How Did the Steel Industry Fare in July amid Chinese Slowdown?
(Continued from Prior Part)
US steel industry’s outlook
So far in this series, we’ve explored the key indicators of the steel industry. However, as an investor in steel companies like U.S. Steel (X), Nucor (NUE), and AK Steel (AKS) you might also want to explore the outlook for the overall US steel industry.
Currently, Nucor forms 2.73% of the Materials Select Sector SPDR ETF (XLB) and 1.51% of the SPDR S&P Dividend ETF (SDY). The steel industry was banking on a recovery in the second half of the year and stock prices did run up in July. However, in the last couple of weeks share prices of several steel companies have hit their fresh 52-week lows. In this part, we’ll explore the US steel industry’s outlook amid challenging global macros.
Chinese slowdown
China is doing everything it can to prevent its economy from crashing any further. In the latest move, China’s central bank has reduced the benchmark one-year lending rates. This is the fifth rate cut that the central bank has announced in the last ten months. The previous chart shows the trend in China’s benchmark one-year lending rates over the last year.
However, despite these rate cuts and the other ways that China is attempting to boost its economy, growth has failed to pick up. There doesn’t appear to be an early solution to the Chinese slowdown. The slowdown in China could continue to trigger volatility in commodity companies’ share prices. Chinese steel exports could also stay at elevated levels as domestic demand sputters.
Strong US demand indicators
As discussed previously, steel demand indicators in the US are quite strong if you exclude the falling steel demand from the energy sector. Steel imports have now fallen year-over-year for four consecutive months.
Moreover, the US steel industry has been quite aggressive in filing trade cases this year. Any positive outcome from these trade cases would be a welcome boost to steel companies.
Further downside in steel shares can’t be ruled out in the short term. Moreover, volatility would be at play over the next few months. Newsflow from China would continue to have its impact on steel companies’ share price.
However, over the medium to long term, steel companies’ performance will depend more on the earnings capacity of these companies. Most steel companies delivered better-than-expected earnings in 2Q15, as most analysts had pessimistic earnings estimates for the steel sector. Many steel stocks rose after their 2Q15 earnings.
Visit Market Realist’s Steel page to learn more about this industry.
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