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What's Ahead For Steel In 2010
The steel sector should see a better 2010, with both higher demand and higher costs, with everything obviously dependent on economic growth in both the U.S. and globally. The stocks, however, seem to have to moved ahead of fundamentals in the sector.
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Demand
The steel industry should see an increase in demand throughout 2010, as world economies begin to get back on track. In the U.S., industry utilization bottomed at 42% in the early part of 2009, and currently is at 63%.
If this demand does come back strongly, bringing with it higher utilization rates, the steel companies will see strong profits due to their operating leverage. United States Steel Corp. (NYSE:X) had 59% of its revenues in fiscal 2008 in its flat-rolled steel division. During the early part of 2008, when capacity utilization was in the low 90% range, that unit saw its operating income peak at $846 million.
Pricing
This higher demand has led to a little pricing power for the steel companies, as Nucor (NYSE:NUE) recently announced price increases on a range of products for January delivery.
Valuation
The stocks, of course, have rallied far ahead of the rebound in the economy with some of the large capitalization stocks moving 100% off the bottoms reached in March 2009. Arcelor Mittal (NYSE:MT) peaked at $100 per share during 2008, before dropping as low as $16 per share. The stock has since bounced back to $46 per share. This bounce may be more to technical reasons as fundamentals remain weak.
Costs
Costs for steel makers will increase in 2010. Negotiations have already begun between the large iron ore companies like BHP Billiton Ltd. (NYSE:BHP) and Rio Tinto plc (NYSE:RTP), and the Chinese steel companies to set prices beginning in the spring of 2010. The ore suppliers are reportedly pushing for price increases of as much as 25%.
This doesn't mean that the steel companies will get stuck paying for it, as in previous years of large price increases for iron ore and metallurgical coal they were able to pass along the price increases in the form of surcharges.
AK Steel (NYSE:AKS) has already announced a surcharge of $155 per ton beginning in January 2010 for its electrical steel products.
The Bottom Line
Investors who believe that the world and U.S. economies are heading for a "double dip," or a second contraction in economic growth, should probably avoid the steel sector as the stocks have moved ahead of fundamentals.
For related reading, check out How To Invest In Commodities and try out the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Demand
The steel industry should see an increase in demand throughout 2010, as world economies begin to get back on track. In the U.S., industry utilization bottomed at 42% in the early part of 2009, and currently is at 63%.
If this demand does come back strongly, bringing with it higher utilization rates, the steel companies will see strong profits due to their operating leverage. United States Steel Corp. (NYSE:X) had 59% of its revenues in fiscal 2008 in its flat-rolled steel division. During the early part of 2008, when capacity utilization was in the low 90% range, that unit saw its operating income peak at $846 million.
Pricing
This higher demand has led to a little pricing power for the steel companies, as Nucor (NYSE:NUE) recently announced price increases on a range of products for January delivery.
Valuation
The stocks, of course, have rallied far ahead of the rebound in the economy with some of the large capitalization stocks moving 100% off the bottoms reached in March 2009. Arcelor Mittal (NYSE:MT) peaked at $100 per share during 2008, before dropping as low as $16 per share. The stock has since bounced back to $46 per share. This bounce may be more to technical reasons as fundamentals remain weak.
Costs for steel makers will increase in 2010. Negotiations have already begun between the large iron ore companies like BHP Billiton Ltd. (NYSE:BHP) and Rio Tinto plc (NYSE:RTP), and the Chinese steel companies to set prices beginning in the spring of 2010. The ore suppliers are reportedly pushing for price increases of as much as 25%.
This doesn't mean that the steel companies will get stuck paying for it, as in previous years of large price increases for iron ore and metallurgical coal they were able to pass along the price increases in the form of surcharges.
AK Steel (NYSE:AKS) has already announced a surcharge of $155 per ton beginning in January 2010 for its electrical steel products.
The Bottom Line
Investors who believe that the world and U.S. economies are heading for a "double dip," or a second contraction in economic growth, should probably avoid the steel sector as the stocks have moved ahead of fundamentals.
For related reading, check out How To Invest In Commodities and try out the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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