The steel industry has staged a comeback after being out of favor for long, taking succour from a recovery in steel demand and prices and a strengthening global economy.
The highly cyclical industry is gaining from a cyclical upturn in steel demand on the back of strong economic momentum across advanced and developing economies. Steel makers are also benefiting from a recovery in steel prices. In particular, steel prices are on an upswing in the United States on the back of the Trump administration’s trade actions to curb imports, reflected by the recent run-up in hot-rolled steel prices.
Moreover, continued momentum in the automotive space and a recovery across housing and commercial construction markets have been key tailwinds for the steel industry. The construction and automotive industries are expected to continue to provide the backbone to the industry.
The steel industry has outperformed the broader market (S&P 500) in a year’s time. The industry has gained around 23.1% in this period, topping the S&P 500’s corresponding return of around 10%.
While the overall demand fundamentals for steel is improving, the industry is still challenged by sustained overcapacity. The global steel industry continues to reel under the effects of excess capacity – the biggest obstacle to persistent growth and profitability.
Upturn in Global Steel Demand Continues
The World Steel Association (WSA) – the international trade body for the iron and steel industry – sees global steel demand to expand 1.6% in 2018. While the WSA envisions a slowdown in demand in China due to the government’s efforts to rebalance the economy and clean up the environment, the momentum is expected to continue in the rest of the world. Global steel demand barring China is expected to rise 3% in 2018.
The WSA expects the global economic momentum to support a growth in steel demand. It sees steel demand in the European Union to go up 1.4% in 2018. The Eurozone’s economic recovery continues apace. The region’s recovery is backed by declining unemployment and strengthening business and consumer confidence.
Steel demand in the United States is expected to rise 1.1% this year, per the WSA. The U.S. economy is showing strong fundamentals on the back of improving business confidence and solid consumer spending.
Demand in emerging and developing economies (barring China) is also expected to rise 4.9% this year. Developing economies are gaining from an upturn in the world economy and economic reforms across several countries including India and Brazil.
Trade Tariffs – A Reprieve for U.S. Steel Mills
The Trump administration has slapped a 25% tariff on steel imports aimed at protecting the U.S. steel industry which had long been reeling under the onslaught of cheap imports and has suffered significant reduction in production and employment. The tariffs would also fulfil one of President Trump’s key election promises of bringing down America's massive trade deficit.
The tariffs, which have drawn criticism from major U.S. trading partners, are the result of the U.S. Department of Commerce’s investigation that was carried out under Section 232 of the Trade Expansion Act of 1962 to determine whether the imports pose a threat to national security.
But President Trump’s softening tariff stance is a worry. The Trump administration, last month, said that it would temporarily exempt certain countries from the tariffs. The list includes the European Union (EU), Argentina, Australia, Brazil, Canada, Mexico and South Korea, many of which have been in talks with the United States to win an exemption. Moreover, the tariff orders included provisions for other countries to apply for exemptions provided their imports do not hurt the U.S. economy.
Nevertheless, the trade tariffs have provided a much-needed relief to the U.S. steel makers. The tariffs are expected to lead to lower imports into the United States, which would in turn boost demand for American steel and drive profitability of U.S. steel makers. The tariffs would also provide a boost to steel prices, give American steel makers more pricing power and help to level the playing field. U.S. steel prices are on an uptrend following the trade tariff announcement.
Moreover, the tariffs are expected to boost production capacity of domestic steel makers amid lower imports. All these are likely to help in creating hundreds of new steel jobs in the country.
Too Much Steel Remain a Concern
The global steel industry continued bear the brunt of a surge in production in China as steel mills in the world's biggest steel producing nation continued to take advantage of a spike in domestic steel prices that translates to higher profits for the Chinese steel industry.
According to a recent WSA report, global crude steel production went up 3.5% year over year to 131.8 million tons (Mt) in February 2018. Production from China, which accounts for around half of the global steel output, spiked 5.9% year over year to 64.9 Mt in February. The rise in production came amid escalating trade tensions between the United States and China.
Chinese steel output was expected to decline during winter months as Beijing had implemented a four-month reduction in production to reduce the country’s excess steel supply and clean up the environment. Production is expected to rise further moving ahead as those winter restrictions ended last month.
5 Steel Stocks Worth Betting on Now
As the steel industry fundamentals are improving, it would be a prudent idea to invest in steel stocks that have compelling prospects and are well poised for solid upside in the second quarter of 2018 leveraging improving steel market conditions. We highlight the following five steel stocks, armed with a solid Zacks rank, that are worth considering for investment right now.
Tenaris S.A. TS
Headquartered in Luxembourg, Tenaris carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has an expected earnings growth of 44.2% for 2018. Earnings estimates for the current year have been revised 32.1% upward over the last 60 days. The company beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering a positive average earnings surprise of around 173%. The stock has also gained around 23.9% over the past six months, outperforming the S&P 500’s corresponding return of 1.3%.
Our next pick in the space is Luxembourg-based ArcelorMittal, sporting a Zacks Rank #2 (Buy). The company beat the Zacks Consensus Estimate in each of the trailing four quarters, delivering a positive average earnings surprise of 39.4%. Earnings estimate for 2018 has improved 2.7% over the last 60 days. ArcelorMittal also has an expected long-term earnings growth rate of 13.4%. Moreover, the stock has gained roughly 18.5% over the past six months, outperforming the S&P 500’s corresponding return of 1.3%.
Steel Dynamics, Inc. STLD
Indiana-based Steel Dynamics is another solid choice carrying a Zacks Rank #2. It has an expected earnings growth of 57% for the current year. The company's earnings estimate for 2018 has improved 7.5% over the last 60 days. The stock also has an expected long-term earnings per share growth rate of 12%. Steel Dynamics has also gained 22.7% over the past six months, outperforming the S&P 500’s corresponding return of 1.3%.
Schnitzer Steel Industries, Inc. SCHN
Headquartered in Portland, OR, Schnitzer Steel sports a Zacks Rank #2 and has an expected earnings growth of 120.3% for the current fiscal year. Earnings estimates for the current fiscal year have been revised 17.4% upward over the last 60 days. The stock has also gained roughly 18.3% over the past six months, outperforming the S&P 500’s corresponding return of 1.3%.
EVRAZ plc EVRZF
London-based EVRAZ carries a Zacks Rank #2 and has an expected earnings growth of 64.6% for the current year. The Zacks Consensus Estimate for 2018 has gone up 11.3% over the last 60 days. The stock has also rallied a staggering 216% over the past six months, topping the S&P 500’s corresponding return of 1.3%.
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