Steel is making a comeback, and luckily for investors, the comeback is just starting. United States Steel Corporation (NYSE:X) stock surged higher yesterday. So did AK Steel Holding Corporation (NYSE:AKS). Both steel stocks were up about 4%.
And it’s a multiday move. Over the past five days, both AKS stock and X stock are up over 10%.
The big catalyst? The same one that shot steel stocks up back in November 2016: President Donald J. Trump.
The Bull Thesis on Steel Stocks
In short, Trump is using Section 232 to see how steel imports affect national security, with the potential implication being a restriction on steel imports. That would cause a supply shortfall in the U.S. steel market. Lower supply coupled with sustained demand leads to higher steel prices. Higher steel prices mean higher steel stocks.
That is the bull argument for X stock, and it makes a lot of sense.
Deutsche Bank has gotten behind the bull thesis. Deutsche Bank analyst Jorge Beristain recently upgraded several steel stocks, including X, saying that “underlying demand will recover and imports subside once Section 232 is formerly released (end-June last timeline) and signed into law by President Trump soon after (between 0 and 105 days).”
Morgan Stanley has also turned bullish on steel stocks. Morgan Stanley analyst Brian Kurtz likewise upgraded steel stocks, including X, saying that “imports are likely to dip significantly in September/October since traders don’t want to take the risk of being an “importer of record” with the threat of Section 232 penalties.”
Here is a little context. In the United States, Section 232 of the Trade Expansion Act of 1962 allows the president to initiate an investigation to determine whether national security is threatened by imports. According to Section 232, this includes the imports causing “substantial unemployment … decrease in government revenue … displacement of any domestic products by excessive imports,” and other adverse effects.
In other words, it’s a very broad clause. That gives Trump tremendous flexibility in instituting policy changes to restrict steel imports.
That’s huge for steel stocks like X. Following the election of Trump as President, steel stocks such as U.S. Steel rallied hard on expectations for increased infrastructure spending to spark higher steel demand. But that hasn’t really been the case, and X stock is now trading just above its pre-Trump levels.
The reason, though, isn’t a lack of demand. Year-to-date, steel demand is up about 4%, underscoring a gradually growing economy with healthy infrastructure spending. Instead, the decline is due to a 14% increase in imports in the same period.
In other words, a supply surge has masked steadily increasing demand in the U.S. Remove the catalyst for the supply surge, and the supply-demand dynamics imply much higher steel prices.
Section 232 does just that, and considering the flexibility Section 232 gives Trump in instituting policy change, the right move here seems to be long steel stocks.
Bottom Line on X Stock
Buy X stock now, before the Trump tailwind comes back into play.
As of this writing, Luke Lango was long X stock.
