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This article will not be popular here. Just know that I was one of you for almost a year. My objective is to provide useful information and perhaps save some of your portfolios and maybe even make you some money.
I wrote the original DD on Nucor and did well from Feb - May. Since then I had been massively long CLF, X shares and some X calls. I Iost a little bit and got flat about a week ago (obviously before the big run up which sucks ass) and I am now long CLF Jan ‘23 $15 puts. Here are my reasons:
It isn't different this time. Imports from MX and 12+ million tons of new production in North America will crush this market. (Some is in MX). A small oversupply is enough to destroy prices - imagine what this will do.
Timna Tanners is right, she just got timing wrong and didn't catch this whiplash supply chain issue we had this year.
The market is softening dramatically and insiders are getting inklings of 2008-like environment. The worst possible environment ever. The next 3-5 years could be a massive bloodbath in steel until some companies are finally forced to shut down some blast furnaces.
CLF's limited diversification and old assets will do them in.
They have 4 billion in debt + 4 billion in pension liabilities
They acquired MT's worst assets along with AKSteel. These assets are very old and have been losing money for a long time. Although LG looks like a genius for buying at the perfect time, it might not work out in the long run.
After crushing it in 2021 and 2022 they may reset and much lower levels
Steel companies will resume their age old tradition of flooding the market, dumping, and shitting prices down to levels where only NUE and STLD make money. I am talking $400-600 steel. The natural price level for steel is to be shit, kind of like the airlines were for a long time. The oligopoly in NA doesn't matter, they will still shit steel down.
My plan is to stay short. When things look like they can't get any worse perhaps sometime in 2023, load up on NUE and probably X shares. Eventually blast furnaces will get shut down.
Bull argument: rotation to value, perhaps scrap stays elevated and puts a bottom on prices, they will still make almost as much this year as last year but going forward could have negative value into nearly perpetuity.
More details on products:
Bar Products - Bar products will remain strong due to new construction being driven by the E-Commerce shift and the strong demand from automotive.
STLD & NUE produce bar products in addition to downstream products related to construction with buildings companies, bar and joist, racking etc.
X and CLF don't participate in this market
CLF is the only company that lacks downstream diversification. Even X has some exposure to the tubular business and billets for bar products
The sheet market is around 60MM a year in terms of consumption. Between US expansions that will be completed in Q2 across the sheet market the overall increase in domestic supply will be in excess of 6MM tons. This is in addition to another 6MM tons of Mexico supply that was added to the market in 4Q 2021. These tons just like Canada don't have any tariff. This is in addition to the additional supply coming into the US in imports.
The US plate market is doing fairly well, but the market is only about 5MM tons. Two new mills are coming online in 2022 with most of the capacity hitting in early 2023. This capacity would represent 50% of the market at around 2-2.5MM tons. This is in addition to the massive amount of imports we will see from Europe on as rolled plate products in 2022 post the removal of the tariff.
In my opinion most of the downward pressure will be on sheet and plate pricing in 2H 2022. The only company that has 100% old facilities(extremely high maintenance costs), no downstream companies and only exposure to plate/sheet is CLF.