What happened
It wasn't just bank stocks that had a rough and turbulent week. Steel stocks don't necessarily have a direct correlation to the financial sector and the regional banks that dominated the news this past week. But the share prices of leading domestic steelmakers Nucor (NUE -0.26%), Cleveland-Cliffs (CLF -0.39%), and Steel Dynamics (STLD 0.04%) also tanked this week.
As of early Friday morning, Nucor and Cleveland-Cliffs had each dropped about 8% since last week's close, and Steel Dynamics was lower by about 12%, according to data provided by S&P Global Market Intelligence. But those stocks could be set to rebound after peer U.S. Steel (X -0.66%) released an optimistic business forecast Thursday night.
So what
Even though there isn't a direct line from banks to steel, it makes some sense that investors connected them tangentially. If turmoil in the financial sector means a recession is more likely in the near future, companies in cyclical industries like steel could quickly see their businesses taper off. And steel stocks had also enjoyed a good run over the last six months, so a bit of a correction might seem warranted. But there are also signs that steelmakers' operations are still busy and benefiting from economic expansion.
Image source: Getty Images.
Now what
Steel companies have announced a series of spot price increases over the past six weeks. For example, on Monday, Cleveland-Cliffs raised the prices of all its carbon hot rolled, cold rolled and coated steel products, including boosting the base price for hot rolled steel to $1,200 per ton. That's a whopping 50% increase from the $800 per ton price Cleveland-Cliffs received for hot rolled steel as recently as the beginning of February. Similar price increases were also announced by the other domestic steelmakers.
But investors this week instead focused on first-quarter earnings guidance issued by Nucor and Steel Dynamics. Both companies said their profits in the first quarter would be meaningfully lower than the prior-year period, as well as down sequentially from 2022's fourth quarter. Those reports triggered this week's sell-off, against a backdrop of fears about instability in the financial sector.
That is not an illogical reaction if one believes the economy is heading into a recessionary period. But as the price increases imply, and as U.S. Steel spelled out in its first-quarter guidance, the domestic steel business looks to be strong and getting stronger.
After raising their steel prices, it's likely that the management teams at Nucor and Steel Dynamics were being conservative with their projections. That would be prudent, considering the uncertain economic environment and the recent well-publicized bank troubles.
The risk of a recession is real, and if one occurs, it could derail momentum in steel pricing and demand. But U.S. Steel noted that its order entry rate is improving, and CEO David Burritt stated, "momentum continues to build in the North American flat-rolled market." If a sudden retraction in economic activity doesn't thwart that momentum, this week's drop in steel stock prices provides investors with some good buying opportunities.
