When a cyclical industry goes through a downturn, many companies hunker down and just try and hold on through the hard times. Some of the strongest companies, however, use the opportunity to make investments and grow stronger.
Two of those such companies in the steel industry are Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD). Supported by strong balance sheets, low-cost operations, and unique work cultures, both continued on with growth projects that have them set up to take advantage of a recovering economy. Any infrastructure investments that may materialize with the next administration and Congress would only add to the already strong level of bookings.
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Both Steel Dynamics (SDI) and Nucor continued to run operations throughout the pandemic, and remained profitable doing so. Both companies surpassed analyst expectations in recent third-quarter earnings reports despite disrupted customer operations, a slowdown in the energy sector, and the hard work needed to keep teammates safe and productive.
Though some capital spending was throttled back amid the economic uncertainty caused by the pandemic, both also forged ahead with major projects that will set them up for more success down the road.
SDI commented in its earnings release about its new state-of-the-art sheet mill in Sinton, Texas. "Construction is going well and remains within our expected project cost of $1.9 billion, with plans to commence operations mid-year 2021," the company reported. Nucor, which had announced more than $3 billion in growth investments prior to the pandemic, confirmed that its new state-of-the-art plate mill in Brandenburg, Kentucky remains on track to begin operations in 2022. Nucor has about $2 billion being invested in Kentucky between the plate mill and a sheet mill expansion at its Gallatin facility that will be completed in 2021.
Nucor and SDI both have said that non-residential construction has remained strong throughout the economic downturn, and that automotive demand has picked up since those customers restarted operations. While energy sector spending remains subdued, the operating assets of both companies are doing well even with those new plants yet to start producing.
Nucor's steel mills operated at a strong 83% utilization rate in the third quarter, up from 68% in the second quarter. SDI similarly reported a rate of 85% utilization. The future capacity coming online will be in position to supply domestic infrastructure projects that are expected to materialize. As Nucor CEO Leon Topalian said in the third quarter earnings conference call "our leaders in Washington must understand the need to move forward with a significant infrastructure spending bill that includes strong 'Buy American' provisions."
Another tailwind that could help both SDI and Nucor is consolidation in the sector. Iron ore supplier Cleveland-Cliffs (NYSE: CLF) has transformed itself by acquiring its customer AK Steel as well as ArcelorMittal USA, the U.S. assets of global steelmaker ArcelorMittal (NYSE: MT).
This makes Cleveland-Cliffs the largest flat-rolled steel producer in North America, but also could help reduce capacity if the company decides to shutter some overlapping, inefficient operations.
The biggest winners of any consolidation will be the most efficient, lowest-cost producers -- Nucor and SDI. These two industry leaders also have the best balance sheets among their peers.
Paid to wait
The major projects that SDI and Nucor have going will take time to ramp up to full production once they start up. And any big infrastructure spending will also take time to get under way, even once approved. If no federal-level infrastructure bill materializes, these projects will still gain business from smaller, local-level projects, too.
But shareholders in both companies collect dividends along the way. Nucor, in fact, is one of the elite Dividend Aristocrats, as it has increased its base dividend for 47 consecutive years. Both stocks currently yield over 3%.
So investors in these two companies get nice income along with expectations that recent investment projects will pay off in the future. Add in the best balance sheets in the industry and the potential for needed infrastructure spending, and one can see how these leading steelmakers will thrive after the election.
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