Wednesday, April 27, 2011

Schnitzer (SCHN) (STLD) (GNI) (SID) Close Mixed on Growth, Cost Concerns

The steel industry, even with some strong recent quarters, looks weak, as over the next five years it is expected to grow at a pace of about 5 percent or less annually, putting downward pressure on steel producers like Steel Dynamics Inc. (Nasdaq:STLD), Great Northern Iron Ore Proper (NYSE:GNI), Companhia Siderurgica Nacional (NYSE:SID) and Schnitzer Steel Industries (NASDAQ:SCHN), which closed mixed on Tuesday. And that's the more positive outlook by the majority of analysts. Many don't think growth will even happen at those modest levels.

A majority of steel companies are being forced to raise prices on their products in order to protect margins and earnings as the price of inputs and commodities rise.

That's not to say steel demand is falling, because it's not. But rising demand doesn't guarantee rising profits, as the industry is experiencing. A number of weak economies around the world could cut also into demand if steel prices and products rise to prohibitive levels.

Of course there a large varieties of companies with steel exposure, and each segment of the sector can represent strengths or weaknesses. So each unit and company will have to be watched closely for performance of course.

There's no way to spin the outlook for the steel industry in a positive manner. The industry will struggle for years even in the midst of strong demand as it attempts to work through the balance between steel demand, rising inputs, and ability for companies and countries to afford price increases from producers.

Some winners will emerge, but over time it's not easy to pick any one that's going to stand out. Some have looked to larger companies who may be able to navigate through the higher costs better, but we'll see if that's the case, as it isn't always that simple because of the wide variety of products and costs and pricing power with each one.

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