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The U.S. economy has seen a strong recovery so far this year. That is good news for the steel industry, which is cyclical in nature and struggled during the downturn. According to the World Steel Organization (WSO), steel demand in the U.S. is expected to recover over the next two years. Given this scenario, one would expect steel stocks to do well. However, the performance of steel stocks such as Nucor Corp. (NUE) , AK Steel Holding Corp. (AKS) and United States Steel Corp. (X) has been disappointing so far this year. So why are steel stocks struggling even though the U.S. economy is recovering and steel demand is expected to bounce back?
Economic Recovery and Rebound in Steel Demand
The U.S. economy has continued to recover in 2014. A report from the Federal Reserve showed that factory production in the U.S. rose 0.6% in May. Meanwhile, the New York Federal Reserve’s “Empire State” general business condition index rose to 19.28 in the month of June. The latest data confirms the ongoing recovery in the U.S. economy.
The recovery in the U.S. economy is also expected to boost steel demand. In a recent report, the WSO said that while it expects global steel demand to weaken in 2014, it expects steel demand in the U.S. to recover. Steel demand is expected to grow by 4% in 2014 and 3.7% in 2015. The outlook is certainly bright for U.S. steel companies, which had struggled during the downturn following the financial crisis of 2008/2009.
Share Price Performance Does Not Reflect the Bright Outlook
Although the outlook for U.S. steel demand is robust, this is not reflected in the performance of steel stocks so far this year. Steel stocks such as Nucor, AK Steel and United States Steel had rallied in the second half of last year. However, all three stocks have struggled since the start of this year.
Year-to-date, Nucor shares have fallen more than 5%. The performance of AK Steel and United States is even worse. While AK Steel has fallen more than 15% this year, United States Steel is down nearly 19%.
The question is why steel stocks are struggling when steel demand is finally expected to recover.
Rising Steel Imports a Problem for Steel Companies
The reason why steel stocks have underperformed despite the bullish outlook is concern over rising imports. Indeed, cheap imports from China are a major worry for steel companies in the U.S.
According to data from Economic Policy Institute (EPI), in the first quarter of 2014, the U.S. imported 8.8 million net tons of steel products, compared to 7 million tons imported in the first quarter of 2013. The rising imports prompted the EPI to describe the situation as the “worst import crisis” for the U.S. steel industry since the mid-2000s.
U.S. steel companies have already raised the issue of rising imports this year. In March, CEOs from several leading U.S. steel companies, including United States Steel and Nucor, told members of the Congressional Steel Caucus that many of the government policies on trade, energy, environment and infrastructure need to be reformed in order to make sure that the U.S. industry remains competitive and American jobs in steel and manufacturing sectors are preserved.
For now though, imports are rising and remain a threat to the steel industry in the U.S. As a result, steel stocks will remain under pressure despite the recovery in U.S. steel demand.