The 'Great Steel Squeeze Of 2021' Continues: What's Next?

The 2021 surge in steel prices has once again prompted Bank of America to raise its earnings outlook for U.S. steel stocks.

EPS Adjustments: On Wednesday, Bank of America analyst Timna Tanners raised her 2021 and 2022 EPS estimates for steel stocks across the board and is now expecting significant earnings beats from all the steel stocks she covers in 2021. Here’s a rundown of the 2021 EPS changes:

• Commercial Metals Company CMC, EPS estimate raised from 78 cents to 87 cents.
• Nucor Corporation NUE, EPS estimate raised from $4.40 to $5.38.
• Reliance Steel & Aluminum Co RS, EPS estimate cut from $4.43 to $4.35.
• Steel Dynamics, Inc. STLD, EPS estimate raised from $2.96 to $3.62.
• United States Steel Corporation X, EPS estimate raised from $2.53 to $2.80.

Related Link: 'Unprecedented Steel Bubble': Here's How To Play It

Despite the near-term tailwinds in steel prices, Tanners said the current pricing environment is unsustainable and investors should be prepared for the fallout.

U.S. benchmark hot rolled coil spot prices recently reached near $1,700 per ton, about 2.5 times higher than their historical level.

How To Play It: Tanners is projecting HRC steel prices will fall to an average of $1,075 in the second half of 2021 and all the way back down to $600 in 2022.

“Our conviction of falling prices is supported by our Steelmageddon oversupply thesis, which was delayed to 2022E due to 2021’s COVID-inspired supply squeeze and some delayed capacity startups,” Tanners said.

The analyst said steel stocks typically correct before steel prices do in past bubbles, making timing the trade very difficult.

For now, she said investors need to be selective within the steel group. Her top stock picks include Cleveland-Cliffs Inc CLF, Reliance and Steel Dynamics.

Benzinga’s Take: The VanEck Vectors Steel ETF SLX is already up 38.3% year-to-date, so the excess cash flow Tanners is expecting in coming quarters may already be priced into the stocks to a large degree.

The big question for steel stock investors is when steel prices start to pull back and how deep that pullback will be.