ArcelorMittal (NYSE: MT), Nucor Corp. (NYSE: NUE), AK Steel Holding Corp. (NYSE: AKS), Freeport-McMoran Copper & Gold Inc. (NYSE:
FCX), and U.S. Steel Corp. (NYSE: X) have all been touted as on the mend, but the worries about the global economy have cooled some of the enthusiasm for steel stocks in the past two weeks. Anticipating a recovery in the global economy, steelmakers have ramped up production since the beginning of the year. The recent troubles in Europe have caused expectations of a strong recovery to fade quickly and have generated concern that the supply of steel will outstrip demand and weigh down steel prices.
AK Steel and US Steel were both recently upgraded by different analysts. AK Steel was raised to buy with a price target of $19 at Citigroup and raised from ‘underperform’ to ‘neutral’ by BofA Merrill Lynch. Goldman Sachs placed US Steel on its ‘conviction buy’ list in early May.
The outlook for US steelmakers has been pretty upbeat on steadily improving economic news. Now that the economy seems to be backsliding, the outlook is softer. US steel producers have solid balance sheets, however, so that is helping stabilize the shares.
US capacity has not shot up dramatically because many mills are still closed. ArcelorMittal plans to close two smaller Indiana mills and re-open one that is larger than the other two combined. This should lower their production costs somewhat.
Worldwide, however, China is still struggling with overproduction of steel and the country is turning to exporting more of its production. Chinese steel exports in April were 3x their level of a year ago. Buyers, sensing an opportunity ahead, are delaying purchases as they wait for the prices to fall.
US steel production in April fell by 1%, while production in China grew by 20%. European steelmakers boosted production in April by 2.5%.
Uncertainty about Europe’s stalled economy and China’s plans to reduce its growth have caused commodity prices, including steel, to fall. Lowered spending in Europe will also hurt Chinese exports because Europe is China’s largest destination for goods.
The global steel production growth rate in April is forecast to lead to production of 1.5 billion metric tons of steel in 2010. Global consumption is expected to be 1.3 billion metric tons. That is an equation for lower steel prices and a negative impact on steel company stocks.
