This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Steel Stocks: How to Play This Bearish Moment

NEW YORK ( TheStreet) -- Steel stocks have entered a decidedly bearish moment as the global economic recovery comes into doubt.

Whether you're already a shareholder or looking to take a fresh position now, given that stock prices in the sector have declined more than 30% from their April peak, here's what you need to pay attention to for the rest of the year:

CHINA

The Past: By now, every investor is familiar with "The China Story," as the financial world has come to call it. It goes a little something like this: Breakneck economic growth followed by worries in Beijing about inflating asset bubbles, followed by de facto credit tightening to reduce the risk of those bubbles, followed by terror that the world's highest-flying economy would stall out with a so-called "hard landing."

Steel production in China hasn't slowed, not yet anyway. The nation's furnaces, which produce nearly as much steel as the rest of the world combined, achieved record output again in May, producing more than 56 million metric tons of the stuff. Those numbers would seem to defy the notion that the country had eased back on its growth throttles, a notion that has since March put pressure on prices of commodities as well as metals stocks.

The Present: This week, China's publicly stated intention to allow the yuan (eventually) to run free sparked a brief uptick in the shares of steelmakers based elsewhere in the world.

That's because a stronger yuan would, in theory, discourage Chinese steel exports, reducing the risk of a flooded global market and boosting the competitive advantage of U.S.-based companies. But China's currency promises are, at the moment, just that: promises. And any real economic impact on steelmakers stateside won't be felt for a long time to come.

The Future: For steel equities, the bigger story involves China's plans for production. Recent signals from the People's Republic suggest that the country's mills now intend to cut back on production, and soon. That's because steelmakers there are getting whacked by higher raw materials costs -- far more than their U.S. counterparts. At the same time, global steel prices have gone into decline of late, falling by as much as 10%. To staunch the narrowing of their profit margins, Chinese steelmakers almost have no choice but to calm the blast furnaces (which were first invented in China, by the way, in the fifth century B.C.).

Furthermore, Beijing recently announced plans to reduce carbon emissions by eventually pulling the plug on a good number of the country's older, dirtier, less-efficient mills. The environmental moves could remove as much as 8% of China's overall annual capacity, which stands at 600 million metric tons.

What does this mean for domestic steelmakers like U.S. Steel (X - Get Report) and Nucor (NUE - Get Report)? Because China has become such a dominant force in the global steel industry, its prices have become the world's prices. Any crimping of creeping supply will thus benefit everyone.

In the end, investors ought to keep an eye on the monthly steel-production dispatches coming from Beijing.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AKS $4.13 0.00%
NUE $47.41 0.00%
STLD $18.45 0.00%
X $23.24 0.00%
AAPL $128.54 0.00%

Markets

DOW 18,096.90 -106.47 -0.58%
S&P 500 2,098.53 -9.25 -0.44%
NASDAQ 4,967.1410 -12.76 -0.26%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs