In the previous part, we noted that Nucor (NUE) expects its 3Q17 profits to fall on a yearly basis as well as a sequential basis. The company’s 3Q17 earnings guidance wasn’t received well by the markets, and the stock saw selling pressure after it released its 3Q17 earnings guidance. Notably, spot steel prices have been strong in 3Q17. We saw a resilience in US steel prices after they showed a weakness in May and June. With spot steel prices showing strength, investors would have expected a similar rise in steel companies’ profits.
Raw material prices
Higher steel prices have had a ripple effect on the raw material markets. Seaborne iron ore prices have also taken cues from higher Chinese steel prices despite analysts’ warnings of an oversupply in the global iron ore markets (CLF).
While steel companies in China mainly rely on seaborne iron ore, steel scrap is widely used in the United States since mini-mills such as Nucor and Steel Dynamics (STLD) mainly rely on steel scrap. Steel scrap prices have risen this year, which has hurt Nucor’s margins.
According to Nucor, “Despite high utilization rates at our sheet mills, continued import pressure has not allowed pricing to keep pace with increasing raw material costs during the third quarter of 2017.”
As steel imports have risen this year amid the pending Section 232 imports probe, US steel market sentiments have turned somber. This is in contrast to last year when steel companies saw a spectacular rally when the markets expected tougher trade laws under the Trump administration.