Fundamental analysis of the shares of Cleveland-Cliffs Inc and Nucor Corporation

Abstract

Our research focuses on the analysis of the shares of Cleveland-Cliffs Inc. and Nucor Corporation. The recovery from the economic crisis caused by the coronavirus has resulted in an explosion in raw material prices, with a more than threefold increase in the price of hot-rolled steel since November 2020. One of the reasons for the explosion in steel prices is linked to the Chinese Winter Olympics in 2022, when blast furnaces essential for keeping the air clean in steel production were temporarily shut down, causing iron prices to fall and steel prices to rise. The aim of our study is to assess the performance of two US steel companies and, through this, to present trends on the world market. The post-Covid-19 economic stimulus programmes are likely to induce further demand growth through the construction industry, which will be influenced by market changes resulting from the Ukrainian-Russian war conflict. The fundamental analysis of the two companies is based on a collection of publicly available information, followed by a relative comparison of the data. Our first hypothesis is that a new upward trend in the steel sector has started since the coronavirus outbreak, and our second hypothesis is that the share prices of the two companies have reacted similarly and positively to the rise in steel prices. The analysis was conducted from 2019 to the end of 2022.

Introduction

The subject of our research is an analysis of the shares of two US companies. Why analysis is important, you might ask, what we expect from the analysis. The data and information provided by the analysis can be important for the owners of the company, i.e., shareholders and investors, new or prospective investors, business partners and even the state, because companies provide wages to employees through employment, who then consume their income and pay taxes to the budget. In this research, however, we assess these firms and their performance through the lens of the investor. An investment can be defined in the literature as a financial instrument or a saving in real goods, which can also be defined as a post-tax investment. Financial instruments can be grouped in many different ways, either by maturity, yield, risk, duration or even by issuer. (Damodaran, 2012) Investors with a security-seeking and low-risk appetite prefer to choose debt securities in the form of bonds, treasury bills, certificates of deposit or cash. In terms of bonds, the most popular are corporate, bank and municipal bonds, as well as government debt. In times of economic stability, the government is usually able to finance its debt in a balanced way, either from domestic or international money and capital markets. Yields are predictable and in a low inflation environment, it is a classic long-term investment alternative. In times of crisis, however, the situation is different, the expectations of money and capital market participants have a significant impact on the performance of securities, and governments usually seek to raise funds to induce investment in order to manage the crisis, which will affect the share price of companies involved in the implementation of the investment. The stock market will be invigorated and the demand for shares will increase, which will cause prices to rise, which will also boost investor appetite and the structure of savings in the money market will be reallocated. A good indicator of this process is that during the COVID-19 period, demand for investment fund units in real estate investments in Hungary also increased significantly, as the state significantly subsidised the purchase and construction of new and second-hand housing, which led to a significant increase in demand and a significant rise in the price of building materials.

