steel Industry’s tunnel, it is not so in China.
China Does not Fare Well
Chinese steel mills struggled with defaulting on, or deferring shipments of iron ore in the millions of tons. The industry is so bearish presently; buyers are looking for spot discounts of ($10-$15) from the index-based price. Even larger discounts are being asked for when plan material is being inquired about. Large steel magnates that have offered loans to private individuals are no longer doing that. Private steel mills are running short on capital as prices for steel products continues to decline while sales keeps shrinking. Some have reported that the current situation is even worse than the economic crisis in 2008, and many private steel mills will go bankrupt in half a year if the industry gloom continues. Even the private steel trading companies are on the verge of collapse. Zhang Changfu, secretary-general of the CISA, told media earlier:
“Companies in the steel sector should be prepared for a long-term depression.”
A government bailout is what industrialists think is the apparent answer. When iron prices rapidly declined in 2008, the price bottomed at $60 per ton the following year. It was assumed the Chinese government would step in and would turn things around with some sort of stimulus and revive demand. Well, it happened and the prices again soared but since the peak of $200 a ton in 2010, policies have been tightening and the slide has brought the price under $100 once more. When the ore price fell, he reminisced, he and his fellow traders were not pessimistic because they correctly assumed that the Chinese government would step in with an economic stimulus to offset the crisis and so revive demand. So everyone is waiting for another government bailout while the government makes ominous announcements.
But the powers that be in China do not believe the bottom has been reached yet. There are more difficult times ahead and price stability is not guaranteed to happen. Macroeconomic regulations put into place have yet to bare fruit. These are the words of the government so what is the iron industry suppose to do? I guess pray! There are no guarantees.
It is not only China; the global steel industry continues to face the problems of economic slowdown. And it is this slowdown that restrains the growth of the global steel industry. Steel has reached a consensus to slow down economic growth for developed countries that undergo sovereign debt crisis. The emerging markets grow better, but inflationary pressures have raised and the risk of economic hard landing increased. These things all have a negative affect upon the steel industry.
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