Steel companies have been quite volatile in June. The volatility could be due to the rising “risk-off” sentiment from concerns over a Brexit, or the United Kingdom leaving the EU (European Union). Is Brexit such a big risk for the global economy? It could put the EU economy into uncharted waters. Right now, analysts can only speculate whether the United Kingdom would be better without the EU or if its economy would prosper more under the EU (EUSC).
However, a Brexit would certainly increase volatility. It has the potential to derail Europe’s fragile economic growth. The region still hasn’t fully recovered from its economic slowdown. Moreover, markets don’t like uncertainty and volatility. This is visible in the recent price action.
Sentimental or fundamental?
Unlike copper and aluminum, which are widely traded on the LME (London Metal Exchange), steel is more regional in nature, and the pricing is determined by buyers and sellers. Although some trading activity does happen on exchanges, steel products are immune from the day-to-day volatility that we see in other industrial metals.
Also, due to trade cases, the US steel industry has turned into a virtual island largely immune to global steel prices—at least in the short term. US spot steel prices have bene flat in June amid the sell-off in other industrial metals. You can see the trend in spot HRC (hot rolled coil) prices in the graph above.
A Brexit shouldn’t have a material impact on steel companies such as Steel Dynamics (STLD), AK Steel Holding Corporation (AKS), and Nucor (NUE) as these companies get most of their revenues from the US market. This is assuming that Brexit doesn’t lead to a global catastrophe like the Lehman Brothers crisis of 2008.
Meanwhile, ArcelorMittal (MT) has sizable operations in Europe and could be more volatile as we get closer to the Brexit vote. We’ll discuss this more in the next part of this series.