Opinion : Iron and Steel Might Be The Next Big Play

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The Rationale Behind

Last week, Saudi Arabia announced hosting peace talks to resolve the ongoing conflict happening between Russia and Ukraine. These include all top diplomats from India and Brazil among other 30 countries. Although, in this summit, Russia won’t be included, we think this is the start in finding the best solution to end the tragedies happening on both Russia and Ukraine sides.

Chinese leader President Xi Jinping’s phone call to Ukraine President Zelensky is showing a great sign of good faith showing the world as a mediator. China and Russia is known for having a close ties. China already showed this effort during the time when China helped in negotiation between Iran and Saudi Arabia during the Arab Summit. This could be a start of somehow creating a framework that can lead to a peaceful resolution.

On the other hand, Russia hosted a meeting between African leaders wherein Russia is providing free grain supplies for most of the African nations. Let us just hope for the better that the peace talks will play out smoothly.

In our opinion, nobody wins in war.

This was clearly written already in history on how every ordinary civilian carried the burden of suffering while losing everything. We just hope that this conflict will find a common ground to end. And yes it is going to be challenging for both East and West as India, Brazil, Turkey and China already showed disapproval from Western by not supporting the sanctions on Moscow, but this conflict has to end at some point.

Who wants conflict anyway?

We think that after all these peace talks and summits they can come up with a greater solution that will work both ways. A lot of infrastructures were heavily damaged and rebuilding is necessary. Iron and steel are needed to rebuild what was destroyed by this war.

How do we trade this catalyst?

There are three stocks that we are closely watching. ASTL (Algoma Steel Group) and CIA (Champion Iron Ltd) both are Canadian stocks and X (United States Steel Corporation) as for the US Market.

ASTL – Algoma Steel Group, Inc. engages in the production of hot and cold rolled steel products. Products include Sheet and Plate. This firm offers its products for automotive, construction, infrastructure, energy, defense, transportation, and manufacturing industries.

We like this stock as it gives dividends as well. Last ex-date was July 3, 2023. Last year alone it recorded around 11% net income. Year over year liabilities were getting lower compared to previous year meaning they’ve been paying their debts and it’s a good advantage on their part considering the cost of borrowing is getting expensive while assets have been steadily growing.

On the technical side, our plan is to wait for the ASTL to create a nice strong support between $8.75 -$9.00 price level. If volume picks up on this level, we will start a position and slowly add more position as long as it respects its upside channel. There’s a big resistance at around $10.20s where it was previously rejected. Right now as of this writing, ASTL is trading at $9.61.

We want to see some volume build up in that $8.75 to $9.00 level before pulling the trigger. If this play is right, our initial goal is to start scaling out at around $11.00 – $11.50 giving us an upside play of around +30%. Our risk is only up to $8.03. If this snaps at this level we are out.

CIA – Champion Iron Ltd. engages in the production, exploration, and development of iron ore properties. We like this stock as it gives dividends as well. Dividends are another way of bringing down the cost of your shares if you are planning to hold the trade for a long time. Last ex-date was June 12, 2023.

Annual revenue forecast is steady at around $1.72B. We think there’s a chance of beating this forecast even though there’s a lot of recession talks going on around the market. We started buying at this $5.00 level. As of this writing CIA is already trading at $5.00.

Our technical viewpoint is if this trade holds this $5.00 mark, it might bounce back and reclaim the $5.25. If this plays out really well, we could start scaling out a bit at around $6.00ish. Our risk is around $4.80. If this minor support fails, we will get out and re-evaluate our technicals again.

X – United States Steel Corp. engages in the manufacturing and selling of steel products. As of this writing, X is trading at around $24.50 as of this writing.

Revenue for the past 3 years were increasing at a faster pace especially on its flat -rolled products. Flat rolled products are steel sheets and plates mostly used for house frames and even in railways. This company also pays dividends. The next ex-date is on August 3, 2023.

We would like to see this stock hold the uptrend channel. If X taps the $23.15 level, we will start our position. Our risk is only up to $22.00 while our initial price target is at $26.50, and fully scaling this trade out at $28.80 and $30.25. We will also consider getting a leap option call contract with a strike at $25.00 once the volume picks up at $23 – $24 but need to see the Greeks first and assess if the odds are with us.

Final Conclusion

This play still depends on what will be the outcome after the series of summit and peace talks. If there’s no meeting of minds between all global leaders, this will invalidate our Iron and Steel play.

And if the Fed and BoC continue its hawkish stands and keep raising interest rates, this could affect the stocks we’ve listed above as the cost of borrowing will be more expensive than before. Cost of borrowing eats up companies net income due to interest expenses on long term debts.

This is where risk management and position sizing comes in hand and must be recognized at all time frames of trades. Let us not forget that there’s a looming threat of recession still creeping around the corner. But that doesn’t mean we stop analyzing the market. Market is surprising at all times and no one knows what will happen – so just be ready.


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