US metal and mining companies expect a particularly ugly fourth quarter

January 7, 2013
January 7, 2013

Earnings season swings into gear in the US tomorrow (Jan. 8), when Alcoa opens the festivities after the closing bell. And while the Pittsburgh aluminium giant’s performance usually doesn’t accurately predict how earnings season will go as a whole, the metals and mining sector is expected to be the source of some especially gloomy news.

In recent months analysts have slashed their earnings expectations for materials companies in the S&P 500. FactSet research analyst John Butters notes that predicted earnings growth for the sector has shrunk from nearly 24% at the end of September, to around 6% as of the end of last week. The shrinkage is centered in metals and mining, where expectations have collapsed from 37% growth at the end of September to about 4%. “Companies that have witnessed significant cuts to estimates in the materials sector include US Steel (to -$0.73 from $0.08), DuPont (to $0.08 from $0.39), and Allegheny Technologies (to $0.16 from $0.49),” FactSet notes.

There’s no real mystery here. Global steel demand remains pretty sluggish, especially in Europe. Late last month, Luxembourg-based ArcelorMittal said it would take a more than $4.3 billion writedown in its fourth-quarter earnings report to reduce the value of its European division. Meanwhile, in China, demand has been spurred by government stimulus spending on items such as railways—quite a departure from recent years when runaway development had Chinese steel mills humming. With those mills now much quieter, China is increasingly looking to export its excess steel, which will add to the downward pressure on steel prices.

US steel producers have already felt that pressure. Back in late October the Wall Street Journal reported:

Overall, U.S. steel imports are up 10.4% over the first eight months of the year, compared with a year earlier, at 23.6 million tons, according to Global Trade Information Services. Imports from China are up 24.6%.

It remains to be seen whether that trend has gotten even more pronounced since.

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