United States Steel (X) is steadily recovering from the huge drop it experienced in May of this year. Although its long bullish move up has been steady, there may be some cyclical issues the steel industry is facing as a whole right now.
Labor Agreements Put in Place
The United Steelworkers union has reached a tentative three-year labor deal with U.S. Steel that covers 16,000 employees at the company. Even though the economy has created sluggish demand and sales have dropped, both parties came to an agreement. This is a good, stable sign for the company. But analysts are being a bit more cautious on the immediate future of the industry as a whole. One concern is that present steel prices may have peaked for this cyclical industry. On top of this, increased domestic pricing was not duplicated abroad. This means the U.S. market may open up to imports that are less expensive than domestic products.
It has been a hard year for the steel industry globally. While prices may have risen in the States, that is not the case internationally, where other companies are struggling. Look at what is happening around the world.
Vietnam: The Vietnam Steel Association (VSA) disclosed that domestic steel prices have suddenly dropped. The price of steel has declined by VND300, 000 ($14) per ton. The main reason for the fall of domestic steel price is the cancellation of public investments and the halt of unnecessary projects.
China: China's domestic steel price has fallen for 10 weeks in a row, with the average loss posted at about 400 yuan per ton. At the current price level, the majority of steelmakers there have dropped into loss-making. Chinese steel mills struggled with defaulting on or deferring shipments of iron ore in the millions of tons. The industry is so bearish presently that buyers are looking for spot discounts of $10-$15 from the index-based price. Even larger discounts are being asked for when plan material is being inquired about. Large steel magnates that have offered loans to private individuals are no longer doing so. Private steel mills are running short on capital as prices for steel products continues to decline, while sales keep shrinking.
Russia: The deformed steel bar prices have decreased slightly in the Russian domestic market, after the peak season of Russian construction industry has comes to an end. It was learned that the prices of deformed steel bar fell by RUB200/ton in the Russian market last week.
So it does not look like U.S. Steel will be doing well enough to catch up to the level it used to be at before the fall -- at least not yet. If there is anything that can help the company stay profitable, it may be that its tubular segment more than tripled to $103 million. Shipments of the steel tubes used in drilling climbed 16% to 493,000 tons as the segment's average realized price rose 9% to $1,706 a ton.
Click to enlarge image.
From the beginning of May and into the early part of June, U.S. Steel saw a slide in the value of its stock from $29 clear down to $18. That was a huge hit in a very short period of time. Since then, it seems to be expanding in a broadening manner as highs get higher. Lows were getting lower, but it appears that trend has stopped and the stock might be forming a bullish peak and valley pattern. It is a bit early to confirm this, but it is something we should consider. The RSI is following the stock. The MACD is doing the same thing. So it looks as if U.S. steel may be getting ready to move back up and attempt to recover all what it has lost.
The Options Play
With U.S. Steel presently trading at $19.21, I am going to create a bullish play on it as follows:
- Buy a January 2013 call with a strike price of "19" (priced at $2.38)
- Sell a January 2013 call with a strike price of "20" (priced at $1.96)
- Net Debit to Start: $0.42
- Maximum Profit: $0.58
- Maximum Risk: net debit
- Maximum Length of Play: five months
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.