Steel is the physical backbone of the global economy and trends in steel pricing offer some insight into strength in investment.
Oftentimes those signals can become muddied by trade flows, especially when China was dumping steel into the US. Since the steel trade war though, US production is far more of a domestic industry than previously and that makes it a better economic barometer.
Today, large steel US producer Steel Dynamics offered an update on Q2 operations, forecasting earnings that were modestly below estimates, leading to a 4% decline in shares. More interesting are the details in the report.
The non-residential construction sector remains solid, as further evidenced by the strength in the company's demand for its long product steels. In addition, the continued onshoring of manufacturing, coupled with the strong U.S. infrastructure program and industrial build-outs, supports strong demand in the coming years.
There's ample and growing evidence that this effect is real, with huge spending ongoing on microchip foundries and other operations. What's not said here, but implied, is that the residential side has slowed. That's a headwind for steel prices but it might only be temporary with US house prices holding up far better than expected this year. Ultimately, US housing will need to be addressed via construction.
Another interesting tidbit in the press release is on inventories:
Recent positive data from the steel service center sector points to low customer inventory levels which the company believes will cause destocking to abate and support steel product pricing.
Given the bearish sentiment throughout markets and the mess in inventories during covid, I suspect this isn't only an issue in steel service centers. If the US economy shows renewed momentum or increased confidence, we could see broader indications of re-stocking, sparking something of a virtuous cycle.
Finally, there's the message from steel prices. Though they're far from the all-time highs during covid shortages, they've stabilized at $900/ton. Historically, those are high prices.
" Steel order activity remains solid from the automotive, construction, industrial, and energy sectors," Steel Dynamics said.
