Something strange is happening at Insteel Industries. On the surface, it's a story of recovery, a steel manufacturer shaking off the lingering effects of volatile scrap prices and a skittish construction market. But beneath the reassuring narrative of price increases and rebounding housing demand lies a subtle shift, a strategic play that may have flown under the radar of most analysts. Insteel, it appears, is quietly maneuvering to dominate its market through a calculated combination of capacity expansion and relentless import suppression.

The Q2 2024 earnings call was, at first glance, an optimistic affair. Insteel reported improved results, with widening spreads and rising demand, particularly in the residential sector. CEO H. Woltz confidently declared that the headwinds of inventory liquidations and declining steel prices had "run their course." Shipments were on the upswing, up over 10% year-over-year in April.

But there's a peculiar detail tucked away in the transcript, a detail that hints at a bolder, more ambitious strategy. Insteel, we learn, is doubling down on capital expenditures, aiming for a hefty $30 million investment in 2024, hot on the heels of a similar $30.7 million splurge in 2023. This isn't just routine maintenance; Insteel is adding three new production lines for welded wire reinforcement and an additional line for PC strand.

The company is adamant that this isn't a permanent shift in CapEx strategy. Yet, the sheer scale of these additions, coupled with Woltz's assertion that companies failing to make similar investments will become "increasingly uncompetitive," raises a critical question: Is Insteel gearing up for a future where it controls a significantly larger slice of the market, potentially even edging towards a monopolistic position?

Capacity Expansion and Import Suppression: A Two-Pronged Attack

Consider this: Insteel's current market capitalization is approximately $620 million. Assuming a conservative 10% return on capital, the company would need to generate roughly $62 million in annual net earnings to justify this valuation. Their 2023 annual net income was $32.4 million, roughly half of what they theoretically need.

Their capacity expansions could, if fully utilized, theoretically double their output and, assuming stable margins, their net income as well. But the market, even with infrastructure spending on the horizon, might not organically grow enough to absorb this additional capacity.

Here's where the second prong of their strategy emerges – the relentless assault on imported PC strand. Woltz is vocal about the "damaging" impact of low-priced imports, highlighting how the average unit value of imported PC strand is often lower than the domestic price of wire rod, its raw material. He's pushing for stricter trade actions and lobbying the administration to expand Section 232 tariffs to include PC strand.

It's a shrewd two-pronged attack: expand capacity while simultaneously squeezing out foreign competition. The implication is clear: Insteel aims to become the primary, if not sole, supplier for a significant portion of the US market for steel wire reinforcing products.

Potential for Innovation or a Stifling Monopoly?

This raises concerns about potential anti-competitive behavior. A near-monopoly in such a critical segment of the construction industry could give Insteel undue pricing power, potentially driving up costs for builders and ultimately consumers.

However, there's another side to this narrative. Insteel's investments in "state-of-the-art technology" suggest a focus on efficiency and potentially even lower production costs. If the company can leverage these investments to offset any potential price hikes, it could become a formidable force, offering high-quality products at competitive prices, while simultaneously securing a dominant market position.

Insteel's long history of aggressive import suppression – they currently have 22 dumping or countervailing duty orders against various countries – adds further weight to this hypothesis.

Insteel's Shipments: A Sign of Recovery

The company reported a positive trend in shipments throughout Q2 2024, with April showing a significant year-over-year increase. Let's visualize this trend:

The company, it seems, is betting big on a future where they're not just a major player, but the dominant player in their field. Whether this will lead to genuine innovation and enhanced competitiveness or a stifling monopoly remains to be seen. One thing is certain, however: Insteel Industries is a company to watch very closely in the months and years to come.

"Fun Fact: The Infrastructure Investment and Jobs Act (IIJA), also known as the Bipartisan Infrastructure Law, is a $1.2 trillion infrastructure bill signed into law in November 2021. While the full impact of the IIJA on Insteel's business is yet to be realized, the company is optimistic about the potential for increased demand in infrastructure-related markets."