Why these steel stocks jumped today

What happened?

Actions by Brazilian steelmakers Company Siderurgica Nacional (NYSE: SID) and Gerdau (NYSE: GGB), and North American producer of iron and steel Cleveland cliffs (NYSE: CLF) gained 12.9%, 13.4% and 9.7%, respectively, on Wednesday. This marks an ongoing mini bull run for the three, who have all gained over 31% since May 15.

So what

The two Brazilian steelmakers joined several of their national counterparts on a run several days higher, as investors start to be more optimistic about the country, even as it faces one of the world’s worst COVID-19 outbreaks. But the shares of the two steelmakers are still down almost half since the start of 2020 and off their highs of more than 50%.

Image source: Getty Images.

Cleveland-Cliffs, formerly a pure play iron producer who is in the process of integrating AK Steel after acquiring the steelmaker earlier this year, was one of America’s most successful steel companies. As of this writing, its stock price is down 35% from its first day of the year high.

Today’s price hike is likely based on the same thing that is pushing up most other North American steel stocks: the general optimism that economic activity (and potentially more government stimulus) will lead to better days to come.

Now what

Brazil’s worst days are probably still ahead of him. COVID-19 cases are on the rise and the country’s health system is inundated. In the United States, cases are on the rise in states that have opened up their economies more in recent weeks, so the optimism could prove short-lived.

This could (and probably will) lead to more days to come when we see these three stocks drop to double digits. And then more days when they come up again. The point is, today’s optimism is grounded in nothing concrete. The COVID-19 crisis continues. It will likely take 2021 before a vaccine is developed and widely available, while treatments also remain a work in progress but uncertain as to when they will be ready.

And it is in this uncertainty that volatility thrives, so be prepared for many more great days, both up and down, throughout the rest of the year. In addition, the state of the Brazilian economy and its more limited ability to recover quickly gives me pause for thought for Companhia Siderurgica Nacional and Gerdau. There is simply too much uncertainty to make an appeal for either today.

Cleveland-Cliffs looks convincing. Its iron production is one of the best and cheapest in North America, and the addition of AK Steel’s finished steel production to its portfolio should translate into a good mix of activities for the company. ” help overcome iron and steel cycles. Cleveland-Cliffs has excellent management which has proven to be very effective in allocating capital and building a strong business. The next year could be painful for the company and brutal for investors, but in a few years, today’s price looks like a winning investment for patient investors willing and able to overcome the obstacles.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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