9 Jan

How U.S. Steel Went from Pariah to Market Darling

WRITTEN BY Mohit Oberoi, CFA

U.S. Steel’s journey

2016 was nothing short of a roller coaster ride for steel investors (XME). Though U.S. Steel (X) and other steelmakers like AK Steel (AKS), ArcelorMittal (MT), and Nucor (NUE) ended 2016 with substantial gains, it was far from a smooth journey.

How U.S. Steel Went from Pariah to Market Darling

Nightmarish January

2016 started on a weak note, and most steel stocks fell to multiyear lows in the first trading week of the year, tracking the weakness in the metals and mining sector. U.S. Steel’s market capitalization briefly fell below $1 billion in 2016. Steel stocks become pariahs as investors sold them in their flight to safety.

However, prices recovered after that. Most steel companies’ 4Q15 earnings were better than estimates, which helped fuel positive momentum around steel stocks. However, the real kicker for US steel companies came in the form of trade actions against imports of flat-rolled steel products from countries including China and Korea.

1H16 rally

Trade actions virtually turned the US steel industry into an island. While steel prices were subdued globally, US steel producers raised their base selling prices several times in the first half of 2016. According to data compiled by Metal Bulletin, spot HRC (hot rolled coil) prices rose from $380 per short ton to $640 per short ton between January 2016 and June 2016. Spot CRC (cold rolled coil) prices rose from $520 per short ton to $840 per short ton over the same period.

When steel prices rally ~70%, steel stocks cannot be left behind. Most steel stocks rose sharply in 1H16 tracking US spot steel prices. Even the Brexit voted turned out to be a small bump in the road for steelmakers.

However, steel companies saw selling pressure as we headed into 3Q16, which we’ll discuss in the next article.

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