What happened
Nucor Corporation (NUE -0.27%), one of the largest and most diversified domestic steel mills, saw its stock price fall around 14% in December, according to data provided by S&P Global Market Intelligence. That was the low end for the steel group, with fellow electric arc mill owner Steel Dynamics (STLD 0.24%) down just under 15%, and blast-furnace-focused United States Steel (X -1.23%) and AK Steel Holdings (AKS) dropping roughly 21% and 27%, respectively.
Check out the latest Nucor Corporation, Steel Dynamics, United States Steel, and AK Steel Holdings earnings call transcripts.
So what
The interesting thing is that steel mills are generally doing quite well today, with Nucor expecting to report record earnings in 2018 and making big expansion plans. It's not alone: Steel Dynamics has been hitting on all cylinders lately, too, and is also making plans to expand its business via ground-up construction. U.S. Steel has even brought shuttered mills back on line to help meet demand it expects to materialize in the near future.
Image source: Getty Images.
There are two stories underpinning these results. The first is tariffs put in place by the White House. Imported steel has been a major headwind to domestic steelmakers in recent years, and the levies have helped to reduce competition from lower-priced foreign products. The steel industry would like to see more tariffs, as it believes the foreign steel is cheap because of unfair support from foreign governments to their local steel industries. With the volume of steel imports down around 11% through the first nine months of 2018, this has definitely been a key support for U.S. steelmakers' results.
But there's a bigger issue at play: economic growth. Over the last two years or so, the U.S. economy has picked up following a long period of positive but historically slow growth. Steel, which is used in everything from cars to construction, is highly sensitive to economic swings. The faster the economy is running, the more steel is likely to be needed. In fact, Nucor CEO John Ferriola laid it out quite clearly during his company's third-quarter 2018 conference call: "The continued strength of the U.S. economy is the primary catalyst for our earnings growth."
And that's why increasing concerns that U.S. economic growth could slow again became a problem for the U.S. steel group in December. One key factor in the month was the fear that the Federal Reserve's sticking to its interest rate hike trajectory would be the catalyst for the long expansion's demise. And with the heavy spending taking place in the steel industry on new production and increasing scale at existing mills, investors worried that companies like Nucor, Steel Dynamics, and U.S. Steel were shifting into expansion mode at the worst possible time. No wonder there was a steep price decline in December.
With the expansion going on longer than most U.S. economic booms in history, it's not a surprise that investors would be a little jittery. Add in the global trade tensions currently at play in an increasingly interconnected world, trade-wise, and there's good reason for investor concern. That said, the pre-emptive price action in the steel sector, despite ongoing strong results, is really just par for the course for an economically sensitive industry group.
Now what
Steel stocks have had a pretty good run financially. That's likely to continue into the new year. But investors are looking further out than the next couple of months, since an economic slowdown could quickly take the wind out of the sails of steelmakers like Nucor, Steel Dynamics, U.S. Steel, and AK Steel. That said, if you've been watching the steel group but haven't pulled the trigger because of valuation concerns, downturns can present great buying opportunities. It's too soon to make that call, since volatility is likely to be the norm until the U.S. economy officially falls into a recession. But patient long-term investors might actually benefit from the cyclicality of the industry if they are willing to sit back and watch for a little longer.
