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This analysis is by Bloomberg Intelligence Senior Industry Analyst Richard Bourke. It appeared first on the Bloomberg Terminal.
Reshoring of manufacturing operations and nearshoring of supply chains have boosted nonresidential spending over the past few years, helping expand Nucor’s steel-products and Steel Dynamics’ fabrication businesses. In addition, Commercial Metals expects increased outlays from the Infrastructure Investment and Jobs Act, CHIPS Act and higher construction spending to extend the momentum.
Steel dynamics leans on fabrication-segment growth
The fabrication unit has expanded into a significant business for Steel Dynamics, contributing substantial profit and helping dampen the volatility of the steel cycle for the company. It could also offer a cushion amid increasing signs of a recession. With hot-rolled steel prices down 56% in 2022, steel fabrication picked up the slack. It posted record operating income of $2.4 billion in 2022, up 564% year over year and outperforming the larger Steel Operations operating income, which fell 29% vs. 2021.
Continued strength in nonresidential construction driven by companies shortening supply chains, along with a strong contractual backlog through 1H, should keep the fabrication business at elevated levels. The unit also provides meaningful pull-though volume for the steel operations.
Nucor builds on steel products construction base
To battle the inherent cyclicality in the steel sector, Nucor turned to M&A to expanding downstream into areas that are extensions of its business model. It’s focused on broadening beyond basic steelmaking, bringing in capabilities to produce more refined products, raise utilization of steel mills, provide protection against imports and reduce volatility in operating results.
These purchases have put Nucor on a path to becoming a diversified, efficient industrial manufacturer of products for use across the construction industry, positioned to capitalize on infrastructure spending, supply-chain reshoring and power-grid modernization. Earnings before taxes have grown at a compound annual rate of over 60% the past five years, and Nucor expects the most recent of more than $4 billion in purchases to add $500 million of Ebitda.
Reshoring, infrastructure backstop CMC’s bullish view
Commercial Metals sees little sign of a North American construction slowdown in 2023. The rosy outlook counters a recent channel check that suggested nearly half of independent rebar fabricators expect to bid fewer jobs in 1Q. But a stronger share of high-volume reshoring projects in its backlog, such as new semiconductor plants under construction in Arizona and Texas, could be driving the rebar market leader’s more bullish view. The spring startup of its Arizona mill will further boost volume ahead of an infrastructure ramp-up forecast for 2H.
CMC looks unlikely to replicate its 1Q performance in fiscal 2Q as seasonal conditions dent demand and boost raw-material costs. But we see margins staying well above the historical average through 1H, positioning the company for a strong 2023 should its demand outlook materialize.
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