Steel Stocks Surge But is Japan Too Far Away?

In chaos theory, the Butterfly Effect explains how small actions can result in big impacts far away. So: Can an analyst report released in Japan move stocks in the U.S.?

Reuters

It would seem so. US Steel stocks are surging today, and the ostensible reason appears to be a Credit Suisse report that was bullish on Japanese steel companies. Nucor (NUE) has gained 0.4% to %40.59 at 12:46 p.m. today, while Steel Dynamics (STLD) has risen 1.1% to $17.36, AK Steel (AKS) has climbed 2.7% to $6.24 and US Steel (X) has jumped 3.9% to $23.61, its biggest one-day percentage gain since Dec. 23.

But here’s the thing: That Credit Suisse report was an upgrade of Japanese steel stocks,  and the reasons offered by analyst Shinya Yamada are almost all specific to Japanese stocks. Yamada offered three reasons to be bullish on Japanese steel stocks: That steel prices in Asia were holding up better than the price for raw materials like iron ore; that there price-to-book ratios relative to the Japanese stock market are back at levels last seen in 2001 and 2002; and that Japanese users of steel could start restocking their inventories, creating more domestic demand. See a reason to be bullish on US steel or AK Steel in there? Didn’t think so.

And in the US, conditions don’t look so hot.  Steel imports rose 6% from last month and 39% from a year ago, thanks to the fact that U.S. steel prices have been so much higher than everywhere else. And Wells Fargo’s Sam Dubinsky and Amir Chaudhri don’t expect that to change any time soon:

We expect imports to remain at elevated levels as domestic versus international price spreads are more than $100/ton across all flat and long products that we track. Typically imports increase when US pricing is at a greater than $100 premium versus international. Currently we estimate spreads are at about $140-155 for HRC and CRC, $200 for HDG sheet, $215 for plate, $150-170 for wire rod, merchant bar, and rebar, and $235 for beam…We would tread lightly on steel stocks.

Axiom Capital’s Gordon Johnson doesn’t expect robust U.S. demand or the auto market to save US Steel:

…in recent discussions with X, we learned that while the sale of steel into the high-end automotive segment (~15% of X's sales) & the high-end tin market (~5% of X's sales) do indeed involve competition solely against fully-integrated-U.S.-steel mills (suggesting spot price moves, as well as shifts lower in iron-ore prices are irrelevant), this only represents ~20% of X's annual sales volume. The other 80% of X's business, however, is exposed to both lower iron-ore prices and fluctuations in spot HRC steel prices (according to X, 40% of what they do competes against mini-mills in the U.S. [exposing them to the iron-ore price fluctuations], & 80% of what they do is exposed to foreign/international steel prices [exposing them to fluctuations in U.S.- & Chinese-HRC-spot prices]).

Maybe US Steel can survive a downturn in steel prices. Then again, maybe not.