Review of Literature

The following is a summary of the main theories in the literature on equity investment, starting with a definition of money and capital market instruments. Money market instruments are generally short-dated, liquid, low-risk securities that embody debt (Bodie et al., 2005) Treasury Bills (T-Bills) are securities with a maturity of one year or less and are issued by the government to raise money. Investors can buy a treasury bill at a discounted value and receive the face value from the government. The difference between the purchase price and the face value becomes the investor’s profit. (Hayes – Scott, 2021) Unlike the money market, the bond market generally trades in longer-dated debt securities. This includes treasury bonds and treasury notes, as well as corporate bonds. Treasury notes and treasury bonds are long-term securities issued by the United States as a form of borrowing. These securities are issued by the government in denominations of $1000. The maturity of a treasury note is generally 10 years, while a treasury bond has a maturity of 20 to 30 years. These are usually taken as a benchmark for yields, as they are the theoretically risk-free investments in the category. Both securities pay interest every six months, and their prices are decided by online auctions held by the US Treasury. Once they are issued at the price decided in the auction (based on competitive or non-competitive bids, as in the case of Treasury bills), the bonds and notes are freely traded on the secondary market and are therefore considered to be particularly liquid assets. Investors need to hold their bonds for at least 45 days before they can sell them on the secondary market (e.g., through a broker). (Chen – Anderson, 2020) The US 10-year treasury note is also often used as a stock market indicator, with its price and yield allowing investors to infer market expectations. With higher yields, investors can earn more with lower risk, which in turn has a negative impact on the stock market, which is usually associated with higher risk. As an example, comparing the S&P500 stock market index with the 10-year ticket yield reveals an opposite trend. Autumn is not a good time for stock market movements, with the S&P 500 falling while the 10-year treasury note yield rises. Inflation, of course, is damaging to both bonds and equities because bonds are fixed income, so their real yields are falling, but for equities the situation is somewhat more complicated. For equities, inflation hurts growth-stage firms, while larger firms with good earnings are more resistant to inflation (Baldridge – Curry, 2021) Corporate bonds, as their name suggests, are issued by companies to raise capital, which pays interest to the investor who buys them. When the bond matures, they also repay the face value. They may also appear on the secondary market, with brokers. There are also convertible bonds, which can be converted into shares if certain conditions are met. There are collateralised and unsecured corporate bonds. (Chen, Courage, – Mansa, 2020) “A share is a security representing ownership of an interest in a company. “ – (Bodie et al., 2005) (p.53) A share gives its holders the right to vote on issues that are crucial to the strategic direction of the company, and also to receive a share of the company dividend. The members of the board of directors are also elected by the shareholders (Bodie et al., 2005).

Shares can be traded on stock exchanges, which can be either large institutional exchanges (New York Stock Exchange, NASDAQ, Budapest Stock Exchange, etc.) or OTC (over-the-counter) markets, which are smaller trading platforms operating under the relevant legislation. On the primary market, companies can sell their shares to raise capital, a process called IPO (initial public offering), where the company floats its shares on the stock exchange where investors can buy them, for which, of course, the exchange charges a fee. Once the shares have been issued on the primary market, it is possible to trade the shares on the secondary market, for which the stock exchange usually charges a fee, although many brokers have introduced free trading. Stock exchanges nowadays trade electronically, while in the secondary market, small investors can trade through brokers. In the market, traders open ‚long’ and ‚short’ positions, with a ‚long’ position ‚betting’ on the price to rise and a ‚short’ position ‚betting’ on the price to fall, usually for a short period, as the name implies (Chen – Scott, 2021).

A company can have more than one „class” of shares on the market at the same time, for example, Google can trade in Class A and Class C shares (Class B shares are not listed), Class A shares have voting rights, while Class C shares do not (Emspak – Brock, 2021)

Since the share represents ownership, it is possible to buy the company. If an investor believes that the management is doing a bad job, he or she can buy up the shares, thus acquiring a majority stake. This is usually done by tender, i.e., the shares are bought at a price above the market price. The shares represent a residual claim or a limited liability. Under a residual claim, the investors are the last to be paid in the event of liquidation of the company. And under limited liability, the investor only loses his original investment in the event of the liquidation of the company, as opposed to unlimited liability companies (Bodie et al., 2005, p. 57).

Preferred stocks are similar to bonds in that they provide a fixed income, in this case paying dividends instead of interest, and are usually held by institutional investors. Preferred shares are usually redeemable by the issuing company, provided of course that the value is paid to the investor. These shares also have no voting rights and are sensitive to fluctuations in the base rate of the central bank, similar to bonds. On the positive side, investors in preference shares have an advantage over ordinary shareholders in accessing the assets of a company in liquidation. They are generally more stable in price compared to ordinary shares and more liquid than bonds (Drinkard – Logan, 2021).

Stock market performance can be measured by stock indices, the most famous of which is the Standard & Poor’s 500 Index (S&P 500), which tracks the performance of the 505 largest US companies with the largest market share. The index is market-value weighted, so the movements of companies with larger market capitalisation are more strongly reflected in the change in the index. In addition, the Nasdaq index tracks the movements of 100 stocks, mostly technology stocks. And the DJIA (Dow Jones Industrial Average) includes the 30 most actively traded stocks, such as Boeing, Apple, and Microsoft. The Nikkei is an index of Tokyo, the FTSE is an index of London, and the DAX is an index of German companies.

