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The Slide for Commodity Stocks Continues

This post was written by CNBC producer Robert Hum

Highlighted by a 5-week low in crude oil today, the weakness in the commodity complex and the subsequent mid to high single digit declines in commodity stocks this afternoon have been in-focus all day. After a significant rally from March to June, commodity stocks continue to add to their recent sell-off with today’s declines.

Since June Highs:

  • Massey Energy -37%
  • Rio Tinto -31%
  • Hess -30%
  • Chesapeake Energy -29%
  • Alcoa -24%
  • U.S. Steel -24%
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But why such a hefty correction? Perhaps traders may have realized that they got ahead of themselves. Recall that much of the rally from March to June in commodities and commodity stocks occurred on traders’ hopes that there would be a strong and fairly quick economic rebound spurring a sharp increase in global demand for oil and metals. Ultimately, however, those hopes may have been overly optimistic.

While it’s true that conditions may have indeed stabilized a bit in the past quarter as the pace of declines have slowed, companies have given few indications that a strong recovery is near. In fact, they continue to expect weak overall demand in the coming quarters. Take a look at a couple of comments made by some of the steel company CEOs over just the past couple of weeks:

1) Arcelor Mittal CEO Lakshimi Mittal: "We won't see a return to very strong levels of demand until 2011" (or beyond).

2) Commercial Metals CEO Murray McClean: "We believe for the balance of calendar 2009, market conditions in the U.S. will remain difficult. There is very little evidence of stimulus dollars impacting demand.”

3) Nucor CEO Daniel DiMicco: "We should be at or near bottom, but we're going to be there for awhile" with good levels of economic activity not returning until sometime between 2012 and 2015.

Earnings Season Ahead

On Wednesday, aluminum producer Alcoa will kick off earning season with an expected third consecutive quarterly loss. The last 1.5 years has been extremely challenging for the Dow component as it has been plagued by a combination of high energy costs, lower aluminum prices, and plummeting demand – with the latter two issues hurting its most recent quarters the most.

Some key issues to keep in mind ahead of the firm’s earnings report:

1) Pricing. The good news for Alcoa – the average Q2 spot price for aluminum rose 9 percent sequentially from the average price in the first quarter of the year. The bad news, however, is aluminum prices are still nearly 50 percent off their levels from the second quarter of last year.

Bottom line: while pricing has improved slightly in recent months, it’s still far from being at substantially profitable levels for Alcoa.

2) Demand. Just like with the steel companies, traders hope Alcoa will provide some insight on the current aluminum demand trends. With conditions possibly beginning to stabilize, if the company notes a pick-up in order flow, traders will look deeper into whether the increase in orders was a result of customers replenishing depleted inventory or if it’s due to notable signs of rising global demand.

3) Cost cuts. While much of the focus will be on Alcoa’s top line results (as a combination of pricing and sales orders), expect the company to cite the continued benefits of its substantial cost reductions amid cuts in production and headcount.

Recall that in its last quarterly report, Alcoa announced it plans to cut capital expenditures 50 percent by 2010.

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