The steel industry came roaring back in 2021 after bearing the brunt of the pandemic last year, taking succor from a strong revival in end-market demand and an upswing in steel prices.

The pandemic put most commodities on a slippery ground last year and steel was no exception. A slowdown in demand across major end-use industries put a dent on the steel industry for much of the first half of 2020. In particular, the pandemic dealt a fresh blow to the U.S. steel industry, which reeled under the effects of the U.S.-China tariff war.

However, demand for steel picked up on the resumption of operations across major steel-consuming sectors such as automotive, construction and machinery, following the easing of lockdowns and restrictions globally. Steel prices have also witnessed an unprecedented surge this year on the back of an upturn in demand across key markets, tight supply conditions and low steel inventory throughout the supply chain.

Stocks of several steel companies have also popped this year driven by the positive momentum of the industry. Notable among them are Commercial Metals Company (CMC Quick QuoteCMC - Free Report) , EVRAZ plc and United States Steel Corporation (X Quick QuoteX - Free Report) .

Steel Prices Retreat, but Industry on Firm Footing

The rebound across major end-use industries such as construction and automotive represents a tailwind for the steel industry. An upturn in industrial activities is driving demand for steel. Demand remains robust across construction and manufacturing sectors. The automotive industry has rebounded following pandemic-led shutdowns on the back of strong customer demand. Order activities in non-residential construction and equipment also remain strong. Demand in non-residential construction is nearing pre-pandemic levels. Steel makers are also seeing improved conditions in the energy markets. However, the rapid spread of the Omicron variant of coronavirus may disrupt economic activities and impact steel demand over the near term.

Steel prices have also escalated to record highs this year. Strong demand and persistent supply shortages have also led to a spike in U.S. steel prices this year to historically high levels, allowing domestic steel companies to churn out record profits despite an uptick in costs of raw materials, including ferrous scrap and headwinds from supply-chain and logistics issues.

After plummeting to a pandemic-led low of roughly $440 per short ton in August 2020, the benchmark hot-rolled coil (“HRC”) prices witnessed a significant rally, breaking above the $1,900 per short ton level in August 2021 on the back of a mismatch between supply and demand.

However, HRC prices have come under pressure since October after peaking in September 2021, pulled down by shorter lead times and a downturn in demand in automotive, resulting from production cuts by carmakers in the wake of the semiconductor shortage. Nevertheless, HRC prices (currently hovering below $1,700) remain elevated notwithstanding the recent correction, as they are well above the year-ago levels and nearly four-times higher than the August 2020 low.

Despite a slowdown in steel demand in the automotive space amid the ongoing chip crunch, healthy demand in other end markets including construction and supply disruptions due to mill outages and scheduled maintenance are likely to lend support to HRC prices through the balance of 2021 and into 2022, driving the profit margins of steel companies.

The massive infrastructure development project is also expected to be a significant catalyst for the American steel industry and U.S. HRC prices in 2022. On Nov 15, President Joe Biden signed the more than $1 trillion bipartisan infrastructure bill into law following months of debate in Congress. The bill includes about $550 billion in new spending on roads, bridges, tunnels and the electric grid, as well as airports, broadband and other infrastructure improvements.

The U.S. steel industry has been urging for infrastructure package since the early days of the pandemic. The massive infrastructure spending would have a beneficial effect on the domestic steel industry, given the expected increase in consumption of the commodity that is used to make almost everything from rail tracks to roads to bridges and tunnels. Per the American Iron and Steel Institute, demand for domestic steel could increase by as much as five million tons for every $100 billion of new investment.

3 Steel Stocks Set to Run Higher

The steel industry has pulled off a comeback after being hobbled by the fallout from the coronavirus pandemic last year. Strong demand across major markets aided by higher industrial activities, still-elevated steel prices, and a sizable infrastructure investment augur well for the industry heading into 2022. Based on strong fundamentals, we have shortlisted stocks that are expected to continue their winning streak in 2022.

For this, we have taken the help of the Zacks Stock Screener to choose stocks that have a market cap of more than $1 billion and currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Our research shows that stocks with a Zacks Rank #1 or 2 offer the best investment options. Moreover, these stocks have gained more than 20% this year.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Here are the three steel stocks that meet the criteria:

Commercial Metals: Texas-based Commercial Metals, sporting a Zacks Rank #1, is gaining from robust steel demand, driven by elevated spending on the residential and construction sector in North America and recovery in the manufacturing sector. It continues to witness stellar demand for steel products across most end markets. In North America, the company is gaining from strong rebar demand, supported by the solid construction growth along with robust merchant bar and wire rod demand. Strength across the key end markets in both North America and Europe is supporting solid steel sales volumes. CMC also continues to gain from its ongoing network optimization efforts. It also has solid liquidity and financial position, and remains focused on reducing debt. These factors have contributed to its share price rally of around 65% this year.

Commercial Metals has expected earnings growth of 10.5% for fiscal 2022. The Zacks Consensus Estimate for fiscal 2022 earnings for CMC has been revised 6.6% upward over the last 60 days. The company has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 7.4%.

EVRAZ: U.K.-based EVRAZ, carrying a Zacks Rank #1, is benefiting from higher steel, vanadium and coal product sales prices and improved activities in steel-consuming industries. Cost-reduction, productivity and customer focus initiatives are also driving its margins. EVRZF also remains focused on de-leveraging its balance sheet and is on track with its key development projects. These factors have contributed to its share price appreciation of around 27% this year.

EVRAZ has expected earnings growth of 9.5% for 2022. The consensus estimate for earnings for 2022 for EVRZF has been revised 31.9% upward over the last 60 days.

United States Steel: Pennsylvania-based United States Steel, carrying a Zacks Rank #2, is gaining from strong demand across end markets, its Best for All business model and higher domestic steel prices. It is witnessing strong consumer-driven demand. The investment in Big River Steel is also expected to be accretive to X’s earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency are also driving its results. Driven by these factors, its shares have popped roughly 35% year to date.

The Zacks Consensus Estimate for earnings for United States Steel for 2022 has been revised 60.3% upward over the last 60 days. X has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 24.5%.