Basic Materials | United States
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (December 8, 2017).
Returns assume a short investment position on the date that WSD Capital Management published its thesis, and an exit on the date that the WSD Target Price is realized.
Returns do not reflect any taxes, fees or dividend and interest expenses related to short sales.
The returns are hypothetical and do not reflect the actual results of WSD Capital Management’s investment activities, nor is it necessarily indicative of future results of WSD Capital Management’s investment activities.
Nucor Corporation (“Nucor”) is North America’s largest recycler and a manufacturer of steel products, with operating facilities primarily in the U.S. and Canada. Nucor, through The David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap.
WSD Capital Management announced its short position in Nucor in August 2017. According to the American Iron and Steel Institute, total U.S. steel imports increased by 22.1 percent year-over-year to roughly 23.17 million net tons through the first seven months of 2017. Notwithstanding a series of punitive trade actions in the recent past, imports continue to make inroads into the U.S. market due to foreign producers’ overcapacity. Nucor, in particular, has raised concerns about a renewed flood of subsidized imports this year during its Q2 earnings call.
The U.S. Department of Commerce has delayed the release of its recommendations from a “Section 232” investigation into whether steel imports pose a threat to national security. The end goal of any measures resulting from that probe should be that U.S. mills run at a capacity utilization rate of 85 percent to 87 percent.
It is important to note that around 200 anti-dumping or countervailing duty measures are already in place on U.S. steel products, making steel one of the most protected sectors. As a result, U.S. prices for many steel products are significantly higher than world prices, greatly disadvantaging U.S. manufacturers that require steel as a primary input. Put another way, any additional import restrictions would do far more harm to steel-using manufacturers than any benefit that could accrue to steel mills. As such, we believe that the appeal for import restrictions will, at best, be muted and short-lived due to their highly corrosive nature.
Modest economic growth in the U.S. market will be something Nucor has to deal with for an extended period of time and until overcapacity issues are resolved on a global scale, investors will be forced to reign in their optimism that the U.S. administration will promote the domestic steel industry through transformative trade policies or an essential trillion-dollar infrastructure investment plan that appears unlikely to materialize.