Economic boom boosts steel comeback
Steel companies, having broken out of years of decline, are forging ahead to new profits. From 1982 to 1986, United States steel companies lost $12 billion. But such things as capacity cutbacks, modernization and streamlining, a weakening of the dollar that has cut into foreign competition, and a boom in the national economy have combined to give steel a comeback.Skip to next paragraph
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``The steel industry is experiencing its strongest markets since 1968, owing to the industrial thrust in the economy,'' says J. Clarence Morrison, an analyst with Dean Witter Financial Services Inc.
In fact, the boom in steel is linked to the boom in the broader economy, says Christopher Plummer, the director of the US and world steel service at the WEFA Group in Bala-Cynwyd, Pa.
``The boom is largely affecting the capital-goods sector - equipment, machinery, that sort of thing,'' he says. ``And anytime you have that type of an economic boom occurring, especially favoring those sectors, that's going to greatly benefit the steel industry. And we saw something similar to this happen in the late '70s and 1974. Again, the 1974 boom was very similar to this in that it was a capital-goods-sparked steel boom.''
Mr. Plummer says the future outlook for steel stocks depends on the strength of the economy as measured by such things as overall growth of industrial production and the gross national product. WEFA economists, he says, expect the dollar to remain very competitive for some time.
``Fundamentals strongly suggest that - that the dollar needs to be kept at a stable and low level compared to other currencies in order to reduce the trade and budget imbalances and that that is in fact the most likely scenario in our long-term forecast,'' he says.
That's good news for the steel industry, Plummer maintains.
``Our macroeconomists are seeing a switchover from a consumption-led economy in the early part of this current expansion to what is now moving towards an investment and export-capital-goods-driven economy.''
That explains why the stock prices of companies like Bethlehem Steel, which have a greater exposure to capital-goods markets, have been increasing at a relatively faster rate than those of some of the other companies, he adds.
The strong markets have helped the US steel industry. Consider the staggering bursts in second-quarter earnings this year over the same period last year for two of the Big Six: Bethlehem Steel Corporation, up 222 percent, and Inland Steel Industries Inc., up 357 percent.
The four others posted gains, too, ranging from 12 to 58 percent.
``The industry has engineered a massive turnaround since the beginning of this decade and now is enjoying operating profits of an average of at least $60 a ton in the nation, as compared to deficits for a number of years,'' says Mr. Morrison.
By this rule - operating profits per ton, the standard measure used to analyze the steel companies - Inland and Bethlehem once again shine, with Inland up to $78 per ton from $43 in the first quarter, USX at $70 from $55 in the first quarter, and Bethlehem up to $65 from $38 in the first quarter.
``You have to remember that all metal stocks are cyclical stocks, and therefore there is a time to purchase them and a time not to,'' says Morrison. ``At the present time we continue to recommend Inland Steel and we are favorably disposed to the others. We haven't got a recommendation on them, but they're interesting trading vehicles.''
The immediate future of steel stocks looks good, analysts say.
``There's still some `upside' left in them,'' says John Rogers of Prudential-Bache Securities Inc. ``They're getting hammered pretty bad now. Everybody's giving up on the cyclical stocks.
``But these guys are making a lot of money now. They're going to continue to make a lot of money in the fourth quarter - I think into '89. And that's the real key. The market doesn't yet realize that these current earnings levels are sustainable beyond 1988.''
Dean Witter's Morrison agrees.
``The outlook is for very promising results at least through the middle, if not the latter half, of 1989, owing to tight supply conditions in a number of flat-roll-product and other lines.''
But on Wall Street this week, the outlook was somewhat less promising. The Federal Reserve System's decision Tuesday to raise the discount interest rate from 6 to 6.5 percent sent the Dow Jones industrial average plummeting more than 70 points midweek. On Thursday, the prime lending rate followed suit, rising from 9.5 to 10 percent, a three-year high. For the week, the Dow closed down 81.61 points, at 2,037.52.
Confidence in cyclical stocks, like those of the steel industry, is hurt by higher interest rates, because people believe that the economy is going to slow down and that current earnings therefore cannot be sustained, says Mr. Rogers.
Just what should steel-watchers look for in coming years? Plummer says one factor ``is actually a shift in market share, whereby many mills into the mid- to late 1990s will be gaining an increasing share of the total US market, so that does not bode well for some of the weaker integrated [steel] companies, especially.''
And then there's competition from overseas.
``We're looking for more world market presence by the newly industrializing countries, like South Korea, Brazil, Taiwan, and others that will be getting into that category over the next five to 10 years,'' Plummer says. ``That will naturally have a negative impact on US steelmakers.''