At approximately 10 p.m. Eastern Wednesday night, Russian military forces launched an all-out assault on their neighbor Ukraine. Calls for economic sanctions by the West were immediate -- and they're having an immediate effect on the prices of publicly traded steel stocks today.
As of 2 p.m. ET, shares of United States Steel Corporation (X 1.71%) had surged 9.6%, European steel giant ArcelorMittal (MT 0.71%) was up 10.7%, and Cleveland-Cliffs (CLF 0.51%) -- which used to be AK Steel and Arcelor in the U.S. -- was up 9.7%.
All of which makes sense.
Russia is, after all, the No. 5 steel producing nation in the world today, putting out 71.6 million metric tons annually, and smaller Ukraine is No. 13, with 20.8 million metric tons of production. Combined, the two companies produce more steel than the United States itself (at 87.9 million metric tons, No. 4 in the world).
Remove from global supply chains the steel produced by Russia (which is coming in for massive economic sanctions in punishment for its attack on Ukraine) and Ukraine (whose workers are being drafted into the Army, whose factories are being shelled, and whose shipping ports are blockaded by Russian warships), and you immediately introduce deficits of steel supply all around the globe -- deficits that U.S. and West European producers like U.S. Steel, Arcelor, and Cleveland-Cliffs can rush to fill in.
And we're not just talking about new markets for U.S. and European steel, either. In a steel deficit situation, there's going to be less competition from foreign steel undercutting prices of steel produced by these three Western steel majors. That means pressure on profit margins, and more pricing power for each of US Steel, Arcelor, and Cleveland-Cliffs.
Result: More revenue -- and bigger profit margin on that revenue for all concerned.
Now, will the increases in steel profits be big enough to justify today's price increases on steel stocks? That remains to be seen, of course. But consider: Right now, U.S. Steel stock costs just 1.6 times trailing net income. ArcelorMittal is only a bit pricier at 2.2 times earnings, and Cleveland-Cliffs, the most "expensive" steel stock on this list, costs all of 3.6 times earnings.
Call me a sucker for a bargain, but I simply don't see a whole lot of risk baked into these valuations. Whether the conflict in Ukraine ends tomorrow, and sanctions on Russia end with it -- or whether both last for months or years to come -- I have to say that steel stocks look pretty darn cheap right now.