Metals stocks, particularly steel stocks, had a rough start to the week. Notable losers by the end of trading on Monday included:
Concerning news from China weighed on all these stocks, but it wasn’t just the China Evergrande Group (OTC:EGRNF) development.
Blue chip stocks like Nucor often tend to move in the direction of the broader market any given day. But Monday drove Nucor and other stocks lower for two reasons: a market sell-off and negative developments in the steel industry.
To begin, China is the world’s largest producer and consumer of steel, so any potential slowdown in the nation bodes ill for steel manufacturers. While Nucor and Cleveland-Cliffs are among the leading steel manufacturers in the U.S., Ferroglobe produces silicon metal, silicon-based alloys, and manganese-based alloys that are primarily supplied to aluminum smelters and steel mills.
On Monday, news about Evergrande, one of China’s leading property developers, potentially defaulting on its huge debt that runs into billions and filing for bankruptcy sent investors into panic mode. They feared Evergrande’s collapse could hit China’s real estate and financial sectors hard and stall the nation’s growth.
As it is, fears loom large in the steel industry thanks to declining prices for iron ore, which is used to make steel. Iron ore prices are crashing at the time of this writing and have slumped an astounding 60% from record highs in May. Blame China.
That nation has slapped production curbs on the steel industry this year to curb pollution in a bid to reach its carbon neutrality goal by 2060. Steel production in the nation continued to decline in September after hitting 17-month lows in August, according to Bloomberg.
Prices of all base metals, in fact, right from iron ore to aluminum and copper, have fallen precipitously in recent weeks and put metals and mining stocks under pressure. With China now reportedly intensifying production curbs even as the Evergrande fears loom large, shares of Nucor, Cleveland-Cliffs, and Ferroglobe cracked even more.
Prices of cyclical commodity stocks move pretty much in tandem with commodity prices, so today’s drop wasn’t surprising.
That said, investors might want to take a long-term view on volatile days like Monday. Steel is the most important material used in construction, so demand will likely rise in the U.S. as the Biden administration rolls out its infrastructure plan. Moreover, while Nucor and Cleveland-Cliffs are already leaders in the industry and are fortifying their balance sheets to make the most of growth opportunities if and when they appear, Ferroglobe’s ongoing restructuring efforts could help it lower costs and generate meaningful margins and cash flows even in a low-price environment. These are just some of the things investors should pay attention to before dumping their shares on panic days like today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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