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Cold Winter for Steel

|Includes: AK Steel Holding Corp (AKS), X

Just like the past 3 months, the only important support to the stock price of steel companies is all but the US dollar. The fundamentals of steel have not been good since steel prices peaked in July. The 4 trillian yuan (approximately $586 billion) government stimulus has led to overexpansion in the steel industry, among other industries on the focus list. Steelmakers responded to favorable steel price early in the year by ramping up production, reaching record high output. Major steelmakers like Baosteel, Hebei Steel, have repeatedly lowered prices of their products. With excess output and export rebates comes the incentive to exports. Exports from China will place a downward pressure on the global steel price which is currently higher than its chinese counterpart. Major US steelmakers such as AK Steel, US steel’s earning releases continue to point to weaker prices in the near future.

In the coming months, there are a few factors that will change the above conjecture for the industry"
1. Recovery in the automakers. If automakers can hold up their production in the second half of the year as announced early this year without “Cash-and-Clunker”, steelmakers will give upside surprise in the upcoming earning reports.

2. Global economic growth. Global steel demand is expected to rise by 9.2% next year. If this is on track, we may see some “real demand” for steel instead of just “restocking”

3. US dollar weakens further. If US dollar weakens further, all commodity prices will rise.

4. Chinese government's crackdown on over-expansion.  Since August, Chinese government has made several announcements and initiatives to crack down on over-expansion of steel industry, among others. If these initiatives can be enforced effectively, the excess capacity can be absorbed in a few months.

Disclosure: no positions