The New Floor Under Nucor

Did you hear that?

That was your venerable American steel industry striking the water after tumbling from an unfinished bridge.

After hailing Nucor (NYSE: NUE) CEO Dan DiMicco as "a champion for truth in a world full of parroting cheerleaders," I'm relieved to report this straight-talking executive's confirmation that a bottom is in place for the U.S. steel industry.

Nucor recorded a net loss of $133.3 million for the second quarter despite a $125 million credit from LIFO inventory accounting. A 16% decline in realized prices from the first quarter absorbed an 11% uptick in products shipped, and the continued impact of higher-cost pig iron inventories pressured margins further.

Nucor exhibits grace under pressure: refusing to lay off workers as rival U.S. Steel (NYSE: X) has done, paying a 145th consecutive quarterly dividend, and maintaining a $3.5 billion liquidity position that could swallow its entire debt balance whole. As we've seen with smaller competitor AK Steel (NYSE: AKS), quality companies shine when the chips are down, and Nucor makes me reach for my sunglasses.

DiMicco avows that "business conditions bottomed in April," but unlike the bottom called by railroad operator CSX (NYSE: CSX) last week, this call of improving conditions comes complete with supporting data and the overwhelming consensus of competitors from ArcelorMittal (NYSE: MT) to Steel Dynamics (Nasdaq: STLD).

Although Nucor's average steel mill utilization rate increased just a touch, to 46% from 45% in the first quarter, the monthly average plunged to just 38% in April before reversing the downtrend and climbing to 54% in June.

In any major disruption to the balance of supply and demand, movements in either direction tend to overshoot the mark before restriking that balance. Like a diver entering the water, steel orders dipped to an April low before breaking back through the surface for air. Inventories were quite low, leading to a sudden uptick in orders, while the surface of the water (the new balance of supply and real demand) lies somewhere in that 45% to 50% range.

We have a bottom ... now what?
While reporting a $16 million loss for the quarter, Steel Dynamics lamented "conflicting signs in the economy." Nucor's DiMicco offered more color: "We continue to believe that real demand in the steel market is in for a long, slow recovery and there will likely be some bumps along the path." John Ferriola, Nucor's COO, added, "We see little indication that end-use demand has improved and expect no significant improvement for the rest of 2009."

Now that we're finally treading water, it looks as though we're still a long way from dry land.