Steel company Nucor (NYSE:NUE) reported first quarter net income of 10 cents a share versus a loss of 60 cents a share in the first quarter of 2009. Sales for the 2010 quarter were up 38% over the year ago quarter and 24% on a sequential basis. With steel being such a fundamental commodity, it's important to pay attention to results from companies like Nucor, aluminum giant Alcoa (NYSE:AA) and others to gage the overall health of the economy.
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On The Right Path
I doubt anyone will disagree that the economy is in much better shape than a year ago. Indeed, the demand for basic goods like steel and copper continues to improve. For the 2010 quarter, Nucor shipments increased by 48% although prices retreated by 7%. Even more significant was the marked improvement in utilization rate in the company's steel mills. In the first quarter of 2009, utilization was 45% as steel producers shut down production in order to combat a precipitous drop in steel demand and steel prices. In the fourth quarter of 2009, utilization was up to 58%, and the first quarter of 2010 continued to see significant improvement with a 73% utilization rate. Such numbers are a sign that demand is showing signs of improvement, and demand is a great sign of an gradually improving economy.
Slow is Better Than Nothing
While I wouldn't expect Nucor's steel volume and utilization rates to reach the peak levels of 2007 and early 2008 anytime in 2010, the business climate is certainly improving. An economic hiccup could slow things down a bit, but considering the significant reduction in production over the last year, overall inventories have declined substantially. So any gradual improvements in the economy should favor steel producers going forward. A strong signal of how the industry is doing will come later this month when the world's largest steel company, Arcelor Mittal (NYSE:MT), reports results. (For more, see Earnings: Quality Means Everything)
What concerns steelmakers more than the state of the economy at this point, however, is the uncertainty over iron ore prices. Indeed AK Steel (NYSE:AKS) shares recently tumbled when it told analysts that its future earnings numbers were clouded by the uncertainty over iron ore prices. The company assumes prices will rise by 30% as iron ore producers are now selling supply at spot prices versus long-term contracts.
Clearly, the steel industry is in much better shape than it was a year ago. While the uncertainty over iron ore currently hangs over the industry, continued gradual demand and a firming of steel prices would clearly help offset that issue. Investors should keep close watch on the operating performance of Nucor and others. (For more, see 10 Tips For The Successful Long-Term Investor)
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