Nerves of steel? – Investors negative about rising steel prices

The price of steel is forecast to jump by 66% this year reports the Financial Times as demand for the commodity continues to soar in the aftermath of the financial crisis and the price of iron ore reaches new all-time highs. The alloy is used across a vast spectrum of sectors from Construction, Automobiles to even pots and pans. We take a look at investor sentiment in: Peugeot SA (EPA:UG), Daimler AG (ETR:DAI), BorgWarner Inc (NYSE:BWA), Fuel Systems Solutions Inc (NASDAQ:FSYS), USG Corp (NYSE:USG), Insteel Industries Inc (NASDAQ:IIIN), Steel Dynamics Inc (NASDAQ:STLD), ArcelorMittal (AMS:MT), United States Steel Corp (NYSE:X), AK Steel Holding Corp (NYSE:AKS) and Haynes International (NASDAQ:HAYN)

The World Steel Association (WSA) announced on Friday that global crude steel output rose 15% in 2010 to a record 1.4 billion metric tonnes. However, this was on the back of a decline of 7.8% observed in 2009 when the industry was one of the worst hit in the global recession.

The global leaders in steel production are likely to be reaping the rewards with growing demand alongside price increases. Yet, Dutch listed, ArcelorMittal sees a significant level of short interest, which has remained flat at 6.1% of total shares outstanding on loan. Short interest in United States Steel Corp peaked in mid-October at 24%, but has since decreased to 15% of total shares outstanding on loan. This stocks has a convertible bond in issue. The pattern has been mirrored in AK Steel Holding Corp with short interest rising in the last quarter of 2010 until now from 3% to 5.5% of total shares outstanding on loan. However, we have noted a decline in short interest at Haynes International (NASDAQ:HAYN) with the percentage of total shares outstanding on loan having reduced from 3.5% to 1.3% over the same period.

The Automobile industry is a heavy user of steel, with both parts and vehicle shells made up of different types of steel. Short interest across the global sector stands at 2.7% of total shares outstanding on loan. Luxury car makers may be expected to be able to absorb the rising cost of steel better than those with lower margins for a temporary time period. However, investor sentiment in Daimler, owner of the prestigious Mercedes-Benz brand, tells a different story. Short interest in Daimler over the fourth quarter of last year until now has increased from 4% to 4.7% of total shares outstanding on loan, whereas short sellers have been covering their positions in Peugeot over the same time period. Short interest in the French manufacturer has reduced from 8% to 5% of total shares outstanding on loan.

Given the vast number of variables which affect investor sentiment, providers of Automobile parts may present a clearer picture. Across the sector world-wide, we see an average short interest of 3%. Of note from a short interest perspective are BorgWarner which produces engineered automotive components and systems. Currently, we continue to see high short interest in this stock at 9.4%, but this is down from 12% of total shares outstanding on loan recorded in December. Fuel Systems Solutions manufactures alternative fuel components to the auto industry and short interest has doubled to 10% of total shares outstanding since early December.

Finally, in the construction industry, steel fabrication companies are forced to pass on the rising cost of steel to home and commercial buildings and other construction stocks. USG Corp, producer of steel wire which has seen a rally in its share price over the last quarter, has also received significant interest from the short market. Short interest has increased since September from 8% to 12% of total shares outstanding on loan. Steel Dynamics, which produces steel and recycles metals has seen a gradual increase in short interest since the last quarter of 2010 from 1% to 2.2% of total shares outstanding on loan.
 

Users of the Bloomberg terminal can see how to analyze a stock mentioned above in the attached user guide.