Steel stocks have rebounded sharply since early July, despite the conflicted outlook for the overall steel industry. Steelmakers led by Nucor (NUE), Commercial Metals Company (CMC) and Steel Dynamics (STLD) have formed constructive chart patterns with valid buy points. The recovery has been less pronounced for others, including United States Steel (X) and Cleveland-Cliffs (CLF). But turnarounds in those stocks have also generated actionable chart patterns.
Steel industry executives coming off strong quarterly performances have been bullish on both product demand and the industry outlook in recent weeks. Analysts, on the other hand, assess the market as oversupplied, suggesting very little pricing strength. Steel prices dropped for six straight weeks through early August. Despite those concerns, investors have been jumping into steel stocks, lifting the stocks to finish up valid bases.
Steel Market Oversupply?
When Steel Dynamics announced its second quarter results on July 20, CEO Mark Millett noted growth opportunities in the current steel market.
“Customer order entry activity continues to be healthy across all of our businesses, conflicting with the more pessimistic emotion in the marketplace,” Millett said. “We believe there are strong drivers for our continued growth.”
However, commodity analysts seem less convinced.
KeyBanc Capital Markets analysts wrote on Aug. 23, that the U.S. steel markets remain oversupplied, after the build up coming out of the Covid-19 pandemic. The analysts noted that U.S. steel production decreased 5% year-over-year in July. Global crude steel production also decreased 6% in July compared to June. And the slowdown was not just in the U.S. China’s steel production dropped 10% month-over-month in July, the analysts wrote.
But even with the decreases, demand remains too weak to sop up industry stockpiles.
“Demand growth is muted,” KeyBanc Capital Markets analyst Phil Gibbs said in an interview. “There seems to be a cloud out there that you’ve got recessionary pressures and all these things going to drive the market down.”
Gibbs added that company views often differ from analysts’ market assessments. Businesses often base views on order flow, even when the orders do not increase their backlog.
“I can’t speak for the rest of the industry, but we’re not — we haven’t seen a dramatic structural sort of change in underlying demand. Order activity has remained pretty strong,” Millett told investors during the earnings call.
For Gibbs, “right now, through our order book, we don’t see it,” he said.
Covid-19: Steel Supply Shortage And Rebound
The Covid-19 pandemic mangled global supply chains in many industries, including steel. As much of the world slogged through the crisis, demand for steel crashed. Steel demand started to pick up toward the end of 2020.
In 2021, U.S. steel prices skyrocketed to all-time highs, moving above $1,900 per short ton in August 2021. Prices fell into a lull early8 this year, then surged to around $1,500 per short ton of hot-rolled coil (HRC) in April after Russia invaded Ukraine. Prior to the pandemic, HRC prices ran near $500 per ton.
On Friday, benchmark HRC steel futures were around $793 per short ton. Steel rebar futures trading around $596 per ton.
On Wednesday, Cleveland-Cliffs announced it was increasing current spot market base prices by a minimum of $75 per ton for many different steel products. CLF said these increases would be effective immediately for new orders in North America.
Despite Cleveland-Cliffs increase, analysts remain bearish on pricing strength.
“Our view is that prices will continue to fall in the coming months due to uneven demand, new capacity starting and scrap prices dropping,” wrote Carlos De Alba, Morgan Stanley steel commodities analyst, in an Aug. 8 note on HRC prices.
Gibbs, the KeyBanc analyst, also sees industry pricing as under pressure. There has been a “big dip” in pricing for a number of steel products this year, he says, which will impact the second half of 2022.
“It could stabilize and bounce, but I don’t think it’s going to be long lasting just because of all the supply on the sidelines waiting to be unleashed at any sign of a pickup in either pricing or demand,” Gibbs said.
Steel Stocks Building Buy Points
Nucor, Steel Dynamics and Commercial Metals Company are all steel stocks that have formed valid bases recently. Steel Dynamics is listed on both the IBD Leaderboard and IBD SwingTrader premium stock services.
Other stocks with steel exposure that are setting up include Paul Singer-backed Howmet Aerospace (HWM), along with ATI (ATI). Both companies engineer specialty steel alloy components for aerospace and other industries.
Industry In Transition
Amid the tangled supply chains and industry contortions caused by Russia’s war in Ukraine, steel manufacturing is in the midst of a vast transition. Younger companies, led by Nucor and Steel Dynamics, have grown up around electric arc furnace (EAF) manufacturing. Other industry leaders, including United States Steel, rely on traditional blast furnace mills.
