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Steel Industry Poised on Automotive, Construction Sectors

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Steel is utilized in every important industry ranging from energy, construction, automotive and transportation, infrastructure, packaging and machinery. Expectations of increased infrastructure-related spending in the United States have fueled steel company stocks to new highs, particularly following the November 2016 election.

There are plenty of reasons to be optimistic about the broader steel industry, both in the short and long term. Here, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.

The “Trump” Card

After being in the dumps for a major part of 2016, steel stocks got a big boost following Trump’s win in November on expectations of significant infrastructure spending in a Trump administration. The president’s call for the massive infrastructure spending is likely to have a beneficial effect on the steel industry given the expected increase in steel demand as it is a key component in many infrastructure products. Trump’s “big” spending plans have thus painted a bullish picture for steel companies.

Construction Sector Remains a Pillar of Strength

The homebuilding market remains a pillar of strength for the economy along with the steel industry. The housing and construction sector is the largest consumer of steel, accounting for almost half of the total consumption. Positives like an improving economy, healthy job growth, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance.

The American Institute of Architects (“AIA”) anticipates spending in the non-residential building sector to advance around 6% in 2017. Nucor Corp. (NUE - Free Report) and Commercial Metals Co. (CMC - Free Report) are the leading steel suppliers to the non-residential construction sector.

Over the long haul, as the urban population increases worldwide, the need for steel to build skyscrapers and public transport infrastructure should see an uptrend as well. Emerging economies will continue to be major catalysts owing to the huge amount of steel required for urbanization and industrialization. Hence, demand for steel is anticipated to remain strong in the years to come. Companies like United States Steel Corp. (X - Free Report) , ArcelorMittal (MT - Free Report) , Nucor Corp. and Steel Dynamics Inc. (STLD - Free Report) would gain from momentum in construction.

Steel to Ride on Demand from Automotive Sector

The automotive sector, which is the second largest steel consumer, is showing significant promise despite threats from other materials. The rising sales trend is anticipated to persist driven by falling fuel prices, low interest rates, enhanced job security, rising wages and household wealth. Moreover, the trend will be backed by improving consumer confidence, residual pent-up demand, attractive deals and vehicle launches.

Moreover, the high average age of light vehicles on U.S. roads is resulting in large replacement demand for cars as well as car parts. This will benefit auto parts manufacturers and retailers. The auto industry in Asian countries, particularly China and India, are also projected to flourish over the next five to seven years. China is the biggest and fastest growing auto market in the world in terms of number of vehicles sold.

With automakers cashing in on strong demand, steel is anticipated to get a proportional boost in the years to come. ArcelorMittal and AK Steel Holding Corp. generate a large portion of their revenues from auto companies. Arcelor Mittal is expanding its global portfolio of automotive steels by launching a new generation of advanced high strength steels (“AHSS”).

Indian Steel Sector to Be a Major Driver

India, currently the fourth largest producer of steel in the world, is anticipated to record exponential growth in the future. This will be fueled by increasing urbanization, along with projected growth in the infrastructure, automobile and real estate sectors. The country’s comparatively low per capita steel consumption and the anticipated rise in consumption owing to increased infrastructure construction, along with the thriving automobile and railways sectors, offer huge scope for growth.

India had a slowdown in economic activity in 2017, but accelerating government reforms are expected to bring about a better investment environment leading to growth in the coming years.

Steady Growth in Developed Economies

Developed economies are expected to witness a stable recovery momentum. Steel demand in these regions will grow 2.3% in 2017 and 0.9% in 2018. In the EU, steel demand recovery remains on track as concern about tensions within the region particularly over migration policies are receding and the economic recovery is broadening.

In the United States, the economy continues to exhibit robust fundamentals supported by strong consumer spending and rising business confidence. An improving job market and a strong housing sector along with President Trump’s infrastructure push will support growth in steel demand.

Developing Countries Benefiting from Economic Reforms

The reform agendas in many developing countries such as Egypt, Brazil, Argentina, Mexico and India are expected to enhance growth potential over time. In the CIS steel demand is expected to strengthen in 2017-2018 and particularly Russia is likely to maintain its slow recovery. Turkish steel demand is anticipated to resume growth momentum in 2018. In Brazil, continuing depressed construction activity has hindered demand recovery in 2017, but a stronger revival is expected in 2018. Steel demand in the developing economies excluding China is expected to grow by 2.8% in 2017 and 4.9% in 2018.

