Shares of U.S. steelmaker Steel Dynamics (STLD 0.52%) rose an impressive 21% in February, according to data from S&P Global Market Intelligence. It reported earnings on Jan. 25, with the stock dipping for a couple days before it started to head notably higher. Here's what you need to understand about this price action.
When all was said and done, 2020 was a pretty good one for Steel Dynamics' business, with its 10.7 million tons of steel shipments near record levels. Revenue came in at $9.6 billion and its net income per share of $2.59 ranked as its fourth best on record. In addition, Steel Dynamics commenced operations at a new metallic coating line and had record fabrication shipments, which are basically all of the value-added products the company sells. It ended the year with $2.5 billion in liquidity and is expecting another capital investment project to come online in mid-2021.
Although you might think that would set the stage for a solid upturn, the stock actually dipped after that update. It didn't start turning higher until a few days later. Which brings up an important thing that investors need to remember about the cyclical steel industry -- steel is, for the most part, a commodity product. That was a tailwind in the final quarter of 2020 and one that appears to have rolled into 2021. In fact, demand for steel domestically appeared to have outstripped supply in February, leading to rising steel prices. And this is most likely what got investors interested in Steel Dynamics, as Wall Street anticipated a continuation of the mill's strong performance into the first quarter. Heightened demand also supports the company's plan to bring another mill online in the middle of the year.
Steel Dynamics is one of the better-positioned U.S. steel mills because of its focus on electric arc mini-mills. Still, its performance is subject to the ups and downs of steel prices and investors can't forget that fact, given that the broader industry tends to ebb and flow with the ups and downs of the U.S. economy. February was a reminder of that fact for long-term investors, especially when you consider the price move in relation to the company's solid late-January earnings release. Earnings are important, but commodity-related stocks often get pushed around more drastically by unfolding industry dynamics.