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Steelmakers Forge Ahead

23 August 2013 in Trading Ideas

The jump in steel prices this summer has sounded an alarm for some – but not necessarily for investors in the stocks of steelmakers.

The Recycled Steel motif, for example, has gained 1.3% during the past month. During that same timeframe, the S&P 500 has lost 1.9%. So far in 2013, the motif has lost 3.6%; the S&P 500 has risen 14.8%.

As the Wall Street Journal reported last month, a trio of events has contributed to higher prices in the US: blast furnace outages in both Ohio and Brazil, and a work lockout in Ontario have combined to take about 4% of US total supply off the market.1

recycled steelThe lack of supply is a far cry from earlier this year when the industry was buried with 200 million tons of excess capacity due in large part to the weak European economy and slowing growth in China.

In some cases, foreign-exchange dynamics have also played a role. Brazilian steelmaker Gerdau, which has a nearly 19% weighting Recycled Steel motif, has seen its shares increase nearly 16% in the past month amid an rating upgrade from HSBC, which cited both the boost from the Brazilian real falling 4% vs. the dollar last week, as well as its ability to raise prices for the long term.

As the Journal noted, part of the price increase is seasonal. Prices typically go up as steel-rich summer construction gets going. However, prices this summer are above where they were last year.

What isn’t clear is whether prices will remain high after the temporary production problems are resolved. A concern for steel buyers is that they’re overpaying now and will be forced to sell at a loss if prices begin to slide.

Perhaps the most cautionary quote came from James Barnett, a president from a small steel mill in Michigan who told the Journal: “When prices go up fast like this, they often go down fast, too.”

1John W. Miller, “Rise in Steel Prices Alarms Buyers,” wsj.com, July 4, 2013.