These Companies are Raising Prices. Will Shares Follow?

Steel makers have announced price hikes across a broad selection of steel products. Only time will tell if the increases stick, but if they do it could spell the beginning of a market recovery for this beleaguered industry and key players like Nucor (NYSE: NUE  ) , Steel Dynamics (NASDAQ: STLD  ) , AK Steel (NYSE: AKS  ) , and ArcelorMittal (NYSE: MT  ) .

More than one market
Although steel is a pretty common substance, the steel industry sells multiple products made of the metal. And, right now, companies are hiking prices across a broad spectrum of offerings. For example, in the first week of November, Nucor and Steel Dynamics informed their customers that they would raise prices of merchant bar by $20 a short ton. That matched an earlier increase from a competitor.

With broad steel industry support, such a hike may actually stick. And that isn't the only market seeing price increases. AK Steel recently announced plans to raise prices on flat rolled steel, also matching a competitor. ArcelorMittal, meanwhile, has announced price increases in its coil products. Clearly, the steel industry is, broadly speaking, looking to move prices higher, with support across both products and companies.

That said, Nucor also put through a price hike in rebar that was half that of a recent increase by a competitor. So the industry consensus isn't universal. Although that can be seen as part of a healthy and functioning market, it also brings with it the concern that this round of price hikes won't stick. That would be problematic and could prolong the industry's pain.

Part of the problem that steel makers are facing is containing costs. Although prices for key inputs like iron ore and metallurgical coal have been relatively low, overall costs have been too high in an oversupplied market. That's led to cost cutting efforts such as closing plants. For example, early in the year ArcelorMittal announced plans to close six lines in Europe because of slack demand, a move that affected 1,300 employees.

Closing facilities isn't the only way that companies have been working to control costs, however. ArcelorMittal has also been focusing on growing its met coal business so it can become more vertically integrated. And it isn't the only company looking to go down this road.

For example, Nucor has partnered with a natural gas driller to ensure access to a cheap supply of natural gas for its mills. And AK Steel is opening its own met coal mine. Although the current low coal prices have led AK Steel to slow down its coal build out, management is clear to point out that the coal isn't going anywhere. When it makes sense to mine more coal, the company will do so.

AK Steel is also working on an iron ore project using a magnetic system to pull iron ore out of mining scrap. Nucor, meanwhile, has its own scrap yard operations with some 70 locations. Although the steel mill has owned its David J. Joseph division since 2008, the efforts across the industry to keep costs in check are clearly focused on vertical integration.

But not every cost saving effort works out as planned. AK Steel slowing its coal efforts is one example. Steel Dynamics noted in its third quarter earnings release that "at higher production rates, product yield has unexpectedly deteriorated" at an iron nugget plant is another. Although these are just two instances, they highlight the fact that you can only do so much on the cost side of the equation. Eventually prices have to be increased.

Is now the time?
So while major steel makers like ArcelorMittal, Nucore, AK Steel, and Steel Dynamics work diligently on the cost side of the equation, they are also pushing prices higher. If the widespread price hikes stick, the steel industry could be about to turn a corner. Although input costs are always important, right now it's the ability to raise prices that will likely make the bigger impact—making it a key issue to watch over the near term.  

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9/28/2016 4:00 PM
AKS $5.10 Up +0.25 +5.15%
AK Steel Holding CAPS Rating: **
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NUE $49.73 Up +1.04 +2.13%
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STLD $25.57 Up +0.31 +1.23%
Steel Dynamics CAPS Rating: ****