Schnitzer Earnings Smelt-Down Bodes Ill for Other Steelmakers

Schnitzer Earnings Smelt-Down Bodes Ill for Other Steelmakers

If you want to know what the future holds for global steel giants like Arcelor Mittal , U.S. Steel , and Nucor , one of the best ways you can spend your time, I suspect, is by reviewing the earnings reports of another company entirely -- Schnitzer Steel .

A major recycler of metal scrap, Schnitzer today does more than 68% of its business outside of U.S. borders, exporting steel to countries abroad, which resmelt the stuff and use it to manufacture goods later imported to U.S. shores. Which countries abroad? Well, to give one hint, in years past, Schnitzer has been known to get as much as 40% of its total revenues from just one region -- Asia. And the biggest country in that region is China...

Earnings upon us
It just so happens that Schnitzer filed an earnings report yesterday, and the news -- for Schnitzer and, I suspect, for steel investors in general -- was not great.

Earnings for the company's fiscal third quarter came to just $0.03 per share, down more than 90% sequentially from last quarter's $0.32. True, Schnitzer's results were affected by a restructuring charge in Q3. Also true, Q2 earnings benefited from an opposite tax "benefit" to earnings. But even so, the clear implication of a 90% drop in net profits cannot be ignored.

So what went wrong? Schnitzer explains: "Ferrous export selling prices declined steadily throughout the third quarter, with market prices at the end of May approximately $50 per ton lower than at the end of the second quarter of fiscal 2013." And in case you missed the word "export" the first time Schnitzer said it, management drove the point home with a second observation that weak pricing was "driven primarily by lower export demand".

Suffice it to say, this doesn't bode well for the globe's manufacturing engine -- China -- continuing to grow and support global demand for commodities such as steel... and iron ore, coal, copper, and so on. It suggests a significant fall-off in demand, and reinforces reports that the Chinese manufacturing sector is now in its second month of recession.

Foolish takeaway
With Schnitzer shares now selling for a staggering 86 times trailing earnings, analyst estimates of 11.5% annualized earnings growth over the next five years seem too weak to continue supporting the stock price at today's levels. Indeed, if China's growth engine is stalling, Schnitzer's earnings may not even top 10%.

As for the other steel companies, USX and Nucor investors probably hope that analysts are right that their stocks, at least, can eke out 7% annual growth rates. But now, Schnitzer's news suggests these estimates, too, could be at risk.

And Arcelor's projected 32% profits growth rate? Not going to happen.

China is already the world's largest auto market -- and if China can turn things around, it could get even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool owns shares of ArcelorMittal. 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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