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Steel Price Rebound Bodes Well for the Economy

Stocks in this article: NUE X

NEW YORK ( TheStreet) -- There's been a decided turnaround in the price of steel and the fortunes of companies that produce and sell it.

In the past few months a series of what Lemony Snicket might call "unfortunate events" has helped boost steel prices more than 10% to levels we haven't seen since the beginning of the year.

Starting with a strike in Ontario and two blast furnace outages in Ohio and Brazil and kaboom! There's suddenly a shortage of this essential metallic product. It's not a small shortage either.

An estimated five million tons of annual capacity has gone away. That's around 4% of the total U.S. supply. Yet, it's not all bad news, especially if you own shares of Nucor (NUE).

When you look at the one-year chart below you'd probably conclude that if you bought shares of NUE late last year you may just be plain lucky that they're where they are right now!

NUE Chart NUE data by YCharts

Do you see what I see? The year-over-year diluted quarterly earnings-per-share (EPS) line doesn't correlate well with the share price of NUE. Yet, that is true with many other companies, so don't worry.

The current PE ratio of almost 32 is offset by the forward (one-year projected) PE of less than 13. Analysts are forecasting NUE's EPS will more than double in 2014 from 2013's $1.72 to around $3.60.

With steel prices popping like organic popcorn of late, those estimates might be accurate. A worldwide boom in infrastructure redevelopment and other structural replacement programs are likely to help.

In the week past week the price of benchmark hot-rolled steel coil, used to make items including autos, perked upward to $630 per ton. That's an increase from the May 28 price of $570, which was the low for the year.

This amazing turnaround in steel's pricing occurred while the news media reported what appeared to be an insurmountable surplus of 200 million tons of excess capacity. Go figure!

This was due mainly to slowing growth in China and the ongoing economic malaise in the eurozone. The causes of the sudden shortages will eventually go away and steel buyers are beginning to worry.

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