Soft Signs From Bellwether Steel

Soft times are back for the makers of hard steel and the recyclers of industrial metals.

Schnitzer Steel (NAS: SCHN) announced restructuring plans this week that will result in the elimination of about 300 positions (representing 7% of the company's workforce). Facing a further 10% to 15% decline in ferrous-metal scrap prices in its current fiscal fourth quarter, Schnitzer's bread-and-butter business unit is expected to place less bread on the table as per-ton ferrous operating margin contracted by about 35% from the fiscal third quarter to between $8 and $9 per ferrous ton.

Schnitzer's remaining business units are not looking any better, with the auto parts segment bracing for a 15% to 20% sequential reduction in revenue that will result in operating income of roughly nil. Although steel-manufacturing volumes are seen rising 15% sequentially, an offsetting 5% decline in the average selling price is likely to yield an operating loss. The company expects to trim about $25 million from its annual cost structure with its proposed restructuring, but investors must first endure restructuring charges of $12 million spread over the next three quarters.

Schnitzer is not alone with its malaise as the domestic steel industry continues to struggle through a difficult period. Private steelmaker RG Steel recently filed for bankruptcy, and the idling of that company's Sparrows Point mill in Maryland may trigger layoffs of some 2,000 employees.

Against the backdrop of a 10.5% advance for the S&P 500, the following year-to-date chart reflects the hardships of a steel industry caught between slim operating margins and the continued influx of price-depressing imports. While Nucor (NYS: NUE) and Steel Dynamics (NAS: STLD) have held relatively strong for reasons I've outlined before, the shares of smaller operators AK Steel (NYS: AKS) and Schnitzer have suffered considerably.

SCHN data by YCharts.

Anthony Rizzuto Jr., managing director of Dahlman Rose, recently downgraded the entire sector, noting: "Recent domestic price increases have not been matched internationally, potentially inviting increased imports later this year and placing a de facto ceiling on domestic prices." Mirroring the lukewarm outlook from the investors at Motley Fool CAPS -- who grant only three stars of a possible five-star rating to the shares of Schnitzer and AK Steel -- Rizzuto dropped AK Steel from "hold" to "sell."

I continue to avoid the steel sector myself -- though if I were to invest in the space, Nucor would be at the top of my list. For now, I prefer to remain at the top of the supply chain with the providers of key steelmaking ingredients iron ore and metallurgical coal. Cliffs Natural Resources (NYS: CLF) looked inexpensive to me near $50 per share back in May, and presently under $40 per share with a 6.4% dividend yield, I think the stock offers a terrific long-term buying opportunity.

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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Cliffs Natural Resources. Motley Fool newsletter services have recommended buying shares of Nucor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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