Tickers in this Article: STLD, NUE, AKS, PKX, CMC, MT, TC
Every commodity and resource boom is a little different, but it is not uncommon to see divergent trends between materials. Materials like copper and iron ore can have their runs only to be followed later by the likes of steel and aluminum. With steel prices starting to firm up, and industrial conditions staying strong, now might be a good time to consider the likes of Steel Dynamics (Nasdaq:STLD).

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A Solid Open to the Year
Due in part to strong pricing, Steel Dynamics surpassed the average revenue estimate for the quarter. Investors should note, though, that there was a very wide range of published estimates ($1.1 billion to $2.2 billion). In any case, revenue rose nearly 30% from last year and almost 32% sequentially. Average selling prices rose 21% from the year-ago level, and more than 18% sequentially, while shipments rose about 10% on a sequential basis. (For more, see Steel Cycle Looks Good.)

The company's cost and profit performance was also stronger this time around. Scrap costs were higher, but operating efficiency handily surpassed that increase. Gross margin jumped more than a full point from last year, and nearly six full points from the fourth quarter. Operating margin improved even more - up more than 160 basis points from last year and more than tripling from the fourth quarter.

Outlook Seems to be Improving
Management seems a little cautious, but that's par for the course in this industry. Looking around, there are ample positive signs for steel demand. Auto production is stronger, and the railroads are reinvesting in their capital infrastructure (and rail is a significant market for Steel Dynamics).

Along those lines, prices are on the upward march. Nucor (NYSE:NUE) recently announced that it was keeping rebar prices flat for the third month in a row, but companies ranging from AK Steel (NYSE:AKS) to POSCO (NYSE:PKX) have been hiking prices and surcharges. Along the same lines, companies like Commercial Metals (NYSE:CMC) are seeing higher demand and pricing for recycled metals. (For more, see Metal Stocks For The Rest Of 2011.)

Better Things to Come?
With this quarter, Steel Dynamics is showing shipment and profit-per-ton levels that have not been seen in almost three years - just before the economy started to fall apart. Keep in mind, though, that commercial construction is still moribund, and that has traditionally been a major consumer of steel from mini-mills. Assuming that the economy continues to rebound and reattain past levels of production, that should make for a solid pricing environment for Steel Dynamics.

Steel Dynamics also has room for internal improvement. Shipments from the company's Mesabi Nugget facility have picked up, and this facility allows the company to improve the quality of its production at a cost-effective price.

The Bottom Line
Investors have no shortage of options when it comes to playing a rebound in steel. Mini-mills like Nucor and Steel Dynamics are probably better options for more patient investors who do not like to trade on every anticipated wiggle or waggle in the market.

Although it may seem counter-intuitive, the improved operating efficiency of mini-mills often works against the stocks during improving market conditions. Instead, more traditional operators like Arcelor Mittal (NYSE:MT) and U.S. Steel (NYSE:X) see even better operating leverage and typically better stock performance. Along the same lines, companies that provide valuable inputs to steel, molybdenum companies like Thompson Creek (NYSE:TC) and zinc miners like Nyrstar and Vedanta, can outperform in those markets. (For more, see ArcelorMittal And The Steel Catch-Up Trade.)

The Bottom Line
Still, Steel Dynamics is a quality steel company that still has room to run before bumping into prior ceilings for revenues, profits and share price. By no means is this a buy-and-forget type of stock, but investors looking to play an extension of the economic recovery might find this stock offers a good balance of reward and risk.

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