Brazil's second-largest steelmaker Companhia Siderúrgica
) has dropped 15% in the past week in the wake of sub-par earnings.
Now at a 52-week low, is it time to buy the iron ore and steel
[caption id="attachment_58541" align="alignright" width="300"
caption="Iron ore extracted from competitor Vale's Gongo Soco mine,
Minas Gerais state, Brazil"]
Like many Brazilian companies whose revenues are in reais, SID's
stock price has struggled thanks to
Brazilian government and central bank policy
weakening the real
. ADRs, which are dollar-denominated, are thus particularly
susceptible to losses from a decreasing home currency against a
flat or strengthening dollar.
Furthermore, weakening Chinese demand for steel has hurt iron
ore prices, which naturally adversely affects the bottom line of
steel companies. Although the Chinese economy is not all
doom-and-gloom at this point, the facets of the Chinese economy
that are responsible for the bulk of Chinese steel demand - namely
housing and industrial production, continue to look weak, which
means steel prices could face sustained pressure.
The basic bullish case for SID involves both bullish Chinese
production (which is unlikely to come to fruition) and Brazil
having to undertake a number of massive projects to build new
stadia and improve underdeveloped transportation
infrastructure for the upcoming 2014 Soccer World Cup and 2016
Summer Olympics, which will require significant steel purchases. On
their conference call last week, SID management indicated that the
company could even see an
increase in prices within Brazil this year
While the company is at a 52-week low, it looks a little too
early for investors to jump in.
Global steel demand continues to wane
; the Brazilian government, at the risk of stoking inflation, looks
intent on seeing the real weaken further.
Technically, unless the stock finds support here to form a
double-bottom, it looks like SID may try to test its 2008 lows.
However, if SID were to drop as far under as 5.50, the stock's
compelling valuation would likely outweigh near-term global and
monetary policy concerns for long-term investors.