This is exactly how it starts. A price increase here, a price increase there -- and the next thing you know you are riding the Apollo right to the moon.
I am talking about the increases in flat-rolled steel prices. We have just seen in the market for the most basic steel, flat rolled, rise first $40 a tonne three weeks ago and then another $40 just last week.
That's the cycle I have been waiting for, the one that allows gigantic steel companies like Nucor (NUE) , our largest, to begin to make some serious money, surprising the analysts, surprising the market.
And I now believe, after an initial interruption in the typical business cycle, that it's about to happen.
Let me explain. We all know of the more pro-business attitude in this administration and changes in the tax law while interest rates were low. That should -- and did -- lead to a surge in orders for all steel companies, and their stocks sailed.
But then the president put in Bill 232, the ban on dumping of foreign steel in this country, relief that the beleaguered industry needed, from the rapacious ways the Chinese used to sell steel in this country under their -- and Nucor's -- cost of production.
Because of fear that we didn't even make enough steel in this country any more to fuel the boom, the steel stores -- yeah that's basically how they sell it -- pre-ordered a huge amount of steel so that there would be no shortage.
But then the economy got sluggish and the service centers, including ones that Nucor owns, had way too much supply.
That led to vicious price cuts and that caused even an outfit like Nucor to make less money than I thought they would. Don't get me wrong, Nucor didn't do badly, they came close to doing their numbers but I know I expected much bigger things after the tariffs went through.
Instead, what happened is that the marginal players in the U.S. faltered because of the glut, a glut that Nucor's CEO, John Ferriola, said was accentuated by media hysterics that there would be a huge shortage from the tariffs.
Now in the last six months, that inventory has finally been worked off. We know that because of those two price increases.
I know it sounds almost silly to think that a $40 a tonne increase on top of a $40 a tonne turn up three weeks ago can signal a change, but I have traded the steel stocks for four decades and every single turn started just like this.
Right now, Nucor is as lean as it has ever been, yet its been building new plants to be ready for the turn in all sorts of higher grades -- not just autos, the traditional market, which Ferriola still thinks will be down 2% in production this year.
If you get Fed rate cuts and a re-acceleration in the economy, this stock is the one to buy because 232 will protect the company from the foreign dumping that has typically destroyed the cycle for as long as we didn't protect our steel companies from those of other countries, particularly the Chinese companies that are so heavily subsidized by the Communist Party.
About 30 years ago I lived near Bethlehem Steel, at one point one of the largest companies in the world and long considered the country club of steels -- why not, it owned two beautiful golf courses in the Saucon Valley for executives and it had the highest-paid and most-bloated work force I had ever come across.
Steel prices had been rising endlessly and that meant that the leverage for this company was fantastic -- every single price increase led to a gigantic beat in earnings. At one point, I thought the company could earn as much as $20 a share.
Then the dumping began. That led to an inventory bulge and price cuttings. We immediately shorted the heck out of the stock. We didn't cover until the stock, which had been in the twenties, disappeared and the company went bankrupt. It was one of our best trades ever.
Now the opposite is occurring. The rally was late because of the interruption of the cycle from the hysteria and subsequent inventory build. The destocking for flat-rolled steel is now done or that first price increase wouldn't have stuck.
Nucor's now right. It could be even more right with cuts. It's the chicken cyclical you want to buy; chicken because the others have bad balance sheets and if I am wrong there's too high a consequence. Buy the stock of Nucor; it's the way to play the new, Fed-induced, president-endorsed steel cycle.
