Steelmakers Feel Bear-Hug on Earnings, Growth Chill

Industry News 09:59:04AM Feb 02, 2012 Source:SMM

PARIS/LONDON, Feb 1 (Reuters) - Shares in European steelmakers are in the cross-hairs of option traders and short sellers following a brisk two-month rally, as doubts about corporate earnings and the outlook for the global economy resurface.

Ahead of results from ArcelorMittal, ThyssenKrupp and others, derivative market sentiment towards the sector has taken a sharp dive after a cyclical upswing had helped it outpace the broader market since November.

The STOXX Europe 600 Basic Resources index surged nearly 30 percent as buyers rotated into cyclicals, double gains in the STOXX Europe 600, but the mood is quickly souring as growth falters and global peers' results underwhelm.

Data from derivatives market operator Eurex shows a much higher number of put options than call options on steelmakers, a sign that option traders expect the stocks to fall.

"The chance of a pull-back looks quite high now.... It now looks sensible to use any rally to trim long-side exposure, or at least get some insurance on, by buying puts," David Morrison, market strategist at GFT Global, said.

The put/call ratio on ArcelorMittal's stock is 1.52, according to Eurex data, while for ThyssenKrupp it is 1.24. Worst off, however, is Kloeckner & Co, Europe's largest independent steel trader, at a massive 38.3.

A high volume of puts compared to calls translates into a ratio above 1 and indicates bearish sentiment towards a stock. The ratio for the Euro STOXX 50 index, meanwhile, is 1.1.

"What we're seeing on the derivatives side is increasing mistrust regarding the upcoming earnings of a number of names, such as ArcelorMittal," a Paris-based options trader said.

"The general feeling is that analyst forecasts, particularly in the sectors such as steel, still need to be trimmed to price in the upcoming recession in Europe. Hence the big number of puts."

The World Bank recently slashed its global growth forecasts, while manufacturing data showed Europe's debt troubles, and its knock-on effect to growth, was hitting factory output.

Kloeckner Chief Executive Gisbert Ruehl told a newspaper this week he expected European steel demand to drop by up to 5 percent in 2012, adding "it could even be worse". As well as weaker demand, Europe is facing tighter credit conditions and competition from low-cost producers in Asia and elsewhere.

The European CRU steel index , a benchmark for European steel prices, has fallen by about 20 percent in the past 12 months, hit by overcapacity and weak demand that has in turn prompted plant closures across the industry.

Some U.S. and Asian peers have already been hit, with U.S. Steel Corp lagging forecasts and Nippon Steel Corp , the world's No.4 steelmaker, being forced to slash its outlook again.

OUTLOOK

That earnings disappointment "is likely to be repeated in Europe", GFT Global's Morrison said. ArcelorMittal is due to report on Feb. 7, followed by ThyssenKrupp on Feb. 14.

Thomson Reuters StarMine data shows 10 of the 31 firms in the STOXX Europe 600 Basic Resources index, which includes the steelmakers as well as miners, have reported quarterly earnings so far, and all have missed forecasts.

StarMine Smart Estimate data, which compares the forecasts of the top analysts with the broad consensus, predicts the remaining companies in the sector will miss consensus forecasts by an average of 7.6 percent.

Earlier on Wednesday, Finland's Outokumpu posted a sharp loss and skipped a dividend payment, sending its stock down 7.3 percent to add to Tuesday's 14.8 percent nosedive after it unveiled a bid to buy ThyssenKrupp's stainless steel unit.

Outokumpu and peer Rautaruukki have featured among the most shorted stocks across Europe, Data Explorers, a research firm which tracks short interest in equities, said.

The percentage of shares outstanding on loan for Outokumpu is 10.4 percent, and 6 percent for Rautaruukki, figures from Data Explorers showed. That compares with an average 2.7 percent for Helsinki's leading index.

Investors who sell a stock short seek to profit from falling prices by borrowing the shares and then selling them in the hope of buying them back at a lower price, cashing in the difference.

A short position on Outokumpu initiated late last Friday and cut on Wednesday morning would represent a lofty gain of about 2 euros a share, before lending fees. The group's shares traded around 6 euros on Wednesday afternoon.

"With the austerity mood across Europe, anything linked to consumer spending is a great short selling idea. Final demand is sluggish and it won't get any better," Derek Lawless, head of WorldSpreads France, said.

"Just look at French car sales, plunging 20 percent last month. This is having a major impact on steelmakers."
 

