The Current Environment In The Steel Space

Steel stocks may not live up to the phrase "steely nerves" if recent indications from some top companies in the sector are anything to go by. As recently as Monday, Steel Dynamics, Inc. STLD pre-announced an earnings shortfall for the third quarter. Earlier in the month, Nucor Corporation NUE also projected an earnings shortfall despite the metric suggesting strong year-over-year growth.

Jefferies Sees Price Weakness

In a note published last week, Jefferies said valuation of steel stocks will compress further as unit prices bottom out. The bearish outlook and the recent inflection in steel pricing could pressure stocks in the sector despite expectations of solid third-quarter earnings and forward guidance due to higher steel prices.

Steel prices in the United States have dived, pressured by higher flat-rolled imports in recent months, low raw material costs and seasonal weakness in demand. Jefferies sees the weakness facing the steel industry as persisting through the year, as there is pressure from supply side to ramp up capacity.

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CLSA Also Cribs On Price Weakness

CLSA said it sees steel prices dropping further as lead times shrink, boosting output, and raw material prices remain soft.

Risk Preference May Help

However, KeyBanc raised the sector rating of the steel sector to Sector Weight from Underweight Monday. The firm said it remains cautious on the group but believes the risk-reward in the steel sector is finely balanced. Investor proclivity toward risk, according to the firm, has become a positive factor for the sector. The firm also indicated that the sector experiences seasonal momentum in the fourth quarter of the calendar year and early first quarter.

Are Stocks Wilting Amid Muted Opinions?

Nucor has not had much movement over the last week, although it did slip to a low of $45.35 in the aftermath of the earnings warning. Since then, the stock has recovered and is currently trading around $46.

Steel Dynamics also traded in a $23–$24 range, and Monday's pre-announcement issued after the market open is pushing the stock down by close to 1 percent to $24.09.

United States Steel Corporation X has pulled back from above $17 over last week and is currently down about 1 percent at $16.64. Meanwhile, AKS Steel Holding Corporation AKS has seen its shares a constant above $4 since the middle of August.

Since September 9, the Arca Steel Index GIS has lost about 1.5 percent, while during the same period, the S&P 500 Index has gained about 0.50 percent.

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