Steel companies’ dynamics
Before we look at possible reasons behind steel companies’ recent fall in share prices, we’ll analyze steel companies’ dynamics. Steel companies usually have high beta. They’re riskier compared to broader markets.
It’s important to note that beta measures the movement in a company’s share price—compared to the broader markets. If a company has a beta in excess of one, it implies that the company’s share price will usually rise or fall more than the broader markets.
Steel stocks outperform in bull periods
The above chart shows steel companies’ stock market returns. As you can see, steel plays had a dream run from 2004–2007. During this period, global markets were in a bull phase. Since steel companies have higher beta, their stock prices moved more than the broader indices.
Companies’ share prices—like U.S. Steel Corp. (X) and Steel Dynamics (STLD)—surged during this period. They gave more than 400% returns. Since the SPDR S&P Metals and Mining ETF (XME) invests in these companies, its value also increased.
Fall in share prices
During the peak of the global financial crisis, stock markets plunged globally. Steel companies were no exception. As you can see in the previous chart, U.S. Steel Corp’s (X) share prices fell by more than 80% in one year. Other steel plays—like ArcelorMittal (MT) and Nucor (NUE)—also saw huge declines in their share prices. This decline was more intense than the fall in the broader markets.
Steel companies came back into focus again in 2013. What factors made investors flock back to steel companies? It’s important to understand these factors before we can understand the recent downturn in these shares. We’ll discuss this more in the next part of the series.