Have steel prices bottomed?

Steel prices in China have reversed a sequence of decline that lasted for more than 3 months since April, according to data reported by China Iron and Steel Association (CISA).

As China is the world largest producer of steel, producing half of the global steel output, steel prices of China have significant impacts on global steel prices. In the first quarter of 2010, over-production in China created downward pressure on steel prices worldwide as steelmakers such as those in the US face fierce competition from low-priced imports from China.

However, analysts cautioned that it is too early to call for a turnaround in the sector. In Marketwatch,

"We believe that the signs of a tentative recovery are welcome for a beleaguered sector," said Goldman Sachs analysts in a report this week.

"However, we caution that channel checks with steel traders themselves suggest that it is too early to tell if the current recovery is sustainable," said analysts Rajeev Das, Nana Hasegawa and HJ Moon.

......................."Many traders do not believe the recovery to be real," they said, because the price rises for flat steel "represent the raising of asking prices, as few actual transactions appear to have taken place."

Moreover, they said, traders have indicated that "barring the auto sector, demand from many other industries remains weak" amid a seasonal slowdown in many Asian markets, particularly South Korea.

While activity in China "still appears to be quite strong, some traders are afraid that the government tightening could yet have a delayed impact when construction in progress is finished," they said. But they cited consensus among traders that production cuts in July were deeper than those in June, and economic data due out in the middle of this month "will help soothe concerns."

Despite this caution, investors took advantage of this short-term rally of steel prices. Steel stocks such as AKS, X, NUE had large gains since mid-July after months of downtrend. Steel ETF, SLX, rallied 12% since mid-July versus 3% of the major index, S&P 500.

Metallurgical Coal is Red Hot

From Business Week,

June 1 (Bloomberg) -- JFE Holdings Inc., Japan’s second- largest steelmaker, and two rivals agreed to a 12.5 percent price increase for coking coal contracts with BHP Billiton Ltd., three people with knowledge of the agreements said.
Prices for the steelmaking ingredient will rise to $225 a metric ton for the July quarter, from $200 a ton for the three months started April 1,...........

Coking coal will be in tight supply globally this year as imports by China, where domestic production can’t meet demand, may reach the second-highest on record, Citigroup Inc. said April 22. Prices may reach $300 a ton in the second half, equaling a record set in 2008, the bank said in the same month.

“The price rise for BHP Billiton is in line with our expectations,” Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst, said by phone in Sydney. “Coking coal is looking like one of the strongest commodity markets.”

From Forexyard

Nippon Steel Corp, the world's No. 2 steelmaker, will likely seek to increase steel prices by an average 25,000 yen in July-September to pass on the rise in costs, the Mainichi newspaper reported.


Nippon Steel will aim to lift prices to 100,000 yen a tonne in talks with automakers and other with automakers and other customers, the paper said, adding that it was in late-stage negotiations for April-June to raise prices by 15,000 yen per tonne to about 90,000 yen

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CLF plunged despite good earnings

The stock of Mining company, Cliffs Natural Resources (CLF) took a beating (of about 10% in the day following the earnings report) despite beating analysts' earnings estimates and offering very upbeat outlook on demand for its main product, iron ore and metallurgical coal.

Revenue in the first quarter rose to $727.7 million from $464.8 million a year ago while net earnings were $93.5 million, or 69 cents per share, compared with a loss of $7.4 million, or 7 cents per share, in the same quarter of 2009.

Iron ore pellet sales volume rose 116 percent to 4.4 million tons due to the boost to more demand as the North American steel industry has increased capacity utilization to between 70 percent and 75 percent in recent months. Iron ore price per ton rose 24 percent to $94.97

As a result of the recovery in steel industry, metallurgical coal sales volume rose to 662,000 tons from 494,000 tons, with average revenue per ton at $104.38, up from $95.34 a year earlier.

The management expected strong demand to continue in 2010 and it increased its sales volume estimate to about 27 million tons in North American iron ore, from 25 million tons.

In its North American coal business, Cliffs said it is maintaining its sales and production volume expectations of about 3.4 million tons in 2010

Very good report card. So, what gives?

 First, it has to be the broader market. The Dow had 2 triple digits down days in 3 days which was quite rare since the market rally started in February this year. The civil and potential criminal probe of Goldman Sachs together with sovereign debt fear in Europe spooked investors.

Second, what I would think is more relevant is new measures to crack down on real estates in China. If Chinese government is determined to slow down its economy, the biggest engine of global growth since the financial meltdown, the renewed recovery in demand for basic materials may die prematurely.

My takes

Chinese government is not as determined  to cool down on its economy as it appears. International Monetary Fund, IMF, is still expecting China to grow 10% in 2010 and 9.9% in 2011. In addition, global economy, especially the US is recovering, albeit at a moderate space, thus contributing to upcoming demand for basic materials. Steel industry, for example, has increased its utilization significantly from last year to 70-75% year to date. With the auto industry recovering quickly this year and housing market slowly stabilizing and strengthening, steel industry is expected to strengthen further, adding to the demand for iron ore and metallurgical coal.

CLF stands to take advantage of this recovery. Once the stock price finds its footing, it offers a good buy.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any position of CLF in her portfolio as of May 2, 2010

Cold winter for steel

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

4. Chinese government since August, 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.

Steelmakers don't have Xmas

U.S. steelmakers reported better-than-expected third-quarter results on Tuesday but offer gloomy short-term views for the industry and the economy.

As pointed out in September post, over production of steel in China continued to pressure steel prices. Despite fairly upbeat 2010 forecast by the World Steel Association on the ground of Chinese stimuli, U.S steelmakers have generally expected the end of "Cash-and-Clunker" to slow down demand for steel toward the end of the year. US steelmakers also expect lower prices for the fourth quarter.

U.S. Steel expects to report a fourth-quarter operating loss and idle two blast furnaces to lower production.
AK Steel, which has been operating at less than 60-percent capacity, said that while it expects to post an operating profit in the fourth quarter, it anticipates a decline in average selling prices.

"Technically speaking, we may be out of the recession, but it certainly doesn't feel that way," James Wainscott, AK Steel's chairman, president and chief executive told analysts. 

"Suffice to say we've bounced off the bottom, but we've got a long way to go from here."

According to Reuters,

Wainscott said AK Steel expects to ship more steel in the fourth quarter as it increases its capacity rate to around 65 percent from 55-60 percent in the third quarter.Wainscott said he was optimistic that auto build rates would increase since carmakers currently had low inventories, due to the business generated by the clunker program.

U.S. Steel's third-quarter net loss was $303 million, or $2.11 per share, compared with a year-earlier profit of $919 million, or $7.79 per share. Revenue dropped 61 percent to $2.82 billion, but was 32 percent higher than in the second quarter, the Pittsburgh-based company said.

Excluding a one-time currency gain, the loss was $2.43 per share versus analysts' average forecast of a loss of $2.87 and revenue of $2.72 billion, said Thomson Reuters I/B/E/S.

AK Steel's third-quarter net earnings were $6.2 million, or 6 cents per share, compared with earnings of $188.3 million, or $1.67 per share, in the same quarter last year.

Revenue fell more than half to $1.04 billion, the West Chester, Ohio-based company reported. Analysts on average were expected a profit of 1 cent per share.

These forecasts are consistent with the peers that have recently announced their earnings.

Steel ER Series-STLD

A streak of earnings releases of steel companies unfolds this week, with the 6th largest in the US, Steel Dynamics (STLD), being the first. In the coming weeks, I will cover most of these earning releases.

Nothing out of ordinary here. the company announced a net profit of $69 million, or 30 cents a share for the quarter ended on September 30, 2009, a sharp decline from with $193 million, or 98 cents a share, a year ago. Revenue for the quarter more than halved to $1.17 billion from the year-ago period, when steel prices were at their peak.

The results beat analysts' estimates that , on average were looking for earnings 23 cents a share, before items, on revenue of $1.06 billion, according to Thomson Reuters I/B/E/S.

"Cash-and-Clunker Effects"

After the $500 billion steel industry witnessed a slow recovery from one of the worst downturns ever, the business  was boosted by a government-sponsored discount scheme for new motor vehicle purchases "cash for clunkers," which ended in August. Shipments at the company's flat-rolled steel segment, used by vehicle manufacturers, accounted for about 73 percent of the total shipments at its steel operations.

With the end of "cash-and-clunker" and a seasonal factor, the company expected the profit of fourth quarter to be lower than the third quarter. It will provide guidance later.

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Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own STLD in her personal account as of October 19,2009

China Iron Ore Imports Exceed Real Demand, CISA Says

In  article in Chinamining. org, China Iron Ore Imports Exceed Real Demand, iron ore imports by China, the world's largest buyer, have exceeded real demand by 50 million metric tons this year. The recent gains in spot iron ore prices are  said to be"speculative," by Luo Bingsheng, the vice chairman of the China Iron & Steel Association.

China's iron ore imports surged to a record this year, hurting the group's bid to negotiate a contract price cut bigger than the 33 percent offered by Rio Tinto Group and BHP Billiton Ltd. The nation is looking at cutting the number of licensed importers, industry minister Li Yizhong reiterated today.

For the first eight months, iron ore imports gained 32 percent to 405 million tons from a year ago, China's customs said in September. Imports by traders accounted for 44 percent of China's total purchases in the first six months, compared with 30 percent a year earlier, the steel association had said in July.The cash price for Australian ore delivered to China has risen 11 percent in the past five weeks, according to the Steel Index.

Steel hope for 2010

The World Steel Association said Monday that steel consumption in the industrialized world won't be as weak as it thought. The global recovery is stronger than the group has predicted in April.


The trade group said it now believes that global steel use will decline by 8.6% in 2009 compared with a year ago. Back in April, the association had predicted a 14.5% drop.

The group also predicted that worldwide demand for steel will grow by 9.2% in 2010, which would put the globe's steel consumption back on equal footing with 2008 levels.

China once again was cited as the driver. China's demand for steel will likely grow by 19% in 2009 and 5% in 2010.


Recovery in North America will come more slowly, according to the report, with a demand decline of 35.8% in 2009 before a rebound of 17% in 2010.


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Is Steel Rally that Short-Lived?

The broader market rallied yesterday with the Dow reaping a triple digit gain and close to the new high. The momentum driven by anticipated cyclical recovery seems to have legs. However, one of the cyclical plays, steel sector that includes stocks like X, AKS, STLD, NUE,  was left out yesterday. It was attributable to Goldman Sach removed STLD from its conviction buy list .

In fact, this is not news. Prices of steel stocks have been driven mainly by weaknesses in USD since early August instead of strengths in fundamentals. Steel prices have been declining since its peak in July. Most recently, China's second largest , the world's fourth largest steel producer, China Hebei announced yet another price cut .

China, the largest steel producer in the world, has let supply gone ahead of demand to take advantage of the increase in steel price in the second quarter this year. In August, Chinese steel producers cranked out record high output, as much as production of the rest of the world combined.

In the first half of the year, the steel order was driven more by restocking very low inventory, mainly in China, instead of renewed demand. The restocking is done. Catalysts in the second half lie in global economy, particularly developed countries. The auto industry has announced plans to increase productions in the second half while housing market has slowly recovered . Together with public infrastructure, the recovery from these two industries is key to supporting steel prices in coming months.