Tight Supplies Have Driven Up Steel Prices. One Analyst Says That Could Last Awhile.
Pricing for hot-rolled coils of steel has sizzled in the recovery, and the heat has ignited steel stocks. United States Steel and Cleveland-Cliffs are up two and three times the S&P 500 index’s 15% gain this year, respectively, while Nucor is up nearly 80%. And, as Credit Suisse analyst Curt Woodworth sees it, steel stocks aren’t cooling down soon.
Tight supply has lifted the benchmark price of hot-rolled coils to $1,600 per short ton from $500 a year ago. A number of analysts downgraded their ratings to Hold, recalling how quickly imports crashed supply-constrained periods in the past. But Woodworth believes that today’s upcycle will endure for a couple more years—and that investors should award the stocks higher multiples. “The rebirth of the U.S. steel sector is a real event,” he writes in a note.
At today’s $97 a share, Nucor stock have almost 20% upside to Woodworth’s target price of $115. Steel Dynamics and Graftech International have about a 45% upside to his targets, while United States Steel could rise 80% from today’s $24, and Cleveland Cliffs by a third from $22. He rates all of these stocks as Outperform.
Imports will remain subdued, he says, because of the cheap dollar and China’s curb on polluting blast furnaces. Domestic supply will rise slowly, he adds, through a ramp-up of electric-arc furnace capacity. Demand from auto makers and renewable-energy developers will keep hot-rolled coil prices well above $1,000 through 2022. Steel makers can make fat profits at those prices—or even lower ones.
Woodworth thinks that Wall Street is discounting a sharp correction in steel prices. But there is a new normal, he writes. “Steel stocks are especially cheap.”
Next Week
Monday 7/12
FedEx hosts a conference call to update the investment community on its business outlook.
Tuesday 7/13
JPMorgan Chase and Goldman Sachs Group kick off earnings season by reporting results before the market open. The two money-center banks recently lifted their dividends 11% and 60%, respectively.
Conagra Brands, Fastenal, First Republic Bank, and PepsiCo report quarterly results.
Dell Technologies hosts a conference call to discuss its ESG strategy.
The Bureau of Labor Statistics releases the consumer price index for June. Economists forecast a 4.9% year-over-year rise, after a 5% jump in May—the fastest rate of growth since August 2008. The core CPI, which excludes volatile food and energy prices, is expected to increase 4% compared with 3.8% previously.
The National Federation of Independent Business releases its Small Business Optimism Index for June. Consensus estimate is for a 99.5 reading, about even with the May figure.
Wednesday 7/14
Bank of America, BlackRock, Citigroup, Delta Air Lines, PNC Financial Services Group, and Wells Fargo release earnings.
The Federal Reserve releases the beige book for the fifth of eight times this year. The report gathers anecdotal evidence of current economic conditions in the 12 Federal Reserve districts.
The BLS releases the producer price index for June. Expectations are for both the PPI and core PPI to increase 0.5% month over month. This compares with gains of 0.8% and 0.7%, respectively, in May.
Thursday 7/15
Bank of New York Mellon, Cintas, Morgan Stanley, Taiwan Semiconductor Manufacturing, Truist Financial, U.S. Bancorp, and UnitedHealth Group hold conference calls to discuss quarterly results.
Friday 7/16
Charles Schwab, Ericsson, Kansas City Southern, and State Street announce earnings.
The Bank of Japan announces its monetary-policy decision. The central bank is widely expected to keep its key short-term interest rate unchanged at negative 0.1%. In June, the BOJ said it would launch a climate-change plan by the end of this year, and would release a preliminary plan at its July meeting. This could take the form of higher interest rates paid to banks for green-lending measures.
The University of Michigan releases its Consumer Sentiment index for July. Economists forecast an 86.5 reading, slightly higher than June’s 85.5. The index is still well below its levels from just prior to the pandemic.
The Census Bureau reports retail-sales data for June. Consensus estimate is for a 0.5% monthly decline in spending to $617 billion, after slumping 1.3% in May.
Write to Bill Alpert at [email protected]
