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Steel Stocks Are Bleeding: Will Coronavirus Bring More Pain?

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Shares of U.S. steel companies are getting punished amid the coronavirus outbreak, which has been spreading fast outside China of late. The lethal respiratory virus has taken a heavy toll on most commodities due to a slowdown in demand in China – the world’s biggest consumer of commodities – and steel is no exception.

Worries over a slump in steel demand in China, the top consumer, has caused a bloodbath in the steel space. The outbreak, which originated in the city of Wuhan in Hubei province, has triggered a broad-based sell-off in U.S. steel stocks. Shares of major American steel makers such as United States Steel Corp. (X - Free Report) , Nucor Corporation (NUE - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) and AK Steel Holding Corp have sank roughly 28%, 24%, 20% and 29%, respectively, year to date.

Nucor, Steel Dynamics and AK Steel each currently carry a Zacks Rank #3 (Hold), while U.S. Steel has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coronavirus fears have spooked global stock markets, as investors fret over the impact of the outbreak on global economic growth. Worries over a sharp rise in new coronavirus cases in South Korea, Italy and the West Asia, have triggered sell-offs across stock markets around the world on concerns over greater economic impact from the contagion. Mounting fears over the epidemic have also pushed all three major U.S. indexes into correction territory. Commodities also have been among the worst hit since the virus started spreading across the globe.

Another Shock to An Embattled Industry

Coronavirus has dealt a fresh blow to the U.S. steel industry which faced choppy waters in 2019. The American steel industry reeled under the effects of weaker steel prices, demand slowdown across major markets and damaging impacts of the trade war in 2019.

U.S. steel stocks had been out of favor for most part of 2019. With the exception of AK Steel, all other major American steel makers underperformed the broader market last year with U.S. Steel being the worst performer.

The slump in domestic steel prices has been the major headwind faced by U.S. steel makers in 2019. The Trump administration’s imposition of 25% steel tariffs provided a shot in the arm to American steel makers last year and drove their earnings. However, after an initial tariff-induced rally, U.S. steel prices had been on a downswing and were down for much of 2019.

The benchmark hot-rolled coil steel (HRC) prices felt gravity’s pull last year after rallying to multi-year highs on the back of steel tariffs during 2018. HRC prices dropped through the first three quarters of 2019.

Higher domestic supply resulting from a ramp up in production contributed to the sharp decline in U.S. steel prices in 2019. Driven by the tariff impetus, U.S. steel mills rushed to bring back capacity and drive production, leading to oversupply in the market.

The global economic downturn and softer steel demand are other key factors for the decline in prices. A slowdown in China’s economy amid prolonged trade tensions with the United States triggered a slump in steel demand in China last year. Sluggish automotive and construction sectors also hurt steel demand in Europe, while demand in the United States was mostly hit by weakness in automotive.

Coronavirus Mars Industry’s Slow Recovery

The U.S. steel industry witnessed some recovery in late 2019 on the back of an uptick in domestic steel prices, raising hopes for a reversal of fortunes in 2020. HRC prices gained some upward momentum in December, hitting $600 per short ton during the month on the heels of price hike actions by major U.S. steel mills and supply-side actions.  

Shares of U.S. steel companies also gained some ground towards the end of 2019 on a recovery in steel prices. The de-escalation in trade tensions due to the announcement of the initial U.S.-China trade deal also provided a boost to shares of American steel makers. Driven by the gains in December, most of the U.S. steel stocks ended 2019 in the green.

However, coronavirus is likely to play spoilsport. China’s economy is already feeling the pinch of the outbreak. Steel demand in China is expected to remain weak over the near term as the country struggles to cope with coronavirus.

The epidemic has slowed down activities in the construction space (a major steel end-use market) in China as workers who returned from the Lunar New Year holidays were being quarantined. Coronavirus-induced panic is also hurting China’s already weakened automobile sector. The automotive industry, which consumes a big chunk of steel, is among the industries that has been hit the hardest.

Moreover, China’s manufacturing sector, which bore the brunt of trade war for most part of 2019 and only rebounded toward the end of the year, is taking another shock. China’s factory activity took a nosedive in February, plunging to an all-time low. The official manufacturing purchasing managers’ index (PMI) tumbled to 35.7 for the month from 50.0 in January. A reading lower than 50 indicates a contraction in activity.

Manufacturing activities in the country have been disrupted due to the shutdowns imposed by the Chinese authorities. Factories in China are struggling to resume full operations due to shortage of workers resulting from virus-induced travel restrictions and disrupted supply chains and logistics.

The demand environment for steel in China is not expected to get better anytime soon as economic activities in the country are expected remain subdued amid the coronavirus plight. ArcelorMittal (MT - Free Report) , a Zacks Rank #3 stock, envisions coronavirus to have a short-term negative impact on demand in China. The world’s biggest steelmaker has seen its shares tumble around 17% so far this year.

Rising finished steel inventories have already put downward pressure on China’s domestic steel prices of late (Read: China Drives World Steel Growth: Will Coronavirus Curb Output?). Weaker domestic steel demand would further hurt prices in China and globally.

U.S. steel prices also came under pressure over the past couple of months amid the virus crisis. Some of the U.S. steel makers have recently announced fresh rounds of price hikes. However, the current weak economic and demand situations in China do not look supportive for higher steel prices over the near term, thus limiting prospects of a rebound in American steel stocks.

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