Steel Sector Booms: Nucor and Steel Dynamics as Leaders

Steel is an essential component of the modern world. From vehicles to buildings to household appliances, the demand for steel remains robust, largely thanks to numerous megaprojects announced since 2021, reaching a total volume of $1.4 trillion. These mega-investments, each worth at least a billion dollars, utilize steel intensively. Given the cyclical nature of the steel market, it is advisable to invest in companies that can manage the entire steel cycle effectively. There are two main methods of steel production: blast furnaces and electric arc furnaces. Blast furnaces are a traditional technology that uses metallurgical coal and iron ore. While they are essential for global steel production, they are also very costly to operate. During periods of high steel demand, they achieve high utilization rates and generate substantial profits. However, during times of weak demand, they often fall into the red as they cannot cover their operating costs. The more modern method of steel production, electric arc furnaces, works with scrap and electricity. These plants can more easily adjust to demand fluctuations and can remain profitable even in a declining steel market. While electric arc furnaces alone cannot meet global steel demand, they offer clear advantages in terms of profitability. Cleveland-Cliffs entered the steel sector by acquiring several regional steel manufacturers and primarily operates blast furnaces. United States Steel, once solely reliant on blast furnaces, is now diversifying with electric arc furnaces to offer a broader product range. This presents both opportunities and risks, as both companies can achieve high profits during good economic times but suffer significant financial losses during downturns. In contrast to these traditional companies, Nucor and Steel Dynamics offer several advantages as they predominantly rely on the modern technology of electric arc furnaces. These companies exhibit more consistent business performance over the steel market cycles. They may not be as profitable as US Steel or Cleveland-Cliffs during boom times, but they are also less loss-prone during downturns. Nucor, the older and larger player, is more established and diversified, while Steel Dynamics, as an emerging company, is growing faster and expanding geographically as well as in its product offerings. Conservative investors might prefer Nucor, while growth-oriented investors may be more interested in Steel Dynamics. Nucor impresses with 51 consecutive years of dividend increases, a remarkable achievement given the cyclical steel market. Steel Dynamics, founded by former Nucor employees, boasts a series of 13 annual dividend increases. Considering the current construction boom in North America, this is an opportune moment to think about investing in the steel sector. Although there are challenges from low-cost imports, this factor should not deter potential investors. Nucor and Steel Dynamics offer promising prospects for long-term investors with proven business models that remain profitable throughout the steel cycle. Both companies are currently trading 20% to 30% below their recent highs, making them attractive options for a portfolio.