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U.S. Steelmakers Paint Bullish Q2 Outlook Despite Cooling Prices

·6 min read

The steel industry has hit a fresh speed bump after enjoying a short-lived bull run as steel prices are back on a downward trend and have retreated to levels before Russia’s invasion of Ukraine. However, buoyant profit guidance from some major U.S. steel makers has raised optimism about a strong second quarter for the industry.

Some prominent U.S. steel producers came up with their guidance for the June quarter this week. Nucor Corporation NUE was the first to divulge the outlook for the second quarter. The steel giant expects to log record quarterly earnings in the quarter, driven by strong end-use market demand for steel and steel products. It projects second-quarter earnings to be between $8.75 and $8.85 per share, suggesting an increase from the previous quarterly earnings record of $7.97 per share in fourth-quarter 2021.

Nucor is confident that 2022 will be another year of robust earnings and cash flow. It envisions second-quarter earnings to be led by higher profitability in the steel products segment, which continues to benefit from strong demand in non-residential construction markets. Earnings in the company’s steel mills segment are projected to strengthen mainly due to higher profitability at bar, sheet and plate mills.

Steel Dynamics, Inc. STLD also sees record second-quarter performance on the back of robust domestic steel demand, particularly in automotive, construction and industrial sectors. It projects second-quarter earnings in the range of $6.33-$6.37 per share, which suggests a record quarterly performance. Adjusted earnings have been forecast in the band of $6.61-$6.65 per share. The company witnessed solid overall steel demand during the second quarter notwithstanding softening hot roll coil steel pricing. Demand in the non-residential construction sector remained strong in the quarter, the steelmaker noted.

Meanwhile, United States Steel Corporation X expects to deliver record performance in the second quarter with each business segment significantly contributing to profitability. The company expects adjusted EBITDA for the quarter to be roughly $1.6 billion, setting a new all-time record for the second quarter. The results are expected to be supported by higher demand across a diverse customer base, including the resurgent energy market.

Prices Soften, but Steady Demand Bodes Well

The steel industry staged a strong recovery last year after the pandemic-led downturn, courtesy of solid pent-up demand and a rally in steel prices to historic highs. The resumption of operations across major steel-consuming sectors such as construction and automotive, following the easing of lockdowns and restrictions globally, led to an upturn in steel demand.

Steel prices hit all-time highs in 2021 on solid demand, higher raw material costs, tight supply and low steel supply-chain inventories globally. Notably, U.S. steel prices skyrocketed in 2021 on supply tightness and robust demand. The benchmark hot-rolled coil (“HRC”) prices hit a record high of $1,960 per short ton in late September 2021, per S&P Global Platts. But prices lost steam since October, dragged down by stabilization of demand, improved supply conditions and higher steel imports.

However, since Russia invaded Ukraine, steel prices significantly rebounded on supply worries and a spike in lead times. U.S. HRC prices shot up to above $1,400 per short ton in April 2022 after slumping to nearly $1,000 per short ton at the beginning of March 2022. Steel prices witnessed a significant rally as the war threatened supplies from the two major producing nations.

Both Russia and Ukraine are key producers and suppliers of steel and steel-making raw materials, including coking coal and pig iron. The conflict led to a spike in steel input costs due to the disruptions in the supply chains.

However, after surging to nearly $1,500 per short ton around mid-April, the rally in HRC prices has stalled as prices have witnessed a downward correction, currently hovering above $1,000 per short ton. Prices have fallen more than 20% from the highs hit in April. The downward drift partly reflects shorter lead times. Mills are also negotiating lower prices for new orders. These factors along with fears of a recession are likely to keep steel prices under pressure over the near term.

Nevertheless, firm demand across key end-use markets augurs well for the steel industry. Steel makers are seeing continued healthy demand in the automotive market, despite the semiconductor crunch, which is affecting automotive production. Order activities in the non-residential construction market also remain strong, underscoring the underlying strength of this industry. Demand in the energy sector has also improved on the back of a spike in oil and gas prices. The impact of strong demand in major markets will likely reflect on the performance of steel companies in the second quarter.

Steel Stocks Worth Considering

A few stocks currently worth a look in the steel space are ArcelorMittal S.A. MT, Olympic Steel, Inc. ZEUS, Commercial Metals Company CMC and Nucor Corporation.

ArcelorMittal sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for ArcelorMittal’s current-year earnings has been revised 25.3% upward over the last 60 days. MT has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 17.8%.

Olympic Steel carries a Zacks Rank #1. The consensus estimate for ZEUS’s current-year earnings has been revised 110% upward over the last 60 days.

Olympic Steel has surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 44.9%.  ZEUS shares have gained around 26% over the past six months.

Commercial Metals carries a Zacks Rank #1 and has an expected earnings growth rate of 153% for the current fiscal year. The consensus estimate for CMC's current fiscal year earnings has been revised 42% upward over the last 60 days.

Commercial Metals beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 16%, on average.

Nucor sports a Zacks Rank #1 and has an expected earnings growth rate of 27.9% for the current year. The Zacks Consensus Estimate for NUE’s current-year earnings has been revised 69.2% upward over the last 60 days.

Nucor beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 2.2%, on average.

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