What happened
Shares in steel producer United States Steel Corporation (X -3.53%) crashed 19.5% in the week to the close of trading on Thursday, according to data provided by S&P Global Market Intelligence. The move caps a dismal week for U.S. steelmakers. On Wednesday, Nucor caused a sell-off in the sector after it released disappointing third-quarter guidance. Nucor's third-quarter earnings are set to fall significantly below the market's prior estimates due to "metal margin contraction" as steel prices fall.
Investors didn't have too long to wait before United States Steel started singing from the same hymn sheet. The company also issued third-quarter guidance, with CEO David Burritt noting the company's response to "market headwinds that have accelerated over the quarter."
In a nutshell, the steelmaker is idling plants and bringing forward outages in response to weakening demand.
Management cited the following:
- Ongoing supply chain issues in the automotive and appliance industries and a softening in container and packaging.
- Lower average selling prices in the mini mill segment.
- In the European segment, "increasing effects of the war in Ukraine which has fueled macroeconomic uncertainty and rising energy costs."
So what
In a sense, the disappointing update is hardly surprising. The prices of hot-rolled coil steel and reinforcing bar steel fell sharply over the summer, and there are no shortages of signs of a weakening global economy. Throw in a weakening in construction in China and uncertainty in Europe, and it's almost a perfect storm.
Now what
The actions taken (plant idling and beginning forward outages) are classic responses to weakening demand and should result in curtailing supply. If mimicked across the industry, it could help to stabilize prices. Moreover, as the global economy works through supply chain challenges, things like automotive and aircraft production should pick up. That said, there are no two ways around the fact that end demand for steel is in a downtrend right now.
