Where Are Steel Companies Headed in 2013?

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The current situation
Major U.S. steel companies have had nowhere to hide from the crumbling non-residential construction market since its peak in July 2008, largely thanks to the recessionary quagmire the nation entered after the Global Financial Collapse unleashed its fury on us all. Major domestic producers have suffered much more than the overall market (as measured by the S&P 500), with four of the largest by market cap down more than 35% over that time frame.

Aside from Nucor (NYS: NUE) , the other three from the peer group I'll discuss are all down more than 59% since July 2008. Nucor can thank its wider range of services for its slightly less than terrible performance when compared with AK Steel Holding (NYS: AKS) , United States Steel (NYS: X) and Steel Dynamics (NAS: STLD)


One thing all of these companies have in common, though, is the impact from the lack of non-residential construction spending. Steel manufacturers have seen the majority of other business segments improve since 2008, aside from those associated with non-residential construction.

The impact on company operations
Nucor's steel products division, which manufactures products that "are used by contractors in constructing highways, bridges, reservoirs, utilities, hospitals, schools, airports, stadiums, and high-rise buildings," accounted for 17.4% of 2011 revenues. When asked about non-residential construction spending in its Q3 2012 earnings call on Thursday, Dan DiMicco, the company's chairman and CEO, said, "we are still seeing abysmal levels overall."

Meanwhile, Steel Dynamics' president and CEO, Mark Millett, has a brighter outlook than his larger competitor does. When delivering the company's third-quarter earnings on Thursday, he cited that the architectural billing index began to turn up in July and continued its momentum into August after declining from March. While he made it known that this short period doesn't signify a trend, he did say that "the upward tick would suggest potential improvement in future non-residential building activity." He specifically mentioned the southern and western portions of the country, which just so happens to be where the company has new plants -- in Arkansas and Nevada, as well as in Mexico.

Positive growth on the horizon?
Continuing with Millett's positive spin, there are some other data points that might lend their support for his point of view. Back in August, the American Institute of Architects shared its optimistic perspective on the 2013 outlook. It projects a 6.3% spending increase for next year as its chief economist, Kermit Baker, cites that companies returning jobs from overseas is leading to the boost in industrial construction demand. There was also a point of caution: Be aware of the looming fiscal cliff, as failure to avoid it could significantly weaken the forecast.

Other data seems to also suggest some growing strength. Looking at the Census Bureau's output of total construction spending in the non-residential sector, it's easy to see that the most recent cyclical trough is above the past two. Could this signal the bottom of the downward trend? On a monthly, seasonally adjusted basis, we can also see that each month so far in 2012 has witnessed more spending than their respective months in both 2010 and 2011, nearly returning to 2009 levels.

While these figures are updated only through August, it will certainly be worth watching for the Census Bureau's next release as we approach the typical winter trough in spending. If it's higher than the bottom at the beginning of this year, we could be start to witness some strength in the steel industry's performance.

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The article Where Are Steel Companies Headed in 2013? originally appeared on Fool.com.

Taylor Muckerman and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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