All Eyes on Section 232

One of the major factors that fueled a recovery in the steel sector last year were favorable developments on a number of trade cases that led to a decline in steel imports. U.S. steel makers continue to pin their hopes on President Trump imposing new restrictions on imported steel. The Trump administration ordered an investigation under Section 232 of the Trade Expansion Act of 1962, in April 2017.

The Section 232 probe is aimed at determining whether the imports pose a threat to national security and also gives the President the power to impose broad tariffs or quotas on imported steel. The U.S. Department of Commerce has until mid-January 2018 to conclude the investigation.

Recently, the U.S. Department of Commerce (“DOC”) issued positive preliminary rulings on imports of corrosion-resistant steel (“CORE”) and certain cold-rolled steel flat products into the United States from Vietnam that are made from materials originating in China. The DOC has imposed heavy tariffs on these imports after finding that they have been skirting U.S. anti-dumping and countervailing duty orders. The ruling marks yet another victory for crisis-hit U.S. steel companies in their ongoing battle against unfairly-traded, subsidized imports that continue to flood the American market.

Recovery in China to Aid the Industry

China’s steel demand is expected to increase by 3.0% in 2017. The recent closure of induction furnaces will lead to a one-off jump in measured steel use in 2017 to 12.4%. China’s economy expanded at an annual rate of 6.8% in the third quarter, a tad lower than the 6.9% growth witnessed in the second quarter. The International Monetary Fund (“IMF”) recently tweaked 2017 GDP growth forecast for China to 6.8% by 0.1%. The upward revision reflects the stronger-than-expected performance in the first half of the year reinforced by previous policy easing and supply-side reforms.

China’s GDP growth had been caught in a downward trend since 2010 and hit a 26-year lowest with 6.7% last year. If this year’s growth even beats 6.7% mark — it would mark the first rebound in seven years.

For 2018, although IMF expects China’s growth to somewhat slow to 6.5%, it is still 0.1% higher than previously forecast. Per the organization, the Chinese authorities will maintain a sufficiently expansionary policy mix (especially through high public investment) to meet target of doubling real GDP between 2010 and 2020. Furthermore, IMF attributed the global economic growth, particularly Asia’s growth, to China’s booming economy. It has raised growth prospects for emerging and developing economies by 0.1 percentage point for both 2017 and 2018 backed by a stronger growth projection for China.

Kobe Steel Data Fabrication Issue a Boon to Steel Players

Japan’s third largest steel producer, Kobe Steel Ltd., is currently grappling with data fabrication issues. The scandal has strongly dented customers’ confidence, who are now taking appropriate measures to check whether product specifications agreed on were met or not.

Per the latest data released by Kobe Steel, the falsified data regarding the product strength and other specifications, is likely to impact as many as 500 of its customers. Products that have come under scanner include steel wires and other steel products, copper products, aluminium, as well as aluminium forging and casting products. Steel wires are increasingly used in car engines and tyres while the aluminium products are used in bullet trains. In addition to the automotive and train manufacturers, the issue has led the company’s aircraft manufacturer customers to assess the possible impact on their business.

With questions arising over the quality of steel produced by Kobe Steel, business scope for steel makers in the United States, Brazil and other nations have grown. Adding to the prospects is the declining steel export from China.

How to Play the Industry

As you can see, there are many reasons to be optimistic about the steel industry over the long haul. Carpenter Technology Corp. (CRS - Free Report) can be a solid addition to one’s portfolio. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Carpenter Technology has an expected earnings growth of 107.78% for fiscal 2018 and 27.67% for fiscal 2019.

We also recommend stocks such as POSCO (PKX - Free Report) and SSAB AB (SSAAY - Free Report) , both carrying a Zacks Rank #2 (Buy).

Posco has an expected long-term EPS growth rate of 5%. It has an expected earnings growth rate of 134.76% for the current fiscal and 5.73% for the next. SSAB AB has a projected earnings growth rate of 133.33% for 2017 and 28.57% for 2018.

Check out our latest Steel Industry Outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for the future.

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