Why Steel Stocks Are Rallying Despite Subpar Earnings (AKS, X, SLX)

U.S. steel producers fight China trade tactics and investors cheer efforts

Steel stocks have been performing horribly in 2015, plain and simple. AK Steel (AKS), U.S. Steel (X), and the Market Vectors Steel  ETF (SLX) know this all too well, with shares down 44%, 28%, and 22% respectively.

ak steel stock aksYou might expect to see AKS and X stock continue their slump today after both steelmakers dropped pretty disappointing quarterly results in the last two days. Instead, AKS stock is rallying, up more than 12% on heavy volume; X stock is also up big, tacking on as much as 10% on Wednesday.

So what gives, and will this rally in AK Steel or U.S. Steel stock last?

Earnings Ignored, Focus on Anti-Dumping Petition

Steel stocks wouldn’t be up today if it were up to industry earnings alone, that’s for certain. Yesterday, AKS stock reported second-quarter results, reporting a loss of 36 cents per share on revenue of $1.69 billion. Analysts expected a 37-cent per-share loss on revenue of $1.7 billion.

Similarly, X stock also wouldn’t be rallying if all investors cared about were the financials. This morning U.S. Steel released the gory details of its second quarter: X stock lost 79 cents per share as revenue fell  34% to $2.9 billion. Both metrics were well below consensus estimates, which called for EPS of 65 cents on revenue of $3.04 billion.

But earnings aren’t the catalyst of the rally. Domestic steel stocks — AKS and X being the most prominent — filed a trade petition against Brazil, China, India, India, Japan, South Korea, the Netherlands, Russia and the U.K. claiming those nations are flooding the U.S. market with cold-rolled steel at below-market prices.

X stock shot 5% higher on Tuesday and AKS stock jumped 15% yesterday after AK Steel decided to put its name on the claim, which was filed by a consortium of bigshots in the U.S. steel industry. Joining X and AKS in the formal complaint were ArcelorMittal (MT), Nucor (NUE), and Steel Dynamics (STLD).

I don’t blame the companies for teaming up to fight unfair import practices. It’s not something the steel industry should stand for under any circumstances, but the economics of the U.S. steel industry are already tough this year. A strengthening U.S. dollar continues putting pressure on most major commodities, and steel is no exception: the price of hot-rolled coil plunged 33% to $456 a ton in the second quarter  of 2015 alone.

The anti-dumping and countervailing duty petitions filed by X, AKS and their peers seek to impose higher tariffs on steel imports from the countries named. Steel exports to the U.S. from the eight aforementioned countries increased by 120% between 2012 and 2014, flooding the market and further pressuring prices.

It’s not just a matter of selling at below-market prices, they say. Investor’s Business Daily explains there’s more to it than that:

“The countervailing duty petitions charge that significant subsidies have been provided to foreign producers by the governments of Brazil, China, India, South Korea, and Russia as they try to build market share in the U.S.”

We’ll have to wait and see if the government decides to levy harsher tariffs against those countries, but if there’s even a hint of truth in the complaint, investors should definitely expect tariffs on steel imports to rise.

That should be immensely helpful for U.S. Steel and AK Steel, so it’s no surprise X stock and AKS stock are rallying on the good news. After all, good news in this industry has been tough to come by.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at [email protected]

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/ak-us-steel-stocks-aks-x/.

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