Why investors need to understand the correction in metal shares

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Nov. 20 2020, Updated 4:12 p.m. ET

Correction in metal shares

Metal shares have had a dream run since mid-2013. Specifically, steel companies’ shares have been defying all the laws of gravity. An example is U.S. Steel Corp. (X). U.S. Steel’s share price jumped by almost 150% since August 2013. Other companies, like AK Steel (AKS), also played their part in this rally. AK Steel’s share price more than tripled in the last year.

The rally in steel plays was mainly broad based. Only a few steel companies—like Nucor (NUE) and ArcelorMittal (MT)—haven’t taken part in this rally.

steel usage

What went wrong with steel companies?

Everything was going well for steel companies until a few months ago. There were upgrades by leading brokerages. There were also favorable judgments on steel product imports. Steel demand from key end consumers was also increasing.

The previous chart shows the breakdown of U.S. steel consumption. As you can see, construction, automobiles, and energy are among the largest steel consumers. The demand outlook for all of these key industries was increasing.

After the spectacular rally, steel companies’ stocks tanked. Leading steel companies’ share prices have fallen by almost 50%. So, what does this fall mean for investors? Was it caused by change in market fundamentals or just profit taking?

In this series, we’ll analyze some of these facts. We’ll discuss how investors should play the steel industry after the recent correction.

In the next part of the series, we’ll analyze the fall in share prices in more detail.

Investors can also gain access to the metals industry through the SPDR S&P Metals and Mining ETF (XME).

Visit the Market Realist Steel page to learn more about the industry.

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