Will U.S. Steel Corporation's 2016 Guidance Pan Out?
US steel prices
Previously, we learned that analysts have upwardly revised U.S. Steel Corporation’s (X) earnings estimates. Rising earnings estimates have brought U.S. Steel’s valuation multiples down to more appropriate levels.
However, the Market still values U.S. Steel at a premium compared to its historical valuations on expectations that steel prices could rally even further. In this part of the series, we’ll see what factors could support higher steel prices in the United States.
Steel buyers went about destocking their inventories last year. Now, as steel market conditions have improved, and the first half of 2016 has been strong for steel demand, there’s a rush to buy steel. Thanks to trade cases, steel buyers are left with few options but to buy steel from domestic steel mills.
Higher lead times for some steel products such as cold-rolled steel are also helping US steel mills such as AK Steel (AKS), Nucor (NUE), and the Commercial Metals Company (CMC) to raise their base selling prices.
Furthermore, rising steel scrap prices have ensured that steel buyers don’t resist much in paying more for steel products. US steel prices have generally moved in tandem with steel scrap prices, as you can see in the graph above.
The cherry on the cake has been the rise in steel prices globally, especially in China. As global steel prices have risen, so have the landed costs for imported steel products.
Improved sentiments have also helped support the rally in industrial metals. The failed Doha meeting is an indication of how strong market sentiments are currently. On another day, failure to reach a production cut deal between major energy producers would have triggered a big sell-off. The energy sector and other commodities did fall after the failure of the Doha talks, but they recouped their losses over the next couple of days.
The above-mentioned factors support higher steel prices in the United States (DIA). Higher steel prices could help U.S. Steel to meet its 2016 guidance. However, certain factors could hamper the rally in steel prices, as we’ll explore in the next part of the series.
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