US steel prices
In the previous part, we saw what factors are supporting the upward momentum in spot steel prices. Prudent investing would warrant looking at risk factors also.
In this part of the series, we’ll see what factors could hamper the upward momentum in steel prices.
Chinese steel demand
Chinese steel buyers, like their counterparts in the United States, were also low on inventory earlier this year. Due to a seasonal uptick in steel demand and better-than-expected demand from the construction sector, Chinese steel prices got a boost. Add a touch of speculation that China is now increasing trading restrictions, and we have a more than 50% rise in Chinese steel prices. You can see the surge in Chinese steel prices in the graph above.
The global steel industry is not completely out of the woods yet. According to the World Steel Association, Chinese steel demand is expected to contract again in 2016. Moreover, rising steel prices have ensured that Chinese steel mills produce more of the metal. Chinese steel exports surged in March 2016 as a result of overproduction by Chinese steel mills.
Amid the jubilation in the global steel industry, the key issue of overcapacity has been left unaddressed. Overcapacity could prompt steel mills to produce more of the metal, which could put pressure on global steel prices. Even in the United States, while Nucor (NUE) and Steel Dynamics (STLD) have taken advantage of higher steel prices and increased spot sales, U.S. Steel Corporation (X) and AK Steel (AKS) still have some of their capacities offline.
If steel prices rise further, these companies could also consider restarting some of their idled plants. This could reduce the lead times for some steel products. Apparently, longer lead times have been one of the factors supporting US (VOO) steel prices.
In a nutshell, the hanging sword of global overcapacity could continue to threaten any major and sustainable rise in the steel industry. You can read more about this global overcapacity in Is the Steel Industry Really Turning Around?
If steel prices lose momentum, U.S. Steel could be hard pressed to meet its 2016 guidance. Any downward revision in U.S. Steel’s guidance could be met with a severe negative reaction from the Market.
Meanwhile, as things stand today, the outlook looks decent for the steel industry. You can read more about this in our series How Do Steel Industry Indicators Look amid 1Q16 Earnings?