That there are so few takers for shares in the developed world's steel makers tells us why the Port Talbot steel works, owned by India's Tata Steel (TTST), is doomed in the long run. It also tells us why the response to the loss of the UK's remaining high-volume steel mill has been measured. True, there have been calls to nationalise Tata's UK steel interests, but these have been half-hearted. Meanwhile, the hysteria that would have gripped the Port Talbot affair had it occurred in the 1980s has been largely absent.
Perhaps there is a growing understanding that there are limits to the extent to which uncompetitive industries can be shielded from global market forces. After all, it's more a fact of life that an industry producing a commoditised product in a high-wage economy will struggle than it's the fault of anyone in particular, be it employees, owners or governments.
For those who doubt this - who believe there is recovery potential in the developed world's steel industry - there is plenty of scope to back up their belief with money. The table shows six of the world's leading quoted steel makers along with their global ranking based on 2014's steel production; and two of them - ArcelorMittal (ONSF) and Tata Steel - have quotes on London's exchange.
Steel yourself
| Global rank | Revenue ($m) | Pre-tax profit ($m) | Mkt cap/sales | Price/Book value | Net debt/Mkt cap | |
|---|---|---|---|---|---|---|
| ArcelorMittal (ENXTAM:MT) | 1 | 63,578 | (7,521) | 0.2 | 0.5 | 1.1 |
| POSCO (KOSE:A005490) | 4 | 50,455 | 157 | 0.3 | 0.4 | 0.9 |
| Nippon Steel (TSE:5401) | 2 | 47,502 | 3,172 | 0.4 | 0.5 | 1.1 |
| Tata Steel (BSE:500470) | 11 | 18,210 | (705) | 0.3 | 0.9 | 2.1 |
| Nucor (NYSE:NUE) | 13 | 16,439 | 709 | 0.9 | 1.9 | 0.2 |
| US Steel (NYSE:X) | 15 | 11,574 | (1,459) | 0.2 | 1.0 | 1.0 |
Source: S&P Capital IQ
Arguably, what's most interesting about the table is the data that's not there. Steel-making plant, almost by definition, is capital-intensive, thus a key measure is return on capital employed. However, that's absent from the table for the simple reason that three of the six are loss-making, so they don't actually produce a return on the capital they use. Of the others, returns are nominal at Korea's Posco (KOSE:A005490) and Nucor (NUE) of the US. They look acceptable at Japan's Nippon Steel (TSE:5401), but the paltry rating the market gives to the company's shares means its accounting returns need to be treated cautiously. What's true for figures on return on capital also applies to profit margins.
Nor should we imagine that focusing on just 2015 badly distorts the picture, miserable though the year was. Take ArcelorMittal, the world's biggest steel maker, formed from the 2006 merger of a European multi-national and the steel interests of India's Mittal family. In the past four years, the group has wracked up almost $16bn in pre-tax losses. It does not matter that most losses came from writing off non-existent goodwill and writing down overvalued assets. Think of that as a catch-up exercise that corrects for past profits being overstated. Meanwhile, there were almost $3bn of underlying pre-tax losses. Free cash flow was slightly better - it totted up to $1.12bn over that period, though net cash losses were over $500m in 2015. True, the dividend has been cut, but there is no justification for a payout at all.
Meanwhile, what the table does show - as our fictitious market maker pleaded in the opening paragraph - is companies whose shares sell for a small fraction of pro rata revenue and generally less than the book value of net assets. Granted, this can be a signal of value; here, it's a sign of desperation.
And somehow it's predictable that the company whose metrics look decent - North Carolina-based Nucor - is the one that does things differently. Nucor describes itself as "the little steel company that could" and got big by using an extremely decentralised business model to run 23 electric arc furnaces that exclusively process scrap metal. Nucor's stripped-down, decentralised model - just 75 of its nigh-on 24,000 employees work at head office - makes it an outstanding performer. Yet its industry background still drags on its share price performance. Its long-term returns still look great. From 1968, when the company diversified into steel smelting, to the end of 2015, its share price growth compounded at almost 16 per cent a year. Since the financial crisis, however, the price - currently $47.67 - has spent much time going nowhere.
So, okay, Nucor gives us hope that even in the steel industry there are companies for investors to take seriously. What's true of steel must surely apply to, say, motors and textiles, too. Yet the bigger lesson is that making excess returns is tough enough without investors making it even more difficult for themselves. And that's what they do when put their capital into industries whose decline is more than just cyclical.
