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Coal squeeze may make steel a short

|Includes:MT, NUE, United States Steel Corporation (X)

People still do not seem to understand that higher prices for coal and iron ore are logically a bad thing for the steel manufacturers that consumer these substances by the ton.

Believe it or not, this is not as obvious in the market as you might think. People seem to think that iron and coal prices are so hot because steel mills are pushing out as much rolled and flat product as they can right now to meet global demand.

It is true that the world is hungry for steel, but the critical thing is that there are a lot of steel mills out there competing for iron and coal — and customers. This drives up demand for input materials but depresses the price they can charge on the other end, and that is just not a recipe for a healthy business.

As supply problems emerge, the situation gets even worse. The floods in Australia have knocked out around 19 million tons of steel production capacity, simply because the mills can’t get the coal they need. Everyone who wants to make a ton of steel has to pay a lot more to do so, but as yet those costs have still not translated into higher prices for steel consumers.

Add in the prospect that a fresh round of euro madness will spark yet another global growth scare and you have a situation that encourages shorting.

Look at the run that X and NUE have had. Look at the way the mothership MT  is leading the sector downward.

X is down a quiet 7.5% in the last two days and NUE looks vulnerable.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: X, NUE, MT