Who Is Driving Demand for Steel These Days?


Since the process to manufacture steel on a scalable level was first discovered, the demand for this foundational combination of materials and processes has ebbed and flowed with industrial growth. That fact clearly remains the same in the 21st century. Since the onset of the "Great Recession," steel companies have seen market prices, shareholder returns and volumes drop off the same ledge as employment and gross domestic product growth. Lately however, there have been rumors of a turnaround, that we have finally reached the trough in the contraction.

Where has this been evident?
For one, automotive sales have been driving out of the valleys of 2008 and 2009, with many in the industry hopeful that United States auto sales will continue toward the peaks. Expectations for over 15.3 million sales in the U.S. for 2013 could keep the wheels greased and rolling toward at least 16 million in 2014, a figure not seen since the glory days of 2007. One of our very own homegrown brands, Ford , delighted investors with 9% year-over-year growth in North American production during its latest quarter, and is on board with the 15-million-plus figure that has been floating around for 2013. Factor in worldwide sales, and the figures are astounding. Toyota Motor , alone, sold 9.75 million cars worldwide in 2012, overtaking General Motors once again as world's largest auto maker.

Why does this matter for steel companies? Well, consider that in 2007, the average car contained 2,400 pounds of steel and the average SUV contained 3,000 pounds. Let's take the average of the two (not taking into account total sales figures for each segment), 2,700 pounds, and multiply that by the projected vehicle sales in the U.S. for 2013. You arrive at 20.7 million tons of steel required. That's only around 7 million tons shy of the entire capacity of Nucor , the largest steel maker in the U.S. Now, granted, steel use in autos has waned a bit since 2007 as lighter, stronger materials have been introduced, but it hasn't been significant enough to reduce the effect that growing auto sales can have on the steel industry.

Manufacturing a market for steel
Because steel is such a widely used material, a consistent indicator of its potential demand is manufacturing activity. Judging by the way the U.S. closed out 2012, manufacturing activity in 2013 could have some nice tailwinds. For example, new orders in December for manufactured durable goods rose $10 billion over November. This $10 billion in growth equates to 4.6% and led to a total bill of $230.7 billion. New orders have now risen seven of the past eight months, and unfilled orders (a look at activity to come) has risen six of the last seven months.

Thanks in large part to cheap natural gas feedstocks, manufacturing companies are planning significant infrastructure spending to take advantage of the boom while it lasts. For example, Dow Chemical , has announced $4 billion in capital expenditure plans along the Gulf Coast, and that is just a blip on the radar. All told, around $95 billion in capital spending from energy-reliant industries like chemical and plastic makers and steel companies themselves is expected to take place through 2020. As these projects begin to role out, steel manufactures should expect the phones to begin ringing with some fairly large orders on the other line.

So, who will benefit?
In my mind, investors would be wise to take a steely look at Nucor and Steel Dynamics . Being the largest player in the space theoretically offers Nucor much more insulation from downturns than its smaller peers. It is also the leading player in mini-mills which offer myriad advantages over more traditional means. As for Steel Dynamics, I really appreciate its low cost mentality, especially in a market such as the one we are hoping to emerge from. In addition to its low cost approach, Steel Dynamics is sitting on solid production capacity of 7.4 million tons due to its growth initiatives, which positions it to take advantage of any increase in demand.

Foolish bottom line
For such a cyclically dependent industry as steel has traditionally been, it is vitally important to recognize leading indicators in order to invest at an opportune time. With recent month-over-month growth in manufacturing and heightened automotive growth expectations, this could be the perfect time to look at U.S. steel producers.

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The article Who Is Driving Demand for Steel These Days? originally appeared on Fool.com.

Taylor Muckerman has no position in any stocks mentioned. The Motley Fool recommends Ford and Nucor. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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