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Steel Stocks Announce Weak Guidance Amid Slowing Demand

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UPDATE: UBS Securities Reiterates On Steel Dynamics On Columbus Potential
Benzinga's M&A Chatter for Monday July 21, 2014

The steel industry continues to suffer from overcapacity, particularly in China. As a result, the world market has been flooded with cheap steel, burdening U.S. steel producers.

End markets for the industry, including the auto industry, are still under pressure despite a clear improvement in worldwide economic conditions. As a result, the steel sector has lagged most other areas of the market year to date.

So, investors should not be surprised that steel stocks are seeing increased pressure during Monday's trading session. On Friday after the market close, Steel Dynamics (NASDAQ: STLD) announced weak second quarter guidance and, Monday morning, AK Steel (NYSE: AKS) also announced weak guidance.

Steel Dynamics provided second quarter earnings guidance in the range of $0.15 to $0.20 per diluted share, which was worse than analysts' consensus estimates of $0.24. These second quarter 2012 estimated results are somewhat lower than the $0.20 per diluted share reported for the first quarter 2012 (which included January refinancing charges of $0.03 per diluted share), and lower than the $0.43 per diluted share reported for the second quarter of 2011.

The company stated that its somewhat weak guidance is primarily the result of decreased sheet steel pricing, attributable to supply-side pressures from increased imports and increased domestic steel capacity. However, the company also mentioned that sheet steel demand quantities are relatively stable, including strength in the automotive, energy, construction equipment and agricultural sectors.

Monday morning, AK Steel said it expects to generate second quarter net income between $0.04 and $0.06 per diluted share, which is lower than analysts' consensus estimate of $0.11. The company stated that this soft guidance is due to increased uncertainty and volatility with respect to near-term economic conditions in the United States and in other markets served by the company, including a recent deterioration in spot market pricing.

Shares of most steel companies traded down on the session; however, Steel Dynamics traded close to flat for the day. AK Steel traded down around 4.5%, U.S. Steel (NYSE: X) traded down about 3.6%, and Nucor (NYSE: NUE) was down about 1.3%.

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