JP Morgan's analysis of the North American steel market suggests a complex picture for the upcoming fourth-quarter earnings season. Despite a notable surge in steel equities and Hot Rolled Coil (HRC) prices, indicating a supply-driven rally, underlying demand remains uncertain. Key industry players are navigating a landscape influenced by regulatory decisions, evolving trade agreements, and specific operational challenges, which will collectively shape their financial performance. The firm projects continued price strength into the first quarter of the new year, yet cautions about potential market adjustments.
Steel Sector's Performance and Price Dynamics
The steel industry in North America is on the cusp of its fourth-quarter earnings reports, with significant market movements preceding these announcements. Over the past three months, steel equities have demonstrated a robust performance, outpacing the broader State Street SPDR S&P Metals & Mining ETF. This impressive rally has been primarily fueled by a substantial increase in Hot Rolled Coil (HRC) prices, which saw a 17% rise. This upward price trend is largely attributed to supply-side factors, rather than a strong surge in demand. Notably, HRC metal margins have seen an expansion exceeding 20% compared to pre-tariff levels, with mill utilization rates also registering above historical averages post-tariff implementations. However, the outlook for future demand presents a mixed scenario, as medium and smaller-scale buyers are exercising caution due to ongoing trade uncertainties. Clarity on critical agreements, such as the United States-Mexico-Canada Agreement (USMCA) and International Emergency Economic Powers Act (IEEPA) tariffs, is deemed essential to unlock larger, steel-intensive projects that could further bolster demand.
JP Morgan's analyst, Bill Peterson, maintains an 'Overweight' rating on prominent steel companies including Nucor Corporation, Commercial Metals Company, and Reliance, Inc. Peterson forecasts that the positive price momentum for HRC will likely extend through the first quarter of the upcoming year, with an estimated price of $955 per ton. However, the potential for further upside is somewhat constrained by a narrowing import arbitrage. A seasonal slowdown is anticipated during the summer months following a period of restocking. For the fourth quarter, weaker earnings are projected, primarily due to seasonally lower shipments and a lag in sheet contracts, particularly for mini-mills which constitute about 75% of the mix, potentially experiencing an 8% quarter-over-quarter decline. Investor discussions hint at a probable earnings beat for Nucor, reflecting a conservative mid-quarter guidance, while challenges stemming from elevated costs might impact other players. Reliance Inc. is expected to surpass its fourth-quarter and first-quarter EPS guidance, driven by stronger pricing and reduced customer resistance, although unplanned outages at certain mills pose shipment risks for the first quarter.