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Wall Street loves the steel complex as steel prices continue to rise. But how long can these good times roll?
earnings report tomorrow should provide clues and is likely to supercharge or break the stock's near-term momentum.
Rising prices are driving both earnings and stock prices, yet analysts remain skeptical -- and rightly so -- about how long prices can seemingly buck the fundamental trends. Demand is clearly strong, but not hugely so, and production and imports continue to ramp aggressively.
Industrywide inventories rose at North American steel service centers in March, though if calculated as days-of-sales they fell because of strong demand. The inventory increase of 196,000 tons took months-of-supply to 2.6 months, from 2.9 in February. Oddly, though, inventory normally falls in March, so last month's increase could point to a supply acceleration that may to tough to absorb.
In contrast, buyers claim that most producers are running several weeks late in filling orders. With most producers operating below full capacity, some analysts speculate that the top producers, which control more than 60% of the market, are simply holding back production in order to keep prices high. Perhaps. While this was spun as a negative "artificial" shortage, some investors will be encouraged that the producers have the discipline and ability to control supply and realize better pricing.
Numbers Not an Issue
For U.S. Steel itself, the numbers should be noncontroversial: The consensus is $1.48 on $3.65 billion in revenue, yet investors are probably expecting more after a solid beat from competitor
. Profit margins are benefiting from declining nattie gas costs -- which are over 50% off their peak from the end of last year. The Gary, Ind., No. 14 mill restarted in midquarter, late from the original December 2005 expectation; this may have held back production but indirectly helped pricing.
On the call, which is at 3 p.m. EDT, analysts will probe whether demand continues to rise in the second half with the auto industry in tatters, housing rolling over and high gas prices and high interest rates finally pinching the consumer. They will also want to assess the threat from China, which has built capacity far in excess of the industry's implied needs, and is exporting with abandon. Will U.S. Steel become a reverse China play, a victim of Chinese activity rather than beneficiary? Comments on the call may provide clues.
At the time of publication, Dvorchak held no positions in U.S. Steel.
Gary Dvorchak is a managing partner of
, a Sarasota, Fla.-based institutional asset manager which manages $140 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.