US Steel Stocks: Can Trump Play ‘Santa’ Yet Again?

  • US steel stocks were strong in November and outperformed the broader markets. Notably, domestic prices rebounded last month, which aided steel stocks’ price action.
  • The sector is in the green today, even as the broader markets are in the red. Today, President Trump tweeted that the Section 232 steel and aluminum tariffs would be restored for Brazil and Argentina. So, could this little Santa Claus rally continue this month? We’ll explore that question in this article.

US steel stocks

In November, U.S. Steel (X), AK Steel (AKS), and Cleveland-Cliffs (CLF) gained 14.4%, 16.9%, and 10.5%, respectively. Generally, the fourth quarter is seasonally weak for US steel prices. However, this year, US steel prices have actually shown strength in the fourth quarter.

While domestic demand has been tepid, the supply side of the equation has been supportive. While domestic steel production has come down over the last couple of months, imports have fallen too. While companies can’t do much to change demand, they can at least adjust their production to match the underlying demand. In this case, low supply chain inventories and the sharp fall in imports also helped domestic mills raise prices.

Trump’s tariffs

The rise in scrap prices and the unsustainably low domestic prices also helped domestic mills push for price hikes. As US steel prices rose last month, steel stocks also rebounded. With the exception of AKS, almost all other stocks are underperforming markets on a year-to-date basis. This is despite the 25% tariff that President Trump imposed last year.

The tariffs lifted US steel companies’ earnings last year. However, earnings have fallen sequentially this year in all three quarters. That said, it wouldn’t be fair to term Trump’s steel tariffs a failure. Read Have Trump’s Steel Tariffs Failed? for more analysis.

Over the last year, the Trump administration has tinkered with the tariffs multiple times. Mostly, the tariffs have been relaxed, and Mexico and Canada were fully exempt from the tariffs to make way for the USMCA.

However, Trump tweeted today that Section 232 tariffs on Brazil and Argentina would be restored. Brazil is among the largest steel exporters to the United States. The tariff hike on Brazil, coupled with China’s better-than-expected manufacturing data, is driving steel stocks higher today.

US steel stocks: Is a Santa Claus rally in the cards?

Many times, equity markets rebound toward the end of the year, a phenomenon known as the Santa Claus rally. US steel stocks had already enjoyed a little rally last month. The rise in US steel prices and optimism over phase one of the China trade deal have helped lift stock prices. In my view, prices could rise a little more from these levels. We’re now headed into the first quarter, where demand is seasonally strong.

The Chinese economy is also showing signs of stabilization, and the country’s November manufacturing activity was better than expected. China is also expediting its infrastructure investments, which should support its metal demand.

US-China trade deal

While there is still optimism over phase one of the US-China trade deal, it’s still not a done deal yet. If the United States and China fail to reach a trade deal, it could lead to a stock market sell-off, and the metals and mining sector could come under pressure. Despite Trump’s tariffs, domestic steel stocks have sagged over the last year partially due to concerns over China’s slowdown and the US-China trade war.

How do US steel stocks’ valuations look?

From a valuation standpoint, U.S. Steel stock is valued at an EV-to-EBITDA of 6.3x its 2020 estimates and 4.9x its 2021 consensus EBITDA. AKS has a 2020 EV-to-EBITDA of 8.3x, while its 2021 EBITDA is 8.6x. The valuation multiples don’t look too exciting.

However, metals and mining companies’ valuation multiples should be read with caution. Given the sensitivity to underlying metal prices, their forward earnings estimates can change quickly. More often than not, stock prices spike before analysts update their earnings estimates.

Coming back to US steel companies’ outlook, it’s largely up to Trump. A US-China trade deal would help the metals and mining sector. Can the President once again play Santa for the industry? We’ll have to wait and see. In the meanwhile, please read Is the US Steel Industry Finally ‘Thriving’ This Month? for more insights into this crucial sector.