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What Awaits U.S. Steel Stocks After an Uninspiring Q3?

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The third-quarter earnings season for American steel stocks has been unimpressive as expected. U.S. steel makers continued to face the heat from weaker domestic steel prices in the September quarter. Lower prices put downward pressure on selling prices of these steel producers, hurting their bottom lines. Moreover, softer demand across certain key markets including automotive weighed on their performance.

Are U.S. steel companies bracing for more challenges ahead or is a rebound in the offing? But before we get to that, let’s take a quick recap of how major U.S. steel makers performed the third quarter.

How U.S. Steel Stocks Fared in Q3?

Third-quarter performance of prominent domestic steel makers paints a mixed picture. Nucor Corporation (NUE - Free Report) , the biggest U.S. steel maker, saw lower profits in the quarter, weighed down by lower shipments and steel prices. Its earnings of 90 cents per share surpassed the Zacks Consensus Estimate of 80 cents. However, revenues fell roughly 19% year over year to $5,464.5 million and missed the Zacks Consensus Estimate of $5,595 million.

Profitability in Nucor’s steel mills segment fell sequentially in the third quarter. Per the company, plate and sheet market conditions weakened in the quarter. Also, excess inventory throughout the supply chain led to continued destocking by customers.

United States Steel Corp. (X - Free Report) delivered better-than-expected results both on earnings and revenue fronts. Its adjusted loss of 21 cents a share for the quarter was narrower than the Zacks Consensus Estimate of a loss of 29 cents. Revenues fell roughly 18% year over year to $3,069 million on lower average realized prices, but beat the Zacks Consensus Estimate of $3,025.9 million.

Weak market conditions have forced the company to idle two of its blast furnaces in the United States and one in Europe. The company is re-scoping its asset revitalization investments and is taking actions to cut fixed costs amid a challenging market environment. The company completed three financing activities following the end of the third quarter which provided around $1.1 billion of incremental capital to support its strategy.

Meanwhile, Steel Dynamics, Inc. (STLD - Free Report) missed earnings and revenue expectations. Its earnings of 69 cents per share trailed the Zacks Consensus Estimate of 70 cents. Net sales fell around 22% year over year to $2,526.8 million and missed the Zacks Consensus Estimate of $2,618.7 million. Lower average steel pricing hurt its profits and sales. Reduced shipments and realized product prices dented results in its steel operations.

AK Steel Holding Corp. (AKS - Free Report) also came up with weaker-than-expected results. Its earnings of a penny per share missed the Zacks Consensus Estimate of 4 cents. Net sales fell around 12% year over year to $1,535.5 million and lagged the Zacks Consensus Estimate of $1,655.1 million.

The company saw lower shipments to the distributors and converters market along with a sharp decline in carbon spot market prices. It trimmed its profit forecast for 2019, factoring in weaker carbon hot-rolled coil (HRC) spot market pricing. Per AK Steel, average spot HRC prices tumbled around 37% year over year to $562 per ton in the third quarter. Slumping prices prompted customers to place orders at minimum levels.

Nucor, U.S. Steel, Steel Dynamics and AK Steel each currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sagging Prices, Soft Demand Take Toll on U.S. Players

After rallying to multi-year highs last year on the back of broad-based tariffs on imported steel, U.S. steel prices have been on a downswing this year. The benchmark HRC steel prices went downhill through the second quarter of 2019 and continued their steady decline in the third quarter amid trade tensions.

A concoction of factors is to blame for the downward drift in U.S. steel prices this year. Higher U.S. steel production, partly driven by restarted mills, has contributed to the drop in domestic steel prices.

A slowing global economy and waning steel demand are other factors for the decline in steel prices. A slowdown in global manufacturing activity, partly due to trade war, is hurting demand for steel. Softness across major end-use markets such as automotive, construction and energy has led to demand weakness.

Sluggish automotive and construction sectors are hurting steel demand in Europe, while demand in the United States is mostly hit by weakness in automotive. Moreover, a slowing Chinese economy amid trade tensions with the United States has led to a slowdown in steel demand in China, the world’s top consumer of the commodity. ArcelorMittal (MT - Free Report) , the biggest steel producer on the planet, has cut its global steel demand outlook for this year factoring in weaknesses across Europe and the United States.

Overcapacity also remains a hot-button issue. While some of the U.S. steel makers have taken steps to reduce excess steel capacity in the wake of declining domestic steel prices, the move has not resulted in a meaningful recovery in prices amid a weak domestic steel demand environment.

U.S. steel stocks have also been out of favor for most of this year. Falling steel prices, softening demand across major markets and trade tensions have weighed on steel stocks this year. The underlying fundamentals of the American steel industry remain weak notwithstanding the Trump administration’s measures to protect the industry through punitive tariffs. A potential U.S.-China trade deal would thus instil positive sentiment and provide a much-needed thrust to the shares of major American steel companies.

Is A Rebound in the Cards?

The uninspiring results have raised concerns that whether the headwinds witnessed in third quarter will continue to affect steel stocks’ performance in the fourth quarter. However, prospects do not seem as bad as they appear.

Nucor, in its third-quarter call, said that it believes that U.S. steel prices have bottomed out. The company’s CEO John Ferriola highlighted certain factors, including improving scrap prices, that could drive up domestic finished steel prices. Ferriola expects U.S. scrap prices to go up about $20-$25 this month and the trend to continue throughout the remainder of the year. He also envisions scrap pricing for 2019 to be up $20-$40 by the end of the year.

Moreover, major U.S. steel mills are raising prices in a bid to reverse the downswing in domestic steel prices. This has provided support to HRC prices this month. Driven by the price hike actions by flat-rolled and plate mills, HRC prices have turned upward in November from the three-year low level reached last month.

While the demand scenario is not expected to get better anytime soon given the global slowdown and trade uncertainties, a recovery in steel prices would augur well for U.S. steel stocks’ earnings heading into 2020. However, amid a still weak demand environment, it remains to be seen whether the recent price gains are just a dead-cat bounce or the beginning of a more sustainable recovery.

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