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Are Steel Stocks Buckled Up for a Bumper Q2 Earnings Season?

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·5 min read
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The steel industry has come roaring back this year after being battered by the fallout of the pandemic in 2020, thanks largely to skyrocketing steel prices and a strong rebound in demand across major end-use markets. The industry witnessed a solid second quarter with steel prices catapulting to record highs riding on an upswing in demand and supply constraints.    

The recent buoyant profit guidance from some of the major U.S. steel makers have also raised optimism about a strong second quarter for the steel industry.

Will steel stocks post blowout earnings in the second quarter? Let’s take a look.

Cheerful Guidance From Big Steel Players

Last month, some of the prominent steel producers came up with an upbeat guidance for the June quarter. Nucor Corporation NUE said that it expects second-quarter earnings of between $4.60 and $4.70 per share. Earnings for the second quarter are projected to be the highest quarterly earnings in Nucor's history, beating the prior record of $3.10 per share set in first-quarter 2021. The company’s steel mills segment is expected to witness an improvement in earnings in the second quarter driven by a significant increase in profitability of its sheet and plate mills.

Steel Dynamics, Inc. STLD also provided an overwhelming view for the second quarter. It sees earnings in the range of $3.26-$3.30 per share. Steel Dynamics also expects second-quarter adjusted earnings in the band of $3.34-$3.38 per share, which will set record quarterly earnings for the company. The profitability of its steel operations for the second quarter is forecast to rise on a sequential basis driven by strong underlying steel demand and significant metal spread expansion across the entire platform, especially within the flat roll steel operations. Steel shipments in the second quarter are projected to increase sequentially across the company's steel portfolio, potentially achieving record quarterly volume.

Moreover, United States Steel Corporation X stated that it expects higher steel prices and strong flat-rolled steel demand, along with well-run operations, to deliver second-quarter adjusted EBITDA that more than doubles its first-quarter performance. It envisions adjusted EBITDA of around $1.2 billion and adjusted earnings per share of roughly $3.08 for the quarter.

Cleveland-Cliffs Inc. CLF also bumped up its guidance for the second quarter. The company now expects second-quarter adjusted EBITDA of $1.3 billion, up from the prior estimate of roughly $1.2 billion.

Nucor, Steel Dynamics and U.S. Steel each sports a Zacks Rank #1 (Strong Buy), while Cleveland-Cliffs has a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Solid Demand, Price Rally to Buoy Earnings?

Coronavirus-induced demand destruction wreaked havoc on the steel industry for much of the first half of last year. However, strong pent-up demand from major steel-consuming industries such as automotive and construction, and zooming steel prices have pulled the industry out of its virus-led slumber and put it on a solid footing.

The industry’s rebound started to gain momentum toward the end of the September quarter last year on the resumption of operations across key steel end-use markets following easing of lockdowns and restrictions across the globe.

The automotive industry has witnessed an accelerated recovery following the pandemic-led shutdowns on the back of strong customer demand. Notably, the pandemic-led shutdowns in the North American automotive industry last spring forced U.S. steel mills to curtail production amid a slump in steel demand. The strong automotive rebound is driving demand for flat steel products globally.

Steel makers are also benefiting from the strength in the non-residential construction market, reflected by strong order activity. The impact of strong demand in major markets will likely get reflected on steel companies’ June-quarter shipment volumes.

Steel prices are also shooting higher on solid demand, tight supply, higher raw material costs and low steel supply-chain inventories globally. U.S. steel prices have witnessed an unprecedented surge this year underpinned by strong underlying supply and demand fundamentals. The benchmark hot-rolled coil (“HRC”) prices cruised above the $1,600 per short ton level in May 2021 and shot past $1,700 per short ton earlier this month. The upward momentum continues with HRC prices breaking above the $1,800 per short ton level recently.

The demand-supply imbalance is the primary reason behind the strong run-up in steel prices. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. On the other hand, production disruptions along with lower steel imports due to the hefty Section 232 tariffs have tightened steel supplies. Prices of ferrous scrap, the main raw material for electric-arc furnace steel producers, also remain elevated amid tight supply.

The effects of the price surge are expected to get reflected on steel companies’ bottom lines for the second quarter. Higher steel prices are likely to have provided a boost to the selling prices of steel makers and driven their profit margins and cash flows in the quarter to be reported. In particular, U.S. steel companies are expected to have benefited from spread expansion as a significant spike in HRC prices has more than offset higher raw material costs.

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