Shares of AK Steel (NYSE: AKS) jumped on Tuesday and were up more than 10% at 2:45 p.m. EST. Driving the buying spree is a bet by investors that China will stock up on the raw materials needed to make steel, which could spur more demand for it.
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Steelmaking raw materials like iron ore and coking coal have been on fire in recent days due to the belief that steel mills in China would stock up on those commodities, so they could quickly ramp up steel production when a curb on steel output to cut pollution lifts in March. Iron ore prices in China, for example, rose 2.6% today, which followed a more than 3% increase last week.
That rise in the price of raw steelmaking materials is driving up the stocks of companies that mine these commodities. However, steel companies are also riding this wave with AK Steel, Nucor (NYSE: NUE), U.S. Steel (NYSE: X), and Steel Dynamics (NASDAQ: STLD) all rising more than 3% today. Fueling this rally is the belief that the increase in raw material prices used to make steel could also drive up demand for steel itself.
Because of that, momentum trading is the only thing driving today's rally in AK Steel. While that momentum could continue for quite some time, it's not sustainable unless demand for steel improves like traders think it will. That's a risky bet to make, which is why investors might want to watch the rally from the sidelines, especially since there are better steel stocks to consider buying for the long haul.
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