Industrial demand is a great leading indicator for the global economy. Companies producing steel (Nucor and Steel Dynamics) and aluminum (Alcoa) get early insights on demand via their order books.
All three reported earnings in the past 24 hours and here are what they have to say about the global economy.
Nucor from the press release:
"End use market demand remains strong for steel and steel products, and we remain confident that 2022 will be another year of very strong earnings and cash flow for Nucor.
We expect that the second quarter of 2022 will be the most profitable quarter in Nucor's history, surpassing the previous record set in the fourth quarter of 2021.
Second quarter earnings will be driven by increased profitability in the steel products segment, which continues to benefit from robust demand in nonresidential construction markets. In addition, the steel mills segment earnings are expected to strengthen due primarily to increased profitability at our sheet and plate mills. Similarly, Nucor's raw materials segment is expected to generate increased profits in the second quarter due to relatively higher selling prices for raw materials."
Steel Dynamics from the press release:
"We remain confident that market conditions are in place for domestic steel consumption to continue to be strong this year and into 2023.
Order entry activity continues to be robust across all of our businesses. We believe steel prices will remain supported by strong demand, balanced customer inventory levels, and elevated raw material costs. We believe the automotive, industrial, and energy sectors will remain solid steel consumers this year, with demand from the construction sector at the lead. Our steel fabrication operations order backlog remains at record volume and forward pricing levels. This combined with continued robust order activity and broad customer optimism, supports strong overall demand dynamics for the construction industry. We believe this overall momentum will continue and that our second quarter 2022 consolidated earnings should represent another record quarterly performance"
Alcoa CEO Roy Harvey (in the conference call after being asked about demand):
"Yes. So let me get started on that one. And I would break it into a few different pieces, but then we could just make sure that I cover all of your concerns when we get to the end. Start off, we talked a little bit about supply chain disruptions. They existed prior to the war in Ukraine, but that war has exacerbated them. I think that's sort of made this chip shortage in automotive be a little bit more difficult. It's also creating some knock-on impacts that are happening around whether the economy continues to grow as it did. And we just saw the IMF bring down their expectations for economic growth just over the course of these last hours or this last day. And so I think that tends to start to erode a little bit some of the demand that we see because aluminum is so tied to the general economic cycle. And I would say that automotive is a place where we're really seeing some of those supply chain disruptions happen and where you have very clear ties in Europe and elsewhere around the world.
You're also seeing an inflationary market. And so as we see some of the inflation happen as we see how the U.S. Fed, for example, reacts to that situation, it tends to put a bit of a break on what we're seeing in demand as well. Again, it's very much more at the very edges. And so when we look at our change in expectations for demand from last quarter to this quarter, we were saying 2% to 3% last quarter. We're now saying aluminum is going to grow by about 2%. And so that tells you, yes, you are starting to see some impacts. However, it's not deep, and we continue to see an aluminum market that's growing.
I would caveat that and just make a very quick reminder that aluminum continues to grow, and we're also seeing significant supply disruptions. So when we look at the favorability of aluminum as a commodity, and it gets down to the financials, the fact is you're having trouble operating smelters inside of Europe because of the price of energy. And we've seen a pretty significant impact there. We're uncertain how much metal is actually being produced in Russia because whether they can actually get the alumina that they need or can actually export that metal. And so from an aluminum perspective, you are seeing a little bit of erosion inside of demand, but you're actually seeing more erosion inside of the supply, the ability to supply and produce aluminum at the same time.
For Alcoa specifically -- and this will round out my answer and then we can sort of move on to the next one or you can ask any clarifying questions. For Alcoa, our order book is very strong. And so when we look forward, we have not seen impacts outside of sort of one-off items that can be very quickly replaced. We simply haven't seen our order book suffer because of the current environment that we find. So we're not seeing demand impacts on our orders. And I would just remind you that we're seeing certainly growth in our regional premiums. We're seeing growth in our product premiums -- significant growth in our product premiums, which you saw come out in our Q1 results. And we are maxed out. We simply don't have more capacity because the customers are asking for everything that we can put out there. So I think there is the potential for disturbance in demand, but it's certainly not being seen in the markets where we have our significant sales, which is really North America and Europe."