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Now May be the Right Time to Go Long on Steel

The steel sector in the United State has experienced setbacks lately. The classic American steel producer,  United States Steel (X, NYSE), reported on June 19 that it will close two Midwestern blast furnaces. A few days earlier, its American counterparts, Nucor (NUE, NYSE) and Steel Dynamics (STLD, NASDAQ), released mediocre Q2 earnings forecasts, signifcantly lower than analysts’ expectations.

It should be noted that projections for 2019 were quite positive for the U.S. steel industry. The mining disaster in Brazil in January significantly lowered the supply of iron ore in world markets and was expected to generate a major rise in the price of steel. In addition, growing American dependence of steel imports should have helped the commodity as well.

However, new developments in the international trade arena acted against expectations. The reduction or elimination of U.S. tariffs against Canadian and Mexican steel in May drove prices downwards. Decreasing automotive production and increased supply from scrap producers have also taken their toll on prices.

In light of all of that, one would obviously expect steel stocks to drop. In reality, the opposite happened. Last Wednesday (June 19), United State Steel surged by 6%. The day before, on Tuesday, it closed 1% higher despite issuing Q2 EPS forecast of $0.40 – 23% lower than Wall Street’s forecast of $0.52.

As to other steel producers, on Wednesday, Steel Dynamics skyrocketed closed morning trade 11.2% higher. Nucor managed to climb by 4.3%. On June 11, Curt Woodworth from Credit Suisse has given Nucor stock a buy rating and a price target of $58 with an upside potential of 6.91%. The current stock price stands at $54.25. All in all, the rally in steel stocks helped the Dow Jones  gain 1.6%.

The bullishness in the steel market was also felt outside the United States. India’s Tata Steel (TATASTEEL, NSE), for example, climbed 5%, abruptly ending a 4-day losing streak.   

What Accounts for this Rally in the Steel Stock Market? 

From a yearly perspective, in 2019 steel stocks as a whole sank by 40% compared to 2018 mainly due to investors’ concerns that the growing trade war between the United States and China would cause global economic slowdown and would, consequently, lower demand for steel.

Investors are now convinced that prices have reached a nadir from which they will only go up. Put it another way, the sector appears to be undervalued, enough to make it a profitable investment once again.