US Steel (NYSE:X) is attracting a lot of long players because of its high level of short sales. Short sales are bullish because they ultimately have to be covered. At 28.46% that’s a lot of short covering coming up. Also the Canadian labour Union has come to its senses and is reporting back to work. The Canadian mill is very efficient and will create better margins.
Here is the snake that
can will bite. US Steel needs steel prices to go up. So if you’re not an economist that means demand is stronger than supply. US Steel needs this and one day it will be true. That’s why steel is cyclical.
In the meantime US Steel has approximately $4 Billion of debt which they must roll over. They do not have the cash flow to seriously knock it down. This debt is the beginnings of malignant cancer. For every one percent (1%) pop in the interest rate they will pay $40 million more per annum. If you believe rates will rise and bonds will fall then US Steel will be caught.
Steel prices have to go up more quickly than interest rates. That’s one hell of a high risk business plan best executed in complex hedging strategies not by running a steel fabricator. When one commodity must go up faster than another you have no control over operations and returns.
So the shorts must eventually be covered. But watch interest rates. There will be some serious bumps on the road which will allow the shorts to cover rather nicely.
George Gutowski writes from a caveat emptor perspective. Follow him on Twitter @financialskepti