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Are We Seeing a Typical Dead Cat Bounce from Steel Stocks?

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Steel stocks

As noted in the previous article, steel stocks are having a strong run in 2019. Last year, steel stocks had a terrible time and U.S. Steel (X) and AK Steel (AKS) fell 48.2% and 60.2%, respectively. Nucor (NUE) fell 18.5%, while Cleveland-Cliffs (CLF) rose 6.6%. So, is the current uptrend in steel stocks the typical dead cat bounce? Let’s see.

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Valuation

To be sure, and as we had noted in Why Metal and Mining Have Been a Falling Knife, steel stocks had started to look attractive from a valuation standpoint. While there were some obvious headwinds ranging from China’s slowdown to a cyclical peak for steel prices, markets were getting a little too pessimistic on steel companies (XME). Also, while some observers have raised concerns over a possible oversupply in US steel markets as domestic companies add more capacity, we should look at the new capacity as import substitution.

Steel imports

The United States is the world’s largest steel importer. However, we saw a fall in US steel imports last year after President Trump imposed Section 232 tariffs. Simply put, the new capacity is not a risk for the US steel markets as long as imports are low, as new capacity would not cannibalize existing plants but would help in import substitution.

Furthermore, we’re now into the seasonally strong first quarter with benign supply chain inventories. Strong broader markets have also helped steel companies’ price action so far in 2019. While headwinds remain for the steel sector, the current uptrend might not be the dead cat bounce as some fear.

In the next article, we’ll see what lies ahead for steel stocks after a strong start to the year.

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