Gordon Johnson On Steel Prices: Demand Does Not Justify Increases

When it comes to steel, traders know product price movement correlates with stock price movement. Steel mills know it, too.

According to Axiom’s Gordon Johnson, this understanding drove ArcelorMittal SA (ADR) (NYSE: MT) to announce a $40- to $50-ton price increase.

“These guys announce price hikes when there’s either real demand or things are very weak and they’re trying to stop prices from falling further,” Johnson told Benzinga. “I think in this case it’s the latter.”

The timing is certainly suspect. By Johnson’s analysis, demand is weak, iron ore is down, scrap is down and falling, and inventories are high based on winter demand. A price surge “doesn’t make sense.”

Industry To Follow?

But the poor state of demand won’t deter competitors from following suit. Johnson said the ArcelorMittal announcement will prompt similar hikes at United States Steel Corporation (NYSE: X), AK Steel Holding Corporation (NYSE: AKS), Nucor Corporation (NYSE: NUE), Steel Dynamics, Inc. (NASDAQ: STLD) and Cleveland-Cliffs Inc (NYSE: CLF).

The mere expectation for peers to imitate ArcelorMittal's price increases inspired a pop across industry stocks, Johnson said. But the spike will only last as long as investors assume strong demand, which Johnson said doesn't exist. He expects a cursory investigation into demand to diminish the market's support of steel.

“This [announcement] will maybe delay the price decline by a week, but if there is no demand, prices will continue falling,” he said. “We believe demand is weak.” The analyst expects “bad” earnings reports — although not necessarily misses — from Steel Dynamics and Cliffs this week, which could reverse Wednesday’s trends.

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Editor's Note: This version was updated from the original version published.