Key Words:  steel mill 

Steelmakers Feel Bear-Hug on Earnings, Growth Chill

Industry News 09:59:04AM Feb 02, 2012 Source:SMM

PARIS/LONDON, Feb 1 (Reuters) - Shares in European steelmakers are in the cross-hairs of option traders and short sellers following a brisk two-month rally, as doubts about corporate earnings and the outlook for the global economy resurface.

Ahead of results from ArcelorMittal, ThyssenKrupp and others, derivative market sentiment towards the sector has taken a sharp dive after a cyclical upswing had helped it outpace the broader market since November.

The STOXX Europe 600 Basic Resources index surged nearly 30 percent as buyers rotated into cyclicals, double gains in the STOXX Europe 600, but the mood is quickly souring as growth falters and global peers' results underwhelm.

Data from derivatives market operator Eurex shows a much higher number of put options than call options on steelmakers, a sign that option traders expect the stocks to fall.

"The chance of a pull-back looks quite high now.... It now looks sensible to use any rally to trim long-side exposure, or at least get some insurance on, by buying puts," David Morrison, market strategist at GFT Global, said.

The put/call ratio on ArcelorMittal's stock is 1.52, according to Eurex data, while for ThyssenKrupp it is 1.24. Worst off, however, is Kloeckner & Co, Europe's largest independent steel trader, at a massive 38.3.

A high volume of puts compared to calls translates into a ratio above 1 and indicates bearish sentiment towards a stock. The ratio for the Euro STOXX 50 index, meanwhile, is 1.1.

"What we're seeing on the derivatives side is increasing mistrust regarding the upcoming earnings of a number of names, such as ArcelorMittal," a Paris-based options trader said.

"The general feeling is that analyst forecasts, particularly in the sectors such as steel, still need to be trimmed to price in the upcoming recession in Europe. Hence the big number of puts."

The World Bank recently slashed its global growth forecasts, while manufacturing data showed Europe's debt troubles, and its knock-on effect to growth, was hitting factory output.

Kloeckner Chief Executive Gisbert Ruehl told a newspaper this week he expected European steel demand to drop by up to 5 percent in 2012, adding "it could even be worse". As well as weaker demand, Europe is facing tighter credit conditions and competition from low-cost producers in Asia and elsewhere.

The European CRU steel index , a benchmark for European steel prices, has fallen by about 20 percent in the past 12 months, hit by overcapacity and weak demand that has in turn prompted plant closures across the industry.

Some U.S. and Asian peers have already been hit, with U.S. Steel Corp lagging forecasts and Nippon Steel Corp , the world's No.4 steelmaker, being forced to slash its outlook again.

OUTLOOK

That earnings disappointment "is likely to be repeated in Europe", GFT Global's Morrison said. ArcelorMittal is due to report on Feb. 7, followed by ThyssenKrupp on Feb. 14.

Thomson Reuters StarMine data shows 10 of the 31 firms in the STOXX Europe 600 Basic Resources index, which includes the steelmakers as well as miners, have reported quarterly earnings so far, and all have missed forecasts.

StarMine Smart Estimate data, which compares the forecasts of the top analysts with the broad consensus, predicts the remaining companies in the sector will miss consensus forecasts by an average of 7.6 percent.

Earlier on Wednesday, Finland's Outokumpu posted a sharp loss and skipped a dividend payment, sending its stock down 7.3 percent to add to Tuesday's 14.8 percent nosedive after it unveiled a bid to buy ThyssenKrupp's stainless steel unit.

Outokumpu and peer Rautaruukki have featured among the most shorted stocks across Europe, Data Explorers, a research firm which tracks short interest in equities, said.

The percentage of shares outstanding on loan for Outokumpu is 10.4 percent, and 6 percent for Rautaruukki, figures from Data Explorers showed. That compares with an average 2.7 percent for Helsinki's leading index.

Investors who sell a stock short seek to profit from falling prices by borrowing the shares and then selling them in the hope of buying them back at a lower price, cashing in the difference.

A short position on Outokumpu initiated late last Friday and cut on Wednesday morning would represent a lofty gain of about 2 euros a share, before lending fees. The group's shares traded around 6 euros on Wednesday afternoon.

"With the austerity mood across Europe, anything linked to consumer spending is a great short selling idea. Final demand is sluggish and it won't get any better," Derek Lawless, head of WorldSpreads France, said.

"Just look at French car sales, plunging 20 percent last month. This is having a major impact on steelmakers."
 

Key Words:  steel mill