Investors turned bullish on higher steel prices for U.S. producers in 2013, helping to spur stocks like US Steel (X) and AK Steel (AKS) higher during the latter half of the year. They might want to rethink that position this year.
Bloomberg JPMorgan’s Michael Gambardella and team explain:
Specifically, we expected the combination of domestic capacity returning to the market at the time of weakening cost support from iron ore and coking coal would depress U.S. prices. In addition, scrap prices play a key factor in U.S. sheet steel markets given the prevalence of scrap-based mini-mills at roughly 33% market share. After a substantial rise through year end 2013, momentum appears to be fading based on weaker than expected January benchmarks and more importantly signs of stress in the country’s biggest scrap importer, Turkey. Lastly, the rapid rise in domestic prices increased U.S. premiums over Chinese steel prices to near record levels and we are beginning to see the first signs of the resulting increased import pressure on U.S. prices.
As a result, they reiterated their bearish view on US Steel and AK Steel, while stating their preference of Nucor (NUE) and Steel Dynamics (STLD) for their “variable cost structures and significant leverage to an eventual recovery in non-residential construction activity,” Gambardella says. UBS stated a similar preference earlier this month.
Shares of US Steel have gained 0.2% to $25.38 today, while AK Steel has dropped 2.9% to $6.07, Nucor has fallen 0.5% to $48.54 and Steel Dynamics has declined 1.8% to $16.66.
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