Must-know: Why it makes sense to hold on to steel companies (Part 6 of 6)
Steel companies rallied on Wall Street
Steel companies have high beta, which means that their prices move more than the market. Their returns are closely related to the overall growth in the economy. Steel stocks bore the brunt in 2008 when the economy dipped into recession. U.S. Steel Corp. (X) saw its share price drop to a fifth of its value. Most of the steel companies still haven’t reached their previous highs. Only Reliance Steel & Aluminum (RS) has touched its pre-crisis high, briefly during this year. ArcelorMittal (MT) trades at a quarter of its peak value while Nucor (NUE) is still down 40%.
Steel stocks rally
The steel industry has seen a change of fortunes over the past several quarters. There has been a rally of sorts as you can see in the previous chart. U.S. Steel Corp. has seen its share price double in the past year, with a 20% gain after its second quarter results. The chart shows that apart from ArcelorMittal (MT) all other major steel companies have given decent return over past two years.
To read more about U.S. Steel’s (X) second quarter results and its impact on its share price also read “Why US Steel increased despite a loss in the second quarter.”
Is there steam left in the rally?
While the share prices have seen a rally, the overall mood on the street is that of cautious optimism. While the resilience and growth in the steel industry are real, a section of the market feels that a lot of positives have been captured in the current prices.
The demand for steel in the U.S. is expected to be 5–6% this year, surpassing the global growth rate. The capacity utilization rates have been increasing steadily, which has improved the margins for steel companies. These factors, along with the key drivers we discussed previously, are expected to benefit steel companies in the U.S.
You can also access steel industry through the SPDR S&P Metals and Mining ETF (XME).
Browse this series on Market Realist:
- Part 1 - Must-know: An investor’s guide to the steel industry
- Part 2 - Why a construction increase is a key driver for steel companies
- Part 3 - Must-know: Why auto sales put steel companies in top gear
- Basic Materials Industry