Steel price rebound bodes well for this stock

The metal's oversupply recently turned into a shortage, helping this well-known name.

By TheStreet Staff Jul 8, 2013 1:44PM

Arrow Up (© Photodisc/Photolibrary)By Marc Courtenay


There's been a decided turnaround in the price of steel and the fortunes of companies that produce and sell it.


In the past few months, a series of what Lemony Snicket might call "unfortunate events" has helped boost steel prices more than 10% to levels we haven't seen since the beginning of the year.


Starting with a strike in Ontario and two blast furnace outages in Ohio and Brazil and kaboom! There's suddenly a shortage of this essential metallic product. It's not a small shortage either.


An estimated 5 million tons of annual capacity has gone away. That's around 4% of the total U.S. supply. Yet, it's not all bad news, especially if you own shares of Nucor (NUE).


When you look at the one-year chart below you'd probably conclude that if you bought shares of NUE late last year you may just be plain lucky that they're where they are right now!

NUE data by YCharts


Do you see what I see? The year-over-year diluted quarterly earnings-per-share (EPS) line doesn't correlate well with the share price of NUE. Yet, that is true with many other companies, so don't worry.


The current price-to-earnings (P/E) ratio of almost 32 is offset by the forward (one-year projected) P/E ratio of less than 13. Analysts are forecasting NUE's EPS will more than double in 2014, from 2013's $1.72 to around $3.60.


With steel prices popping like organic popcorn of late, those estimates might be accurate. A worldwide boom in infrastructure redevelopment and other structural replacement programs are likely to help.


In the week past week the price of benchmark hot-rolled steel coil, used to make items including autos, perked upward to $630 per ton. That's an increase from the May 28 price of $570, which was the low for the year.


This amazing turnaround in steel's pricing occurred while the news media reported what appeared to be an insurmountable surplus of 200 million tons of excess capacity. Go figure!


This was due mainly to slowing growth in China and the ongoing economic malaise in the eurozone. The causes of the sudden shortages will eventually go away and steel buyers are beginning to worry.


Here's what they worry about. If they buy steel when prices are high they may get stuck with excessive inventory they'll have to sell at a loss if prices and the economy were to suddenly tank.


Industry sources have been saying the current causes of the supply shortage and the spiking price of steel may continue into the fourth quarter of this year.


An example of why is the situation in Ontario, Canada, at a mill owned by U.S.Steel (X).


The company has an ominous "sell" recommendation from the research department at TheStreet.com.


U.S. Steel's share price hasn't done as well as Nucor's, as you can see in the comparative chart below. It's interesting to notice the similar share price patterns for both companies.

X data by YCharts


At U.S. Steel's Lake Erie, Ontario, mill, 1,000 workers are now in the third month of a labor lockout after management failed to negotiate a new contract. This is a mill that can produce over 2 million tons of steel per year, so this strike is a big deal for the American steel buyers who are the main customers.


Some of the steel price jump can be attributed to seasonal factors. Summer is when a lot of steel is used because it's the peak building season. Another positive price factor may be that U.S. steelmakers may see diminished overseas imports.


Earlier this week, a group of American steel producers filed a trade complaint with the International Trade Commission over imports from nine countries of various and sundry steel products. The complaint is mainly about foreign steelmakers receiving unfair subsidies that enable them to sell below cost.


Getting back to NUE, it will report earnings on Thursday, July 18 before the market opens. It will be followed by a live conference call with Chief Executive Officer and President John Ferriola.


The Nucor event will be available on the Internet on July 18 at 2 p.m. ET. It should be interesting to hear how the company addresses the benefits and challenges of steel's pricing rollercoaster.


At the time of publication the author had no position in any of the stocks mentioned.


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