May 06, 2021
Steel Prices Have Tripled. Bank of America is Sounding the Alarm
New York (CNN Business)--A bubble could be brewing in steel stocks. The pandemic brought the American steel industry to its knees last spring, forcing manufacturers to shut down production as they struggled to survive the imploding economy. But as the recovery got underway, mills were slow to resume production, and that created a massive steel shortage. This leads to the continuously rising prices of all steel products. such as Excavator and Bulldozer spare parts. Now, the reopening of the economy is driving a steel boom so strong that some are convinced it will end in tears. "This is going to be short-lived. It's very appropriate to call this a bubble," Bank of America analyst Timna Tanners told CNN Business, using the "b-word" that equity analysts from major banks typically avoid. After bottoming out around $460 last year, US benchmark hot-rolled coil steel prices are now sitting at around $1,500 a ton, a record high that is nearly triple the 20-year average. Steel stocks are on fire. US Steel (X), which crashed to a record low last March amid bankruptcy fears, has skyrocketed 200% in just 12 months. Nucor (NUE) has spiked 76% this year alone. While "scarcity and panic" are lifting steel prices and stocks today, Tanners predicted a painful reversal as supply catches up with what she described as unimpressive demand. "We expect this will correct — and often when it corrects, it over-corrects," said Tanners, a two-decade veteran of the metals industry who authored a report last week headlined "Steel stocks in a bubble." Steel shortage is lifting stocks Leading steel stocks have rallied five times more than the S&P 500 since the beginning of the year. 'A bit frothy' Phil Gibbs, director of metals equity research at KeyBanc Capital Markets, agreed that steel prices are at unsustainable levels. "This would be like $170-a-barrel oil. At some point, people will say, 'F this, I'm not going to drive, I will take the bus,'" Gibbs told CNN Business. "The correction will be very intense. It's just a matter of when and how it happens." Gibbs said he is "more confident the steel price is in a bubble," rather than that steel stocks themselves are in a bubble. The steel bubble buzz is just the latest debate about the sustainability of booming pockets of the market in this era of rock-bottom interest rates. Bitcoin, ethereum, dogecoin and other cryptocurrencies are on fire. GameStop (GME), AMC (AMC) and their fellow Reddit-fueled stocks skyrocketed earlier this year. And blank-check companies, some backed by celebrities, are raising gobs of money. Even Federal Reserve Chairman Jerome Powell has acknowledged the risk of overspeculation. "You are seeing things in capital markets that are a bit frothy," Powell said during last week's press conference. "That's a fact. I won't say it has nothing to do with monetary policy, but also it has a tremendous amount to do with vaccination and reopening of the economy." Yet another shortage as the economy reopens Steel i...
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