SHIGEKI MAKINO CHIEF INVESTMENT OFFICER PUTNAM GLOBAL EQUITY FUND

COMPANY: Nucor Corporation TICKER: NUE (NYSE) PRICE: $53.38 52 WEEK RANGE: $50.99-$53.39 MARKET CAPITALIZATION: $8.32 billion

Shigeki Makino is the chief investment officer at Putnam Investments. Nucor is a steel company with headquarters in Charlotte,N.C.,and it has at least 20 minimills spread across America. Mr. Makino spoke with Katharine Herrup of The New York Sun about why the tight supply and demand in the steel industry makes Nucor a good stock pick.

Why did you choose a company in the steel industry?

The steel industry is showing accelerated demand on a short-term and long-term basis. A lot of countries like Brazil, Russia, India, and China (aka the BRIC countries) are becoming much more steel intensive. Essentially they are the largest emerging markets and increasingly have become the manufacturing source for the world. These countries need to build more infrastructure in their countries like roads, bridges, etc., that require the use of steel. It is like what was going on with steel in Japan and Korea back in the 1960s and 1980s. What we are seeing right now is acceleration in the industry – Japan and Germany are coming out of some long-term funks.

Eastern Europe is having more difficulty supplying steel,and it is now a net consumer. Countries in this region are exacerbating the supply/demand ratio – steel supply is growing in a much slower fashion and the demand for steel is growing faster than it has historically. The Chinese government has recently been more supportive of the industry as well. It was really fragmented and now they are making it more consolidated.

We’ve also seen global industry consolidation, which has caused some high profile companies to battle. There is a net consolidation across all regions that should make the market more rational. Steel companies are growing by buying other companies, but that does not increase the supply for the overall industry.

What about the American steel market?

America itself is a net importer. Only 75% of America’s steel needs are produced within the country. For America, global pricing is very important as a swing factor. The weak dollar and improving pricing overseas is helping the American steel industry. The steel stocks are very cheap on cash flow and earnings as we speak.

Of all the American steel companies, why do you like Nucor?

Nucor is one of the biggest players in America, and one of the most cost-competitive players in the world as well. They export very little. They produce high-quality products in the steel chain: steel plates, bars, beams, and structural related steel, a lot of which is used in commercial buildings. They also produce steel for civil uses like roads and airports.

We like the relatively big returns that they get.They also continue to acquire smaller players in the market and have been improving their raw materials usage. Mini mills like Nucor, which compete with blast furnace mills, usually use scrap material to make steel, but they’ve been using iron ore and using other technologies so that they can have better raw material inputs.

They are trying to improve their stability of raw materials prices, like gaining iron ore access, which puts them in a better position. Nucor and the minimills have been taking market share from some of the blast furnace mills by improving their raw materials.

How has Nucor been doing recently?

In the last eight of the nine quarters they have been ahead of guidance by a lot. They are trading very cheap on a free cash flow of about 10%. And the company has consistently paid out when they have had excess cash flow.

Do you think the price of the stock is at a good value?

It is definitely underpriced. A lot of the steel companies are pretty cheap.

What are the risks?

If the global economy slows so much that the supply/demand ratio becomes less tight.Basically,there would have to be a global economic recession.