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U.S. Steelmakers Paint Tepid Q3 Picture as Steel Prices Retreat

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The steel industry has lost some momentum after enjoying a solid run earlier this year as steel prices have witnessed a sharp downward correction from their April 2023 peak. However, the industry is benefiting from a demand recovery in automotive and a resilient non-residential construction market.

Some prominent U.S. steel producers recently came up with their guidance for the September quarter. Nucor Corporation NUE was the first to divulge the outlook for the third quarter. It projects third-quarter earnings between $4.10 and $4.20 per share, which suggests a decline from $5.81 per share reported in the second quarter of 2023 and $6.50 per share in the third quarter of 2022.

The expected decline in earnings for the third quarter of 2023 is primarily attributed to lower earnings in Nucor’s steel mills segment, which is anticipated to be impacted by lower pricing and, to a lesser extent, reduced volumes. The sheet mills within the segment are expected to experience the most significant impact on earnings.

Steel Dynamics, Inc. STLD also sees lower earnings in the third quarter, partly due to a decline in steel prices. It projects third-quarter earnings in the range of $3.46-$3.50 per share, which indicates a decline on both sequential and year-over-year basis. Third-quarter profitability in STLD’s steel operations is expected to see a significant drop from the second quarter due to a contraction in metal spreads. Lower realized flat rolled steel prices are expected to more than offset the benefits of lower scrap costs. Steel shipments are anticipated to remain steady, excluding the lost volume related to an unplanned outage at Sinton in July, while steel order activity remains strong, Steel Dynamics noted.

Meanwhile, United States Steel Corporation X expects to deliver strong performance in the third quarter on the back of higher selling prices in the flat-rolled unit and lower raw material costs. The results are expected to be supported by better-than-expected performance in each of the company’s operating segments, the steelmaker noted. However, the company’s guidance also reflects the expected impacts of the ongoing United Auto Workers (“UAW”) strike against Detroit’s big three automakers. U.S. Steel expects adjusted earnings for the quarter to be $1.10-$1.15 per share, reflecting a decline from $1.92 in the prior quarter and $1.95 in the year-ago quarter.

Last month, U.S. Steel, in a letter addressed to its stockholders, informed that it is exploring strategic alternatives in response to multiple unsolicited proposals, including partial acquisitions and a complete buyout. The company has reportedly entered into confidentiality agreements with multiple third parties.

Nucor, Steel Dynamics and U.S. Steel each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Prices Soften, but Steady Demand Bodes Well

Steel prices witnessed a significant correction globally in 2022 as the Russia-Ukraine conflict, skyrocketing energy costs in Europe, persistently high inflation, interest rate hikes and the slowdown in China due to new COVID-19 lockdowns dampened demand for steel across key end-use markets. Notably, U.S. steel prices tumbled after surging to roughly $1,500 per short ton in April 2022 due to supply concerns stemming from the Russia-Ukraine war.

The benchmark hot-rolled coil (HRC) prices cratered to near the $600 per short ton level in November 2022. The downward drift partly reflects weaker demand and fears of a recession. Nevertheless, HRC prices rebounded during the first three months of 2023, driven by U.S. steel mills’ price hike actions, low import levels, supply tightness partly due to mill outages and a recovery in demand.

However, HRC prices have retracted from their April 2023 peak of around $1,200 per short ton. Prices have fallen more than 40% from the highs hit in April, currently hovering around $700 per short ton. The downward drift partly reflects shorter lead times. The UAW’s strike against General Motors, Ford and Stellantis has also weighed on HRC prices of late. An extended strike could be detrimental for the U.S. steel industry given its impact on steel demand. The impacts of weaker steel prices are expected to reflect on the performance of U.S. steel companies in the third quarter.

Nevertheless, U.S. steelmakers are expected to benefit from firm demand across major steel-consuming sectors such as construction and automotive in the third quarter. Steel demand in automotive has improved this year on the back of an easing global shortage in semiconductor chips that weighed heavily on the automotive industry for nearly two years. Order activities in the non-residential construction market also remain strong, underscoring the underlying strength of this industry. Demand in the energy sector has improved on the back of strength in oil and gas prices.  Healthy demand in major markets will likely support steel companies’ volumes in the third quarter.

Steel Stocks Worth A Watch

A few stocks currently worth a look in the steel space are Commercial Metals Company CMC, POSCO Holdings Inc. PKX and L.B. Foster Company FSTR.

Commercial Metals carries a Zacks Rank #1. CMC beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 6.6%, on average. The stock has gained around 39% over the past year.

POSCO currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for POSCO’s current-year earnings has been revised 12.8% upward over the last 60 days. PKX shares have surged around 162% over the past year.

L.B. Foster carries a Zacks Rank #2. It has an expected earnings growth rate of 112.5% for the current year. It surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 134.5%. FSTR shares have rallied around 86% over the past year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

POSCO (PKX) : Free Stock Analysis Report

Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report

United States Steel Corporation (X) : Free Stock Analysis Report

Nucor Corporation (NUE) : Free Stock Analysis Report

Commercial Metals Company (CMC) : Free Stock Analysis Report

L.B. Foster Company (FSTR) : Free Stock Analysis Report

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