Can US Steel Stocks’ Santa Claus Rally Continue?

  • US steel stocks have been on fire in the fourth quarter and have outperformed the broader markets. However, they’re still far below last year’s highs.
  • The rise in US steel prices and the optimism surrounding a US-China trade deal have lifted these stocks. But can this rally continue further? Let’s take a look.

US steel stocks rally

US steel stocks have risen sharply in the fourth quarter. Based on yesterday’s closing prices, U.S. Steel Corporation (X), AK Steel (AKS), and Nucor (NUE) have gained 20.8%, 55.02%, and 14.2%, respectively, in the quarter. Earlier this month, Cleveland-Cliffs (CLF) announced that it would acquire AKS. The news triggered a buying spree in AKS.

The sector is in the green this month even as the broader markets have turned choppy. X, AKS, and CLF have risen 5.9%, 27.5%, and 10.5%, respectively, in the month.

What’s driving steel stocks up?

Metals and mining companies’ fortunes are closely tied to underlying commodity prices. US steel prices have bounced back from their lows, supporting these stocks’ prices. Read Is the US Steel Industry Finally ‘Thriving’ This Month? to explore what’s been impacting steel prices in the last month. Along with the uptrend in US steel prices, optimism over a US-China trade deal, along with signs that the Chinese economy might be bottoming out, is supporting commodity prices.

Furthermore, President Trump has restored Section 232 tariffs on Brazil and Argentina. Brazil is among the leading steel exporters to the US. To sum it up, several factors have helped US steel stocks move up in the last month.

This brings us to the next big question: What lies ahead for the sector?

Can US steel continue to rally?

In my last article, I noted that US steel prices should rise further from their current levels. Reportedly, domestic mills are pushing for $600 per ton as the base for HRC (hot rolled coil) prices. While there are different grades of steel, HRC prices are generally seen as the benchmark. It’s worth noting that lead times have extended, and imports have also fallen. Months of destocking have meant that supply chain inventories are also quite low. In short, we have a short-term supply squeeze in the markets.

X’s capacity curtailments also helped in restoring supply balance. However, the demand side of the equation has sagged this year. Looking forward to 2020, we think that while demand growth is expected to be muted, supply-side actions might still support prices.

Plus, a pickup in the global economy in 2020 might lead to positive sentiments in metals markets. Phase 1 of the US-China trade deal would also support US steel stocks. In my view, unless Washington and Beijing really screw up on the trade deal, the uptrend in US steel stocks might continue for now.