The versatility of steel as a product along with its fundamental requirement in our lives, makes it a crucial element for economic growth. Steel stocks were propelled following President Trump’s election win in November 2016. The change in momentum can basically be attributed to expectations of significant infrastructure spending under the Trump administration.
Trump’s aggressive trade policies are also anticipated to provide more protection to the U.S. steel industry. Further, the industry continues to benefit from the sustained healthy demand in the automobile and construction sectors.
Per the World Steel Association’s data available through July 2017, global steel production improved 4.6% to 977 metric tons (Mt). Steel production in Asia was at 675 Mt in the quarter, a 5.1% year-over-year increase. North America’s crude steel production registered a 7.1% rise to 67.6 Mt in the quarter while the EU produced 99.6 Mt of crude steel, rising 3.9% year over year. Steel production in the C.I.S. was at 57.8 Mt, a decrease of 3.3% year over year.
China, the world’s largest steel maker, delivered a 5.1% rise in steel production during the first seven months of the year. An economic slowdown in China had dealt a massive blow to the global steel industry. Overcapacity and lower steel prices have dented the margins of Chinese steel producers. Efforts have been undertaken to reduce overcapacity and upgrade production in China's steel industry to negate these factors.
To mitigate the impact of rebalancing, the Chinese government issued a number of mini-stimulus measures. This led to a short-term boom in infrastructure investment and the housing market, working in favor of the steel industry. Consequently, China’s steel demand grew 1.3% in 2016 and the industry continued to witness strong steel demand so far in 2017.
China’s economy expanded at an annual rate of 6.9% in the first and second quarters, a tad better than the 6.7% growth witnessed last year. China’s actions to reduce excess steel supply are also expected to lend support to steel prices in 2017. The world’s largest steel producer has pledged to cut steel production capacity by around 50 million metric tons in 2017 to tackle pollution and curb excess supply.
The steel industry remains challenged by waning investments, turbulence in the financial market and geopolitical conflicts in many developing regions. Given the industry’s 10% exposure to the energy sector, lower oil prices have weighed down prices of steel as well. Steel demand from energy companies continues to be weak due to declining capital expenditure budgets. United States Steel Corp. (X - Free Report) , which is the biggest supplier to energy companies in North America, along with AK Steel Holding Corp. (AKS - Free Report) and ArcelorMittal (MT - Free Report) , were affected by the slowdown.
U.S. steel mills remain impacted by depressed capacity utilization and a surge of unfairly traded imports. The domestic market continues to be inundated with cheap imports from overseas producers, especially China. American steel makers including Nucor Corp. (NUE - Free Report) , U.S. Steel, AK Steel, Steel Dynamics Inc. (STLD - Free Report) and ArcelorMittal USA, a part of ArcelorMittal, have borne the brunt of high levels of cheap imports. This has resulted in declining orders, idling of mills and layoffs across the board.
Consequently, U.S. steel makers continue to actively press regulators to stop unfair trade practices and enforce new trade laws to rescue the crisis-hit American steel industry.
Industry Positioning – Mixed Bag
The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is that, we put our industries (all 265 of them) into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
In the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. Click here to know more: About Zacks Industry Rank
Within the Zacks Industry classification, the Steel producers, Steel-pipe and tube and Steel specialty industries are grouped under the Basic Materials sector (one of 16 Zacks sectors). The steel-pipe and tube and steel Producers and industry, with a respective Zacks Industry Rank #50 and #51, remain in the top half. However, the steel specialty industry occupies a space in the bottom half of the Zacks classified industries with a Rank of #252.
Sector Level Earnings Trend - Positive
Per the Zacks Industry classification, the steel industries are grouped under the broader Basic Materials sector. Earnings from the sector participants on the S&P 500 Index increased 7.5% in the second quarter while sales improved 3.9%.
Per our projections, earnings for the Basic Materials sector is expected to dip 0.1% in the third quarter of 2017 and recover in the fourth quarter with a 13.4% rise in earnings. In 2018, earnings growth will remain strong with projections of 11.7% and 10.7% for the first quarter and second quarter, respectively.
In the past year, the Steel Producers industry has outperformed the broader market with a rise of 29.6% compared with S&P 500’s corresponding gain of 11.6%. The steel specialty and steel-pipe and tube industries however lagged behind the S&P 500 with a 5.1% rise and 1.8% dip, respectively.
What Lies Ahead?
After recording growth of 1% in global steel demand in 2016, the World Steel Association projects global steel demand to rise 1.3% in 2017. This will be followed by a 0.9% rise in 2018. In both the years, a cyclical upturn in steel demand is anticipated backed by an ongoing recovery in the developed economies along with an accelerating growth momentum in the emerging and developing economies. United States is expected to continue to lead growth in the developed world thanks to strong fundamentals, newly announced measures related to fiscal stimuli and rising infrastructure spending.
Meanwhile, the European economy is on the road to recovery. Steel demand in the EU is expected to go up in 2017 and 2018. This is a positive for companies like ArcelorMittal, which generates almost half of revenues from this region. U.S. Steel also has a significant presence in Europe. India is anticipated to act as the next growth engine, given its progressing construction and manufacturing sectors along with rapid urbanization and structural reforms.
Meanwhile, the automotive and construction industries will continue to provide the backbone to the steel industry. A projection of earnings growth, the favorable Zacks Rank also instills investor confidence in the space.
At this juncture, we recommend stocks such as POSCO (PKX - Free Report) and Schnitzer Steel Industries, Inc. (SCHN - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Posco has an expected long-term EPS growth rate of roughly 5%. It has an expected earnings growth rate of 116.53% for the current fiscal year. Schnitzer Steel Industries has a projected earnings growth rate of 115.94% for the current fiscal year.
However, we suggest staying away from or getting rid of Zacks Rank #5 (Strong Sell) stocks such as Haynes International, Inc. (HAYN - Free Report) . The stock has delivered average negative earnings surprise of 66.66% in the trailing four quarters. The company has also been witnessing downward estimate revisions lately.
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