Derivatives such as futures and options can also be traded on the exchange. There are call options, which give you the option to buy a share at a given price and time. A put option, on the other hand, offers the holder the opportunity to sell at a given price and time (Bodie et al., 2005).

A futures contract is a legal agreement that the holder can buy an asset (e.g., a commodity, but there are also index futures contracts) at a given price and with a given maturity. The buyer of the contract agrees to have the asset (e.g., 1 tonne of steel) delivered to him and the seller agrees to deliver it.
Of course, futures traders have no interest in delivering 1,000 barrels of oil, so they close their positions before the expiration date of the contract (Hayes et al., 2021).
Equity valuation techniques
Technical analysis
Three basic principles are generally attributed to technical analysis by analysts.

1. Everything is „priced”. The first principle is that the share price already contains all the information from any fundamental analysis, so it is worthwhile for investors to look at the statistical methods used to predict the share price itself.

2. Prices are trend-driven, possibly only momentarily random developments occur, which can also be linked to a regularity.

3. History repeats itself, so we can conclude that market participants will behave in a similar way as in similar situations in previous cycles (Vincze – Mihályi, 2013, p. 226).

On this basis, the aim of technical analysis is therefore to predict the stock price by means of trends and technical indicators on the stock price graph and based on these, to realise profits on the executed transactions. Technical analysis as we know it today is mainly associated with Charles Dow, who created the DJIA (Dow Jones Industrial Average) market index, thus making it possible to carry out technical analysis of the market. According to the Dow Theory, a market is in a „bull” (upward) trend when one of its averages (e.g., industrial or transportation) rises to its previous high and, at the same time (or subsequently), another average does the same. For example, the DJIA is rising to new highs, so presumably the DJTA (Dow Jones Transportation Average) transportation index will follow suit. If the same happens on the downside, the market will follow a „bearish”, or downward trend (Hayes – Potters, 2021.)

The first practitioner of Dow Theory was William P. Hamilton, who applied the assumptions of Dow Theory in practice. He used the theory to determine whether a bear market or a bull market had just begun, using railroad and industrial indices. He also used it to predict the Great Depression of 1929 within a year (1928), which he also warned would occur three days before it began (Beattie, 2019).

Technical indicators

1. Covering indicators: these indicators are located on the exchange rate chart and usually use the same unit of measurement, such as moving averages (20, 50 and 200 days), Bollinger Bands and turnover (Vincze – Mihályi, 2013, p.: 229)

2. Oscillators: these technical indicators usually fluctuate between a local minimum and a maximum and are usually located below or above the price chart. Examples are the stochastic oscillator, the MACD, or the RSI (Chen et al., 2021.)

The moving average helps to support the trend. If the 20-day MA (Moving Average) moves above the 50-day MA, it indicates a strong trend. It shows a particularly strong trend if the price stays above the 20 moving average.

The Bollinger band is also based on a moving average, it is based on the 20-day moving average and characterizes volatility. There is too much buying in the stock near the top and too much selling towards the bottom. The width of the band represents the volatility, the wider the band, the greater the volatility. At a narrow band, the market is generally calm, and investors speculate on a period of volatility that is about to occur (Hayes – Potters, 2021.) Histograms show the direction in which the indicator is moving and the distance from the marker. A green histogram shows the distance upwards from the marker, and a solid green histogram indicates a larger deviation between the indicator and the marker compared to the previous time unit. The reverse is true for red histograms (Fernando et al., 2021.)

Fundamental analysis

According to Investopedia fundamental analysis is a way of determining the intrinsic value of a stock. Fundamental analysts look at everything that can affect the value of a security, from macroeconomic factors such as the state of the economy and industry to microeconomic elements such as the effectiveness of a company’s management. The goal is to find a stock whose intrinsic value is greater than its current market value (Segal et al., 2021.)

