12 Sep

US Steel Stocks: Decoding the Good and Bad News

WRITTEN BY Mohit Oberoi, CFA
  • US steel stocks are flying high this month. U.S. Steel Corporation (X) has gained 19.5% so far, while AK Steel (AKS) is up 31.0%. Nucor (NUE), the largest US-based steel producer, is up 8.7%.
  • The US-China trade war’s de-escalation is helping metal and mining stocks this month. However, the US steel industry still looks weak fundamentally.

US steel stocks are having a good run this month. As of yesterday, U.S. Steel Corporation, AK Steel, and Nucor had risen 19.5%, 31.0%, and 8.7%, respectively. We’ve also seen some palpable de-escalation in the US-China trade war this month, and China exempted some US goods from tariffs yesterday. Additionally, Donald Trump has delayed tariffs scheduled for October 1 to October 15. Last month, both sides of the trade war upped the ante, but have since stepped back somewhat. As a result, the broader metal and mining space, including US steel stocks, has strengthened.

The good news for US steel stocks

Let’s look at the good news first. The US-China trade war’s de-escalation has improved US steel market sentiment and boosted steel stocks. This improvement comes after US steel stocks fell sharply in May and August when the trade war escalated. In May, Trump called off the trade war truce, accusing China of reneging on its commitments. And in August, both countries escalated matters.

Chinese steel exports

Elsewhere, central banks are cutting rates to shore up growth. China also lowered its reserve ratio for banks last week. Furthermore, despite slowdown concerns, China’s domestic steel demand is looking strong, led by the property sector. China’s steel exports fell to multi-month lows in August amid strong domestic demand. However, while this improved sentiment may help in the medium-to-long term, the US steel industry’s fundamentals look hazy at best.

Now the bad news for US steel stocks

Whereas central banks are trying to shore up growth, they may not be able to cure the slowdown. In China, we could see a slowdown in steel demand in 2020 as the property-led boom slows down. And in the US, steel demand indicators have been tepid and steel prices have weakened this month after rising in June and July. Scrap prices have also fallen. Generally, scrap and finished steel prices move in tandem.

Trump’s tariffs

Last year’s tariffs may have had a mirage effect, which isn’t new to the US steel industry. In early 2016, US steel prices rose sharply after tariffs were levied on flat rolled steel. However, US steel prices fell in the second half of 2016 to normal levels. Similarly, Section 232 tariffs created a divergence between US and international steel prices last year. Those prices have now normalized again.

What to watch for

Over the next couple of days, Nucor, Steel Dynamics, and U.S. Steel Corporation are set to release their third-quarter earnings guidance, which could offer more insights on the US steel industry’s health. We could see if Trump was correct in claiming that the US steel industry is “thriving” under his administration.

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