The Curious Case of Steel Companies’ 2Q16 Revenue Miss




One of the key features of steel companies’ 2Q16 financial performance has been lower-than-expected revenues. All the steel companies in our coverage of stocks missed consensus revenue estimates in 2Q16. We should note that steel companies’ revenues are functions of shipments and average selling prices. Steel companies’ shipments generally depend on end-user demand as well as on import penetration.

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Steel shipments

Steel production is a key driver of steel companies’ performance, so it’s important for investors in the metals and mining space to follow quarterly production and shipment data. Steel companies don’t have much pricing power due to the commoditized nature of their business, and so changes in shipments tend to determine how one company’s revenue changes compare to others.

2Q16 shipments

The graph above shows different steel companies 2Q16 shipments. Steel Dynamics’ (STLD) reported a 10.3% YoY (year-over-year) increase in its steel shipments—the highest yearly increase in our coverage of stocks. Notably, STLD’s 2Q16 revenues were only a tad short of analysts’ expectations. Most other steel companies missed revenue estimates by a much wider margin.

Nucor’s (NUE) 2Q16 steel shipments rose 6.7% as compared to the corresponding quarter last year. U.S. Steel’s (X) and ArcelorMittal’s (MT) 2Q16 steel shipments were almost similar to their respective 2Q15 shipments. AK Steel (AKS) has been an outlier and its steel shipments fell by more than 14% YoY in 2Q16.

Tight supply

We should note that US steel producers have deliberately kept supply tight in 2016. Although it has negatively impacted their steel shipments, it has led to higher lead times in domestic markets, which are supporting steel prices.

Investors looking to diversify the risk of investing in a single security might also consider the SPDR S&P Global Natural Resources ETF (GNR). Almost one-quarter of GNR’s holdings are invested in steel and other metal companies.

In the next part of the series, we’ll look at different steel companies’ 2Q16 average selling prices.


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