Zvi Bodie wrote in his book Investing that the essence of fundamental analysis is to determine the correct price of a company’s stock based on a forecast of expected dividend and earnings trends. The dividend and the stock market price are determined by the success of the company, so the factors that influence this need to be examined. The analysis should take into account the business environment in which the company operates, although for some companies macroeconomic and sectoral conditions have a stronger influence on the development of profits than the relative performance of the company within the sector. The overall analysis starts with an examination of the state of the world economy and of a particular national economy, and then considers the impact of the external environment on the company’s sector. This is followed by an analysis of the situation within the sector (Bodie et al., 2005).

In the definitions, the concept of „intrinsic value” can be observed. Intrinsic value is an objectively interpretable fundamental value in an object, good or security. If the market value is below the calculated intrinsic value, the thing is a good buy, if the market value is above the intrinsic value, it is time to sell. However, intrinsic value cannot be calculated from good news and the positives of the firm alone, but requires numbers, which can take many forms, from financial statements to the calculation of the dividend present value model (Alvarez et al., 2021.)

Based on this information, fundamental analysis can be divided into two parts: quantitative and qualitative analysis. Since the calculations are basically made from forecasted profit growth and financial ratios, a quantitative, quantifiable category is needed. However, analysis alone is not enough; we need to be able to put the numbers into context and back up any increase (or decrease) with qualitative information that helps to build a picture of the company’s situation.

– Quantitative – Information that can be expressed in numbers and helps to make comparisons or forecasts. These include profit, revenue, assets, etc. These can be extracted from financial statements.
– Qualitative – Qualitative attributes, these could be technological innovations in the company, a favourable industry or world market situation, but also a capable CEO, brand recognition, even standards (Segal et al., 2021.)

The qualitative foundations

Four key fundamentals are distinguished by fundamental analysts when examining a company. These are:

1. The business model: the business model is the company’s plan to make a profit. The business model is the model of how the company’s business plans to operate. The two most important components are pricing and costs. As an investor, it is worth considering whether the business model makes sense and is backed up by numbers (Kopp et al., 2020.)

2. Competitive advantage: Competitive advantage means that a company can produce the same products or services better or cheaper than its competitors, so they can work with better margins and gain a competitive advantage. (Tömört et al., 2021) This can come from cost structure, vertical integration of inputs, product quality, distribution policy and network, but also includes customer service. These are comparative and differential advantages (Twin – Anderson, 2021.)

3. Management: arguably the most important criterion for a company from an investor’s perspective. Competent management is able to carry out the first point and not make strategically flawed decisions in running the company. (Salem A et al., 2022) As an individual investor, it is difficult to assess the skills of management, but you can usually find their information, previous jobs, etc. on company websites. Management share transactions are an important indicator, they sell shares for many reasons, but usually buy shares for one reason; the company will perform well.

4. Corporate Governance: Corporate governance includes the set of rules, practices and processes by which a company is run and managed. It is based on balancing the interests of stakeholders in the company, such as shareholders, board members, customers, suppliers, even government. It is usually worth investing in a company that operates transparently and whose management respects the interests of shareholders.

Transparent and understandable communication to shareholders is extremely important, and a good way to keep shareholders informed is, for example, the conference call usually held for quarterly reports, where management informs shareholders and stock market participants about their plans and the past quarter (Chen – James, 2021.)

In addition to the four key aspects, it is important to pay attention to the sectoral conditions mentioned above, including:

– the customer base,
– market share,
– industry development,
– presence of competitors,
– regulations,
– and cyclicality.
(Segal, Boyle, & Munichiello, 2021.)

