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Steel Stocks Could Be in for a Revival after Recent Weakness

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Steel stocks’ performances

US steel stocks have come under pressure in April. Credit Suisse and Bank of America Merrill Lynch issued bearish notes on the steel industry’s outlook earlier this month.

Both these brokerages see rising US steel production capacity as detrimental to the domestic steel price environment and have downgraded U.S. Steel Corporation (X).

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US steel prices have shown signs of bottoming out after falling sharply in the fourth quarter of 2018. On April 22, Steel Dynamics (STLD) provided positive commentary on the steel industry’s outlook during its first-quarter earnings release. In contrast, Nucor (NUE) has provided a somewhat downbeat commentary and expects its second-quarter earnings results to be similar to its first-quarter results.

During its earnings release, Nucor said, “The performance of the steel mills segment in the second quarter of 2019 is anticipated to be consistent compared to the first quarter of 2019 as weakening margins for sheet and plate mill products are expected to be offset by improving margins for structural and bar mill products.”

Brokerages’ view

Meanwhile, after the sell-off in steel stocks (XME), some brokerages have taken a more hopeful view of the sector. Bloomberg reported recently that Longbow analyst Chris Olin had said in a note to clients that he saw “a potential for a guidance cut from the likes of U.S. Steel Corp. and AK Steel Holding Corp.” However, he added that these risks seemed to be “fully discounted.”

Bloomberg also reported, “Cowen analyst Tyler Kenyon agrees that the risk-reward in steel stocks is more positive heading into first quarter earnings after the recent sell-off. But, given the potential downside for steel prices, the upside for the stocks is likely to be limited near-term.”

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