Steel Dynamics Inc. warned its first-quarter earnings would come in well below analysts' expectations.
In addition to worries about demand for steel in the auto and construction industries, analysts say investors are also concerned about rising prices for scrap steel, which will pressure profit margins for many steelmakers who use scrap for production. They include Steel Dynamics and Nucor Corp.
"With the Steel Dynamics warning, people are wondering just who else hasn't warned yet," said Lloyd O'Carroll, an analyst for BB&T Capital Markets. He doesn't own steel stocks and his company doesn't provide banking services to steelmakers.
Putting pressure on the flat-steel market is slowing auto sales, which have caused auto makers to announce production curtailments, noted HSBC analyst Peter Bures. He added, "That doesn't bode well on the demand side, and might prove difficult to push through price increases.
Bures, who also doesn't own steel stocks and whose company doesn't provide banking services to steel firms, said Steel Dynamics had expected steel demand to pick up in the first quarter, something that has apparently not happened.
China is emerging as a pivotal point in the current market. In a report, Prudential Financial Research said that at the same time the auto and heavy capital-goods markets are slowing in the U.S., China has exhibited strong demand for American steel exports.
However, the report said it doesn't expect demand to continue, as a recent $40 per ton drop in prices in China "indicates to us that the window for U.S. steel sales into China is closing."
At the same time, however, the price of scrap steel -- used as a raw material -- is increasing because more scrap steel is being shipped to China, said O'Carroll. "That's the feed stock for mini mills like Nucor and Steel Dynamics, " he added, "so there is margin pressure there as well."
In another report, Salomon Smith Barney analyst Michelle Applebaum said Steel Dynamics executives played down concerns about the Chinese market in a recent presentation. In that meeting, Steel Dynamics said it is on track to ship about 70,000 tons of high-quality light-gauge product to China in the first quarter, with booked orders of more than 150,000 tons for the second quarter.
Meanwhile, Bures said the steel market overall won't fully recover until capital spending in a variety of sectors -- including retail, transportation and heavy construction -- recovers. "No one knows when that will come," he added. "A stronger economy will be needed for that to turn around." Dow Jones