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Steel surges but will US profits keep up?

1. sunnyb0y 15 april 2005 06:24

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   Steel surges but will US industry profits keep up?
   Thu Apr 14, 2005 04:59 PM ET
   
   By Steve James
   NEW YORK, April 14 (Reuters) - Predicting U.S. steel industry profits used to be easy: there just weren't any.
   
   Now, after two decades of swimming in red ink, steel posted combined 2004 earnings of about $7 billion and hopes are high for more of the same this year.
   
   But with so many imponderables, such as higher costs for iron ore, energy and other raw materials; uncertainty over demand in China; domestic capacity; the strength of the dollar; and whether prices will remain high, investors might just as well read the tea leaves.
   
   Wall Street analysts are equally divided on the prospects for steel makers as the first-quarter earnings period nears.
   
   UBS analyst Timna Tanners said major steel customers are more negative than in recent quarters. "Demand has disappointed versus a banner 2004, with smaller-than-expected orders on economic uncertainty," she wrote in a research note.
   
   "We believe a weaker second-quarter outlook could further deteriorate sentiment" for Nucor (NUE.N: Quote, Profile, Research) , U.S Steel (X.N: Quote, Profile, Research) , Steel Dynamics (STLD.O: Quote, Profile, Research) and Wheeling-Pittsburgh (WPSC.O: Quote, Profile, Research) , Tanners said.
   
   But Mark Parr, a steel industry analyst with KeyBanc Capital Markets in Cleveland, said the earnings outlook "is fairly robust in the second and third quarter.
   
   "As far as the U.S. market is concerned, there appears to be emerging evidence of improving supply discipline," he told Reuters.
   
   Charles Bradford, of Bradford Research/Soleil, said first-quarter results will probably be good for most companies but are likely to be lower than the last quarter of 2004.
   
   He said he believed the recent steel resurgence may have peaked with third-quarter 2004 results. "It will be very, very hard for companies to have a favorable comparison (this year) after the first two quarters.
   
   "The second quarter gets tougher and Q3, I don't think they can beat it. Last Q3 was higher than ever before in the industry," Bradford said.
   
   The companies themselves have been upbeat as recent results have outshone even their wildest expectations.
   
   Nucor, for example, said it expected first-quarter earnings of $1.70 to $1.90 per share, compared with 72 cents a year ago. The company said it also expects the second and third quarters to exceed the first.
   
   But a U.S. Steel said its first-quarter earnings would be hurt by higher raw material and natural gas prices and slightly lower shipments, even though realized prices for flat-rolled steel are expected to be little changed from the fourth quarter.
   
   And U.S. Steel President and Chief Executive John Surma caused a stir in the industry in February when he suggested 2005 might not be as profitable as 2004.
   
   "We have some optimism that 2005 will be a good year. Whether it's a better year or not compared to 2004 remains to be seen," Surma told Reuters.
   
   Asked about U.S. Steel's prospects, he said that in its core North American flat-rolled business, "we see having a good first quarter and a good second quarter, (but) it's hard to see much further ahead."
   
   The industry was spooked on Thursday when the Wall Street Journal reported that U.S. steel demand is beginning to slow, weakening prices and prompting production cutbacks.
   
   The American Iron and Steel Institute said domestic steel output has dropped almost 10 percent in the last year.
   
   But there was good news out of Washington, where a U.S. trade panel handed the domestic industry a victory by voting to continue duties and other restrictions imposed five years ago on imports of hot-rolled steel from Brazil, Japan and Russia.
   
   The U.S. International Trade Commission said there was a significant threat that lifting the measures could damage U.S. steel companies by exposing them to unfair low prices.
   
   Last month, more than two dozen members of Congress joined U.S. Steel's Surma and other industry and union leaders to urge the ITC to continue the protections.