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Will Steel Stocks Post Blowout Q1 on Price Rally, Solid Demand?

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Anindya Barman
·6 min read
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After being plagued by the fallout from the pandemic last year, the steel industry came roaring back in 2021, thanks largely to skyrocketing steel prices and a strong rebound in demand across major end-use markets. The industry witnessed a solid first quarter with steel prices catapulting to record highs riding on an upswing in demand and supply constraints.    

Moreover, recent buoyant profit guidance from some of the major U.S. steel makers have raised optimism about a strong first quarter for the steel industry.

Are steel stocks buckled up for a bumper first-quarter earnings season? Let’s take a look.

Upbeat Guidance from Big Steel Players

Last month, some of the prominent steel producers came up with a cheerful guidance for the March quarter. Nucor Corporation NUE said that it expects first-quarter earnings of $3.00-$3.10 per share, reflecting an increase from $1.30 in the prior quarter and 7 cents in the year-ago quarter. The projected first-quarter earnings are expected to exceed the previous record set in the third quarter of 2008 and be the highest quarterly earnings in the history of Nucor. The company’s steel mills and raw materials segments benefited from strong steel demand and higher prices. Nucor expects the performance of these units to be considerably higher on a sequential basis in the first quarter.

Steel Dynamics, Inc. STLD also provided an overwhelming view for the first quarter. It envisions earnings of $1.88-$1.92 per share that suggests an increase from 89 cents in the previous quarter and 88 cents in the prior-year quarter. Adjusted earnings for the quarter have been forecast at $1.94-$1.98 per share, which Steel Dynamics expects could be a record figure. The profitability of the company’s steel operations for the first quarter is forecast to rise considerably on a sequential basis led by flat roll metal spread expansion, as prices of flat roll steel remain supported by strong demand. Steel Dynamics also expects steel shipments to rise sequentially across its portfolio.

Moreover, United States Steel Corporation X bumped up its earnings view for the first quarter factoring in strong market conditions. The company raised adjusted earnings per share outlook to $1.02 for the quarter from 61 cents communicated earlier. U.S. Steel noted that solid market fundamentals and its well-timed acquisition of Big River Steel are backing significant earnings growth. It expects to benefit from healthy flat-rolled customer demand across most end-markets and flow-through of higher steel prices.

Cleveland-Cliffs Inc. CLF also issued strong guidance for the first quarter that exceeded analyst expectations. The company sees first-quarter adjusted EBITDA of roughly $500 million.

Nucor currently sports a Zacks Rank #1 (Strong Buy), while Steel Dynamics carries a Zacks Rank #2 (Buy), at present. Both U.S. Steel and Cleveland-Cliffs have a Zacks Rank #3 (Hold).

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

Strong Demand, Price Surge to Buoy Earnings?

The steel industry was hobbled by pandemic-induced demand destruction during the first half of 2020. However, the recovery in demand from key industries such as automotive and construction started in the back half and gained momentum toward the end of the third quarter of 2020 on resumption of operations following the easing of lockdowns and restrictions around the world.

Steel makers are seeing strong order booking in automotive. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. The automotive rebound is driving demand for flat-rolled steel products.

The construction sector has also bounced back on the heels of a resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient.

Steel Dynamics, last month, noted that steel demand in the United States remained strong in the first quarter led by momentum across the automotive and construction sectors. U.S. Steel also benefited from consumer-driven demand and pent-up infrastructure demand. As such, the impact of strong demand in major markets will likely get reflected on steel companies’ March-quarter results.

Meanwhile, steel prices are on a tear driven by an upturn in demand, supply shortages and higher raw material costs. Notably, U.S. steel prices have staged a strong recovery and hit all-time highs.

It is worth noting that U.S. steel prices plummeted at a breakneck pace last year with benchmark hot-rolled coil (“HRC”) prices cratering to a pandemic-induced multi-year low of roughly $440 per short ton in August.

However, HRC prices started to recover in September 2020 and are shooting higher since then. Prices have propelled to levels not seen since 2008 on U.S. steel mills’ back-to-back price hike actions, tight supply and surging end-market demand. Notably, HRC prices zoomed past $1,200 per short ton for the first time in February 2021 and cruised above the $1,300 per short ton level last month as the bull run continued. Prices have shot up roughly 200% from the August 2020 low.

The imbalance between supply and demand has largely contributed to 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, supply remains restricted due to the idling of blast furnaces and production disruptions associated with mill outages. These along with lower steel imports due to the Section 232 tariffs and the pandemic have tightened steel supplies. Prices of ferrous scrap, the main raw material for electric-arc furnace steel producers, also remain elevated amid tight supply. Notably, domestic steel mills are benefiting from spread expansion as a significant spurt in HRC prices has more than offset higher ferrous scrap costs.

Moreover, steel prices have strengthened in China on the back of firm domestic demand. Global steel prices also remain elevated on higher demand in China.

As such, the effects of the price surge are expected to get reflected on steel companies’ bottom lines for the first 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.

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United States Steel Corporation (X) : Free Stock Analysis Report
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
ClevelandCliffs Inc. (CLF) : Free Stock Analysis Report
Nucor Corporation (NUE) : Free Stock Analysis Report
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