Stocks of steelmakers, including Cleveland-Cliffs, rise on infrastructure stimulus hopes

American steelmakers, including Cleveland-Cliffs Inc., and machinery producers surged Wednesday, Jan. 6, on expectations that Democrats will take control of Congress, paving the way for President-elect Joe Biden to pass a wide-ranging infrastructure stimulus bill.

Investors in the metal used in everything from skyscrapers to highways to bridges and tunnels are wagering that control of the House and Senate will give Biden the support he needs to make good on infrastructure and clean energy campaign promises.

The S&P Supercomposite Steel Index, which includes Cleveland-Cliffs, U.S. Steel Corp., Nucor Corp. and 11 other members, gained 6.8% by noon Wednesday and was headed for the biggest two-day gain since March. Caterpillar Inc., which makes the equipment needed for the massive projects, rose more than 6%.

"We see the 'Blue Wave' reflation trade as driving outperformance in both steel and metal equities today owing to expectations that Democrats will be able to continue to more effectively funnel stimulus into the U.S. economy as well as the potential for a more sizable infrastructure bill," Curt Woodworth, director of U.S. metals and mining research at Credit Suisse, said in an email.

The industry has been clamoring for an infrastructure package since the early days of lockdown, with five U.S. steel groups in April asking Congress to include investment in a second round of stimulus, which didn't come until a few weeks ago. At the time, President Donald Trump had called for $2 trillion in spending on roads, bridges and tunnels.

One of the biggest hurdles to infrastructure spending is Senate Majority Leader Mitch McConnell, who has said it must have some form of revenue source and has complained that stimulus would be used for "blue state bailouts" to shore up things like state pensions.

In November, the Steel Manufacturers Association suggested Biden do a five-year, $1 trillion-plus package, with funding coming from a "modest" increase in the gasoline tax.

"It's not a blue state versus a red state issue," the group's president, Philip Bell, said at the time in an interview. "When you have infrastructure investment, it grows out from the center, so you might have a situation where there's a project in Texas but you need engineering from California, contractors from Arizona and steel from a mill in Alabama to get that done."

"Construction is a critical consumer of steel for both hot-rolled coil and rebar, and the market reset of inflation expectations higher is likely to drive fund flows into hard assets such as metals and steel equities, given historical hedge for inflation," Woodworth said.