Cleveland Cliffs was a miner and steel industry supplier of iron ore. It moved aggressively into traditional blast furnace steel manufacturing in 2020, acquiring AK Steel and the U.S. operations of Luxembourg-based steel giant Arcelor-Mittal (MT).
The electric arc furnace, as its name suggests, runs off electricity as its primary source of energy. Scrap steel is the primary raw material. The electric arc furnace steel industry currently makes up more than 70% of steel produced in the U.S., according to the Steel Manufactures Association. However, globally, traditional blast furnace steel manufacturing still makes up around 70% of the market.
The electric arc furnace technique offers companies lower initial costs and takes less time to manufacture products. It is also easier to manage the temperature within the system and emits 75% less greenhouse gasses compared to blast furnace operations, according to a Steel Manufacturers Association study.
The raw materials in blast furnaces are iron ore and coking coal, which generates the high temperatures needed for the process. The industry reports that this can produce a higher quality steel, but it emits increased amounts of carbon dioxide.
Steel Stocks: Steel Dynamics
Steel Dynamics topped an 86.04 buy point in a cup with handle base on Thursday. Shares held above that entry on Monday, despite a receding overall market. The buy range extends to $90.34. The stock on Monday gained 0.4%, to above 87.
The Fort Wayne, Indiana-based company is among the largest producers of carbon steel products in the U.S. It engages in metal recycling operations along with steel fabrication and produces myriad steel products. STLD’s market capitalization recently moved north of $16 billion market cap, so it’s entering territory that tends to attract more investment by large-cap funds.
Steel Dynamics topped earnings estimates in second quarter. Earnings increased 98% to $6.73 per share while sales grew 55% to $6.2 billion. Analysts forecast third quarter EPS edging up 2% to $5.08. Revenue is projected to spike 10% to $5.6 billion, according to FactSet.
The stock ranks first in the Steel-Producers industry group. STLD stock has an 96 Composite Rating out of 99. It has a 90 Relative Strength Rating, an exclusive IBD Stock Checkup gauge for share-price movement that tops at 99. The rating shows how a stock’s performance over the last 52 weeks holds up against all the other stocks in IBD’s database. The EPS rating is 98.
Nucor is working on a cup-with-handle base with a 146 buy point, according to MarketSmith. The stock moved above its 50-day and 200-day lines on July 26 amid below-average volume. Shares rose 0.6%, 141.31, on Monday.
The Charlotte, North Carolina-based Nucor has been the largest steel and steel products producer in the U.S. for several years, with U.S. Steel running just behind it on that list. Nucor operates around 20 steel mills across the country.
The company topped earnings views on July 21 with record profits. Earnings grew 88% to $9.67 per share in the second quarter. Total sales increased 34% to $11.8 billion. Analysts expect full-year EPS to grow 31% to $30.28 while revenue is expected to increase 16% to $42.4 billion.
The company’s outlook for the third quarter calls for demand to remain “stable and resilient.” Nucor expects a decrease from its second-quarter numbers, but still predicts 2022 “will be the most profitable year in Nucor’s history.”
Nucor is third in the Steel-Producers industry group, behind Steel Dynamics. The stock has an 92 Composite Rating. It has a 89 Relative Strength Rating. The EPS rating is 97.
Steel Stocks: Commercial Metals Company
CMC shares added 0.8% to trade just below 43 on Monday. They have formed a double bottom pattern with a 42.99 buy point, according to MarketSmith. The stock moved above its 50-day and 200-day lines on July 26 amid below average volume. CMC has climbed around 50% above its 52-week low set in July.
The Irving, Texas-based Commercial Metals company engages in the manufacturing, recycling, and marketing of steel and metal products. It operates in both North America and Europe. Founded in 1915, its facilities includes eight electric arc furnace mini mills.
CMC topped third quarter earnings views on June 16. Earnings ballooned 150% to $2.61 per share. Sales increased 39% to $2.5 billion. Analysts forecast EPS growing 93% to $2.44 in the fourth quarter while sales are expected to increase 20% to $2.4 billion.
Wall Street is predicting full-year earnings to soar 151% to $8.86 per share. Full-year revenue is predicted to increase 33% to $8.9 billion, according to FactSet
Commercial Metals Company ranks first in the Metal Processing & Fabrication industry group. CMC stock has an 99 Composite Rating out of 99. It has a 92 Relative Strength Rating. The EPS rating is 99.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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