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August 29, 2011 Dear Friend,
We raised our investment rating for Nucor
to Neutral from Underweight because its shares fell approximately to our $35
price target and because the $210 per ton fall in U.S. hot-rolled sheet
prices since March 2011 has put U.S. selling prices well below prices
abroad. The August 26th Nynex hot-rolled sheet future near $665 per ton
equates to about $150 per ton below the $620 per short ton August 26th close
of the LME steel billet futures, after adjusting for the "value-added" of a
rolled product over a semi-finished steel product. We believe most U.S.
consumers are willing to pay up to a 10% premium for prompt delivery,
quality assurances and convenience of local steel, and that Nucor will enjoy
very large selling price rises in the December-January period as "the ground
freezes" and scrap steel prices peak seasonally. We believe Nucor faces long
dormant nonresidential construction end markets, firm scrap steel costs and
several litigation risks, but that the pending favorable near-term steel
price reversal should be the stronger favorable force in the coming quarter
or two.
The Nucor upgrade to Neutral is similar to and a "follow on" to our August 2, 2011 upgrade of U.S. Steel to Overweight from Neutral. We expect U.S. Steel to be a better trade because it is less closely tied to the weakest construction markets, U.S. Steel owns and produces its own iron units and U.S. Steel defends fewer antitrust litigations. Separately, in an effort to fine-tune our earnings estimates, we studied whether steelmaking converting costs have risen or fallen from 2008 peak or record levels. A $50 per ton rise or fall in the nonscrap conversion costs could be a large swing factor impacting margins. In fact, Nucor’s nonscrap conversion costs per ton rose $55 per ton in 2009, which we attribute to the company’s “no layoff” and “no plant shutdown” policies. Commercial Metals Eastern European nonscrap conversion costs rose $141 per ton in 2009, where it had marketing and operational issues. Steel Dynamics nonscrap conversion costs fell $81 in 2009 and Commercial Metals nonscrap conversion costs fell $133 per ton in its U.S. plants in 2009.
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n 2010 these trends reversed, where Nucor’s nonscrap conversion costs fell $40, CMC’s European costs fell $114, Steel Dynamics’ rose $28 per ton and CMC’s U.S. costs rebounded $12. Thus, in 2010 Nucor’s nonscrap conversion costs were $15 below 2008, CMC’s European costs were $27 below 2008, Steel Dynamics’ unit costs were $53 below 2008 and CMC’s U.S. costs were $121 per ton below 2008 nonscrap conversion costs. Thus, it is conceivable that Nucor or CMC in Europe have higher nonscrap costs of goods sold per ton in 2011 than 2008, and the regression lines in Figures 1 to 4 for all four companies suggest a general long-term cost uptrend. John C. Tumazos, CFA |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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