U.S. steel companies forged solid earnings in 2018, thanks largely to the Trump administration’s trade actions on imported steel. The 25% tariff on steel imports, which the U.S. administration levied in March 2018, provided a thrust to U.S. steel prices last year, driving profits and cash flows of American steel makers.
However, is a tough first-quarter in store for U.S. steel stocks? Let’s take a look.
Profit Warnings from Some Key Players
Lower-than-expected guidance from some of the major U.S. steel makers has left investors’ worrying about a possible weak first quarter for the U.S. steel industry.
Steel Dynamics, Inc. STLD, for example, provided underwhelming earnings guidance for the first quarter as it expects lower earnings in its steel operations in the quarter. The steel producer expects earnings for the quarter in the band of 88-92 cents per share. That is a decrease from $1.17 per share recorded in the previous quarter and 96 cents per share it earned a year ago.
The company expects profitability from its steel operations to be lower sequentially in the first quarter mainly due to reduced earnings from its sheet operations.
While Steel Dynamics expects overall steel shipments to rise in the first quarter sequentially, it envisions average steel product pricing to decline more than the cost of average scrap consumed.
Moreover, U.S. steel giant Nucor Corporation NUE, last month, said that it expects earnings per share in the band of $1.45-$1.50 for the first quarter. This reflects a sequential decline from $2.07 in the fourth quarter of 2018. The company’s guidance also fell short of expectations.
Nucor expects earnings in the steel mills unit to decline sequentially mainly due to lower average selling prices and margins in its sheet mill group. Per Nucor, the sheet pricing has reached the low point during the first quarter and the impact of recent price increases are encouraging.
Moreover, United States Steel Corp. X, in its fourth-quarter call, provided disappointing profit guidance for the first quarter. U.S. Steel expects adjusted EBITDA for the first quarter at roughly $225 million, which excludes the expected impacts of fire at its Clairton coke making plant. The guidance was lower than expected and also well below the company’s fourth-quarter adjusted EBITDA of $535 million.
While AK Steel Holding Corp. AKS did not provide any specific guidance for the first quarter, its full-year profit guidance was disappointing. The company, in its fourth-quarter call, noted that it expects net income of $160-$180 million for 2019. The guidance reflects a decline from net income of $186 million the company logged in 2018. The company cited lower steel prices and higher costs as headwinds. It expects to record charges of around $80 million for Ashland Works facility closure costs in the first quarter.
Earnings Estimates Southbound
Earnings estimates for major U.S. steel stocks for the first quarter have gone down over the past two months. It appears that analysts are pessimistic about the earnings prospects for these stocks for the March quarter.
For Steel Dynamics, the Zacks Consensus Estimate for first-quarter earnings has declined around 16.4% over the past two months. The same for Nucor has gone down 6.3% over the same period. Estimates for U.S. Steel has also dropped 59.5% over the same timeframe.
Weaker U.S. Steel Prices
While U.S. steel companies reaped the benefits of higher domestic steel prices in 2018, the momentum is unlikely to sustain this year. U.S. steel prices tracked downward in second-half 2018 and tumbled during the fourth quarter on concerns over a slowdown in steel demand in China, the world’s top consumer, amid a cooling Chinese economy.
In fact, after rallying to multi-year highs on the back of Trump administration’s imposition of tariffs on imported steel, U.S. steel prices have now fallen back to the levels seen prior to the tariff announcement.
The tariffs have boosted production capacity of American steel producers amid lower imports. They have helped U.S. steel industry capacity break above the important 80% level – the minimum rate required for sustained profitability of the industry. Improved capacity has led to increased U.S. steel production.
However, higher U.S. steel production (partly driven by restarted mills) has contributed to the drop in domestic steel prices. Uncertainties surrounding global economic growth and concerns over a possible slowdown in the U.S. economy are other factors for the decline.
Notably, the benchmark hot-rolled coil steel prices went downhill in January 2019. While prices rebounded in February and have stabilized since then, they are well below their peak level of roughly $920 per short ton (st) reached in July 2018.
According to S&P Global, U.S. hot-rolled steel coil prices fell 13.2% to $695/st in the first quarter compared with $801/st in fourth-quarter 2018.
As such, weaker U.S. steel prices will likely put pressure on selling prices of American steel makers and weigh on their bottom lines in the first quarter.
Nucor, Steel Dynamics, U.S. Steel and AK Steel each currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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