Material and method

In the following, we look at two steel companies for stock market investment between 2019 and the end of 2022. 2019 marks the end of the commodity cycle, but the end of the coronavirus pandemic pushed steel prices even lower in 2020, which is why we thought it appropriate to start the analysis here. The two companies under review are Nucor Corporation and Cleveland-Cliffs, the latter a large, established player in the steel industry. Global semiconductor shortages are expected to improve in 2022 and with car makers’ inventories extremely low, we expect production to accelerate and steel demand to increase. Important fundamental characteristics that have a catalytic effect on share prices have been compiled and companies are analysed using hedging ratios to get an idea of the risk associated with investing. The relative comparative analysis was carried out with companies in the steel sector using multiples (EV/EBITDA, P/B, P/S, etc.) Two hypotheses are tested, the first one being that a new cycle has started in the steel industry since the beginning of the coronavirus pandemic and the second one that the share price of the two steel companies under study have reacted in a similar positive way to the rise in steel prices.

Results
Analysis of Cleveland-Cliffs Inc.

After its acquisitions in 2020, Cleveland-Cliffs Inc. has become the largest flat-rolled steel producer in the United States. The company is fully vertically integrated, from the raw materials mined through DRI iron and premium scrap steel to primary steelmaking, which includes stamping, turning, tube making, hot-rolled and cold-rolled plate. The company is self-sustaining, the largest producer of iron ore pellets in all of North America, and also produces its own coke and scrap iron. (Cleveland-Cliffs, 2021) In 1994, they acquired the Minnesota mining company Northshore, and by 1995 they had a total of 7 iron mines in the United States, Canada, Europe, and the Pacific Basin. In the 1990s, many of the mines were sold because the US steel industry could not compete with cheap imported steel. (Case Western Reserve University) In 2017, the Australian and Canadian mines were sold for consolidation, and management changed the company name back to Cleveland-Cliffs (Bowers, 2018), which would further increase demand (Cleveland-Cliffs, 2021.)

President Joe Biden’s infrastructure bill has been explained previously; the company will have numerous opportunities for expansion here, as well. Green renewables alone will require an enormous amount of steel, with wind power requiring 130 tons of steel plate per megawatt and solar power requiring 40 tons of galvanized steel per megawatt. (Cleveland-Cliffs, 2021.) In addition, the only producer of GOES (Grain Oriented Electrical Steel) in the entire United States is AK Steel, now a subsidiary of Cleveland-Cliffs. Unfortunately, the division has been operating at a loss due to cheap imports, but federal requirements for transformers and power supplies will make imports impossible, and this will create significant demand for the company (Bureau of Industry and Security, 2021.)

The company’s EBITDA reached nearly $2 billion by the third quarter of 2021, even with current automotive market trends. In addition to the record quarterly earnings, it is worth noting that high steel prices did not play a great role for the company. The price of steel sold to the automotive industry is contract-based, so sales were based on last year’s contracts, which were a fraction of current steel prices. However, in October this year, contracts were renegotiated at current prices, which means that even if prices fall, the company will still sell steel at those prices (Cleveland-Cliffs, 2021).

Acquisitions have had an impact on results. The minimum for ROE and ROA ratios was the second quarter of 2020, where the shutdowns occurred due to the pandemic. The coverage ratio indicator is for the previous 12 months, with the 12-month coverage ratio only positive for the first quarter of 2021. The leverage ratio indicator also peaked in the second quarter of 2020, due to loans taken out to finance acquisitions, but it is a good sign that since then the indicator has been reduced to almost 1, with only 1.25 for the third quarter of 2021. Whether the debt is a direct threat to the company can be measured by the coverage ratios. There have been no problems with the settlement of short-term liabilities in recent quarters, but if we look at the quick ratio, problems may arise. Interest cover was not there in the first three quarters either, but by the end of 2021 there is no problem.

The poor performance in 2020 has been replaced by an extremely strong post-acquisition performance, and the company is trading around 3.5 times P/E based on current Wall Street consensus forecasts. Cleveland-Cliffs lags well behind in EPS, with Cliffs’ competitors in this case being long-established steel companies, with relatively recent acquisitions likely to be a contributing factor. It should be noted here, however, that the company did not have as heavily loss-making a year in 2020 as U.S. Steel or ArcelorMittal.

