Did Steel Companies Overreact after the Brexit Vote?



Steel companies

The Brexit vote created a financial tsunami on June 24. It drowned all risk assets. Bears were back selling everything from commodities (DBC) to equities. Of course, gold was an exception. It gained ~3.8% after the Brexit vote as investors took solace in safe-haven assets. In this part of the series, we’ll explore what Brexit means for US steelmakers. Let’s start by looking at steelmakers’ price action after Brexit.

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ArcelorMittal got hammered

ArcelorMittal (MT) lost more than 15% after Brexit. Investors sold everything related to Europe. Europe is ArcelorMittal’s biggest market. In 1Q16, the company got more than 53% of its revenues from Europe (HEZU). However, the EBITDA (earnings before interest, tax, depreciation, and amortization) contribution was less than 40%. Note that Brexit could negatively impact ArcelorMittal’s earnings due to the euro’s fall against the US dollar.

US-based steel companies

Nucor (NUE) and Steel Dynamics (STLD) also lost more than 5% each. Fundamentally, these companies haven’t got much to do with Europe. Both of these companies get most of their revenue from North America. Unless Brexit turns out to be a global catastrophe like the Lehman Brothers crisis of 2008, US-based steel companies shouldn’t be impacted much.

The same applies for AK Steel (AKS). It gets most of its revenues from US markets. Almost 90% of those shipments are to contract customers that are somewhat immune from the volatility in spot steel prices. However, AK Steel fell almost 10% in the Brexit tsunami.

We could see US steel companies including U.S. Steel Corporation (X) recoup some of their losses in the coming days unless a global sell-off engulfs equity markets.

US spot steel prices, especially in the flat rolled space, have literally been on fire this year. In the coming parts of the series, we’ll explore if Brexit can spoil US steelmakers party. Before that, let’s see how Brexit could impact ArcelorMittal.


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