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US Steel Stocks: Is the Island Party Finally Over?

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  • US steel stocks have been weak this year. After the initial frenzy over Section 232 tariffs died down, markets turned bearish on the sector.
  • US steel prices rose to a decade high last year. Since then, prices have fallen sharply. The outlook appears bearish considering global and international factors.

US steel stocks

US steel stocks have been volatile this year. September started on a strong note for steel stocks. However, US steel stocks were weak last week. U.S. Steel Corporation, Nucor, and Steel Dynamics released their respective third-quarter guidance last week. All of the companies issued lower-than-expected guidance, which triggered a sell-off in stock prices. Looking at the larger picture, U.S. Steel Corporation (X), AK Steel (AKS), and Nucor (NUE) are trading way below their levels before the Section 232 tariffs were announced last year.

The same holds true for US steel prices. The prices rose sharply in the first half of 2018. However, US steel prices have fallen. June and July were an anomaly. Domestic steel mills managed to push through price hikes. The momentum didn’t continue. US steel prices have fallen since August. US steel stocks also followed steel prices lower.

What went wrong for US steel stocks?

Before we analyze what went wrong, let’s see what actually worked in US steel’s favor. First, the global economy was strong in the first half of 2018. The strong global economy supported global steel prices. President Trump’s tariffs provided an additional impetus to US steel prices. The tariffs made imported steel products 25% higher. So, domestic US steel mills got the pricing power to raise their selling prices. In a way, the US steel industry became a sort of island.

The domestic steel industry went through this phase in 2016. The US imposed steep anti-dumping tariffs on flat-rolled steel imports from countries like South Korea and China. Most major flat-rolled steel exporters were slapped with hefty tariffs. As a result, flat-rolled steel imports fell and US steel mills got massive pricing power. Rising US steel prices supported US steel stocks in the first half of 2016.

US steel prices started to tumble

Island parties have an expiry date in free markets. In 2016, US steel importers managed to bring in imports from countries that weren’t named in the flat-rolled trade cases. Eventually, Chinese steel shipped through Vietnam. US steel stocks weakened in the third quarter of 2016. However, President Trump’s election changed the scene. US steel stocks rallied sharply in the fourth quarter of 2016 in what was called the “Trump effect.”

Looking at the current scene, two things have happened over the last year. First, global economic growth has slowed down. Metal prices have been subdued amid sagging global growth and the US-China trade war. US steel prices are a function of global steel prices and spreads. Reduced global prices lower the floor for US steel prices as well. The spreads are basically the differential between US and international steel prices.

Domestic markets

Second, US steel markets have also been weak. There was a demand-supply mismatch. While domestic steel mills increased their production to take advantage of higher prices, there wasn’t commensurate demand. President Trump granted a Section 232 exemption to Canada and Mexico—the leading steel exporters to the US. US steel stocks fell after President Trump announced an exemption for Canada and Mexico. Subdued US steel demand also led to compressed spreads between US and international steel prices.

Double whammy for US steel stocks

US steel stocks got a double whammy. Global steel prices and spreads between US and international steel prices have fallen over the last year. As a result, US steel prices struggled this year. The third-quarter earnings guidance acted as a reality check for US steel stocks. While the guidance was lower than expected, steel companies’ commentary on US steel markets didn’t instill confidence either. U.S. Steel Corporation sounded pessimistic in its third-quarter guidance release. Read US Steel Companies’ Guidance Opens a Can of Worms to learn more.

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