Cleveland-Cliffs is not the most underpriced stock in the steel sector. It ranks second behind Nucor, which is trading at a forecast P/E ratio of 4.63 times. So, looking only at the relative comparison, U.S. Steel is the most undervalued company, but the situation is not nearly so simple. Nucor, for example, has a market value of around $31 billion (5 December 2021), so it could be said to be the largest company in the sector. Despite this, its P/E is only 4.63. The average market capitalisation of the S&P 500 for the past 12 months as of 3 December 2021 is 28.53 times (Multpl, 2021), almost nine times the P/E of Cleveland-Cliffs, but even 6 times that of Nucor. On this basis, we would not distinguish between companies in the steel sector, but rather conclude that the sector as a whole is undervalued relative to the market.

Analysis of Nucor Corporation

Nucor Corporation is the largest and most diversified producer of steel and steel products in the United States. The company is also among the largest in scrap recycling in all of North America. The electric blast furnace was first used by Nucor in America to make beams and structural steel in 1969, and since then it has become America’s largest steel producer through various acquisitions. Today, the company has over 300 locations and more than 25,000 employees (Nucor Corporation, 2021).

A completely different kind of company than Cleveland-Cliffs, Nucor is a steel giant that has been in business for more than 60 years and makes up a huge part of the US steel market with its diversified products. However, it should be noted that the company is not fully vertically integrated like Cleveland-Cliffs, so it is exposed to input costs. The evolution of the iron ore price is therefore important in this respect, although conditions are currently favourable, potential volatility should be expected when China restarts production in the first half of 2022. The company’s revenue increased by 17% compared to the second quarter, amounting to around $10.31 billion. The company also reported an EPS of $7.28, a quarterly record in the company’s history (Nucor Corporation, 2021.) In addition to the company’s results, it should be mentioned that it has little debt, with net debt of about $3.38 billion, and when compared to EBITDA of $7.7 billion, it can be seen that the company has its debt under control. (Nucor Corporation, 2021.) In comparison, Cleveland-Cliffs has debt of between $5.5 billion, which is a much smaller company in terms of market capitalization.

However, according to Wall Street, no particular growth is expected, with annual EPS forecast at around $23.73 and next year’s about 35% lower at $15.46. (Seeking Alpha, 2021.)

In the third quarter alone, they spent almost $2 billion on acquisitions, buying a state-of-the-art steel plate manufacturing blast furnace, as well as an insulated sheet metal company and a steel racking company. With this diversification, the company will be able to supply the materials needed to build data centres. (Nucor Corporation, 2021.) Acquisitions are therefore continuous, as we have seen in the history of the company, and debt is not a constraint because of its cash flows. Despite acquisitions, the company’s free cash flow for the quarter was over two billion dollars (Nucor Corporation, 2021.)

The cash flows suggest that management has increased the dividend every year since its introduction. In the first nine months of 2021, $2.1 billion has already been returned to investors, accounting for 47% of total net sales for the period. Of this, $367 million was dividends and $1.8 billion was share buybacks. (Nucor Corporation, 2021.) The company announced on December 3 that it would increase its dividend by 23.5 percent, from 41 cents per share to 50 cents per share. In addition, the board of directors replaced the $3 billion share buyback programme it had introduced earlier in the year with a $4 billion programme, with $2.3 billion already repurchased under the existing programme. (Singh M. , 2021.)

