Shares of U.S. steel giant Nucor (NUE 1.79%) declined just shy of 13% in February, according to data from S&P Global Market Intelligence. Most of that drop happened at the same time that the S&P 500 Index was swooning toward the end of the month. Nucor, however, wasn't alone. Peers Steel Dynamics and United States Steel, among others, also saw big share price drops.
While there are obviously other things going on in the steel industry, investor concerns about COVID-19 were a driving force of the broad steel industry plunge. There are two big issues to consider here. First, the coronavirus has led to a sharp economic slowdown in China. That is a key demand center for steel and a huge source of global supply. If China's supply/demand balance in steel gets out of whack, it could lead to more Chinese steel being sent overseas. That, in turn, could result in an uptick of foreign steel hitting U.S. shores. This has been a problem in the past, and China's coronavirus troubles could make it a problem again.
But that's just one potential headwind for domestic steel producers like Nucor. The number of COVID-19 cases is rapidly growing around the world. It is already showing up in the United States and could get materially worse before it gets better. That increases the risk that the U.S. economy could fall into a recession. Steel demand normally falls during recessionary periods. This is why the steel industry is highly cyclical, and why an economic contraction would likely hit the industry hard.
On top of these industrywide issues, Nucor is spending billions of dollars on capital expansion projects over the next two years. It has solid reasons for its investments, largely working to improve its market positioning and increase the amount of value-added products it produces. However, a downturn would likely make affording its investment plans at least a little more difficult.
Nucor and its peers are used to the ups and downs of the steel industry. That said, Nucor is one of the best positioned to handle a downturn because of its strong balance sheet. That remains true even in light of its big capital spending plans. Long-term investors looking for a great steelmaker should probably be looking at Nucor. However, if there's a coronavirus-led U.S. recession, Nucor's stock is likely to fall even further. So be ready for more volatility here.