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Steel Yourself for a Rough Winter (X)

Posted on February 6, 2020

We’re writing today about iron ore and steel.

As you know, the economic impact of the novel coronavirus is being felt very strongly in China, and the ripple effects are spreading rapidly.

Until the virus is contained, there’s an excellent chance the global economy will contract substantially in Q1 and possibly thereafter.

Where we’re seeing the most marked effects is in the commodities, and particularly in the demand for iron ore.

China is both the world’s top producer of iron ore (responsible for slightly less than half of global output) and consumer (using roughly 45% of annual production).

So What’s it Mean?

The immediate effect of the outbreak has been to cause a) a steep decline in the price of iron ore globally, with prices falling over 10% just last week, b) Chinese demand drying up, c) transport restrictions curtailing deliveries, d) construction projects postponed and e) local Chinese steel production dumping by some 20% this month alone.

Have a look here –

This is six months’ worth of trade in iron ore, and it clearly shows an accelerated decline in the metal’s sticker once news of the virus could no longer be hidden.

Wait! Somebody’s hiding something?

Yes.  Now be quiet.

It appears, however, that prices are now bottoming, providing an outstanding opportunity for steelmakers to step into the breach and purchase their ore in quantity – and on the cheap.

And that’s precisely what they’re doing.

Stateside, steel producers are also experiencing a boost in share price as fatter margins get worked into the latest guidance numbers.

On top of that, President Trump’s tariffs enacted last month on low-cost Brazilian and Argentine steel imports are making U.S. producers more competitive, boosting sales and projected sales figures for the coming year.

Take a look now at a weekly chart of U.S. Steel (NYSE:X) for the last three years –

U.S. Steel has lagged its peers somewhat of late, but that looks likely be remedied shortly.

Consider –

  1. A year’s worth of positive divergence from both RSI and MACD indicators (in green) bodes well for higher prices going forward.
  2. Taken together with a breakout from its 20 month declining trend channel (in red) on surging volume (in black), and we say the groundwork for a turn higher for X is now firmly in place.

But what of the latest price weakness, you ask?

Good question.

And our answer is – we see it

Stay healthy out there.

Many happy returns,

Matt McAbby

4 responses to “Steel Yourself for a Rough Winter (X)”

  1. Robert J Daggett says:

    Any update on the recent State Street Financial trade?

    • Hugh L. O'Haynew says:

      Hi Robert,
      Thanks for writing.
      Nope. No action today.
      Outlook is still negative – even after the latest three day bubble-up.
      Price target still firm in the 70/71 range by month’s end.
      We’ve got a close eye on it.
      If there are changes, of course, we’ll post them immediately via Alan B. Harvard’s blog, Climbing the Wall of Redemption.
      Until then – hang tough, brother!
      All the best,
      Huey

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