Financially, therefore, we are talking about a very strong company, without the shortcomings that Cleveland-Cliffs has because of acquisitions, but it must be said that there are few similarities between the two situations. The counterpart to Cliffs’ electric steel – in terms of demand potential – at Nucor is a net-zero carbon footprint steel product called Econiq, which is made using 100 percent renewable electricity in electric arc furnaces from iron reduced with natural gas and recycled scrap in electric arc furnaces. In response to increasingly stringent emissions standards, General Motors has already signed a contract with Nucor, with the first delivery expected in the first quarter of 2022. The company’s scrap and electric arc furnace setup has led it to emit more than 70% less emissions than the steel industry average. (Bloomberg, 2021.) Nucor’s share price is set to grow 207% between June 2020 and December 2021, but there is still upside potential based on fundamental analysis. Apart from the technical analysis in this case, it can be said that it is positive for a share price with this look to consolidate. The numbers clearly show that we are talking about a much healthier company economically. Even during the downturn in 2020, the leverage ratio did not go above one, barely exceeding 0.5. By the third quarter of 2021, the company will have returned almost half of its invested capital in revenue, and the return on assets will have almost reached 20 percent, before a mere almost three percent in the second quarter of 2020. The fast rate is pretty close to 1 by the third quarter of 2021, trend-wise. There is no problem with the leverage ratio, so these ratios are less of a concern, but it is also worth bearing in mind the balancing of short-term liabilities. The interest coverage ratio was low only in the first quarter of 2020, but even then it remained at an acceptable level of three and a half times. On their own, the hedging ratios may be a cause for concern, but when taken together with the other ratios and the cash flow generated, we do not expect any problems in the settlement of short-term liabilities.

After examining the hedging ratios, we will look again at the market multiples ratios, although these have already been briefly discussed in the Cleveland-Cliffs comparative analysis.

In the first quarter of 2020, the almost one- time book value as a percentage of exchange rate is striking, but what is interesting is that the latest figure is not much different from the 5.19 EBITDA as a percentage of enterprise value of the same period, which was 6.20 in the third quarter of 2021. A P/E of around 13 in early 2020 is average, but the current forecast of 4.65 is still low.

The metrics clearly show that by the third quarter of 2021, Cleveland-Cliffs, based on its forecast P/E and EBITDA to enterprise value, looks undervalued relative to Nucor. In terms of book value, however, both companies are priced above one, i.e., above book value, but Nucor is more undervalued than Cliffs in this respect. The data suggests that Cliffs has the potential for higher growth, but of course this has to be taken together with the undervaluation of the sector and the fact that both companies are diversified in different directions.

Summary

The world of steel and the world of the stock market are therefore very complexly interlinked. Everything can be linked to the steel industry in some way, as it is a fundamental building block of everyday life, which is why the semiconductor shortage caused by (partly) cryptocurrency mining can indirectly affect the figures in the profit and loss accounts of steel companies. In conclusion, the steel cycle has not reached its peak. The post-pandemic bounce-back brought with it the new cycle and the extent to which steel companies responded to the price rises with increases was visible. Both companies have the potential to see increased demand, with an improvement in the semiconductor shortage helping to revive the auto industry, which will provide significant revenue for Cliffs with contracts at these high steel prices. Nucor also has exposure to the automotive industry but will benefit more from Joe Biden’s infrastructure bill because of their diversification. Cleveland-Cliffs will of course also benefit from the package, a concrete win for the whole steel industry due to the requirements that only US steel can be used in the development. In addition, China’s position in the steel market is changing, the outlook is that their dumping and exports will no longer dominate the steel market on the road to carbon neutrality, which will affect the whole world. Nucor’s financial position is very strong, and it has a strong dividend paying stock in addition to its steel industry outlook while Cleveland-Cliffs has more potential in the medium term due to its vertical integration. In an aggressive steel portfolio, we would allocate 60% to Cleveland-Cliffs and 40% to Nucor. The aggressiveness comes from Cliffs’ beta of 2.24 (Yahoo Finance, 2021) versus Nucor’s beta of 1.47. (Yahoo Finance, 2021) Risks would include China, but the new coronavirus mutation should not be taken lightly, and as a lot depends on steel demand remaining at high levels, this is also a risk factor. Much also depends on the easing of the chip shortage, but producers are likely to bring the situation under control by the end of 2022 at the latest, which will further expand demand for steel, and 5 years of infrastructure investment will keep demand up.

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Dr. Aranka Baranyi, Associate professor
Óbuda University

Dániel Tomek, Economist, business analyst
Goshu Desalegn, PhD student
Hungarian University of Agricultural and Life Sciences, Doctoral School of Economics and Regional Sciences

Dr. László Pataki, Associate professor
Hungarian University of Agriculture and Life Sciences