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Here's How the Steel Industry's Getting Hot

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Steel is utilized in every important industry ranging from energy, construction, automotive and transportation, infrastructure, packaging and machinery. A favorable global economic scenario, commodity prices and perked up investment is expected to buoy steel demand in both developed and developing economies.

Consequently, 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” Effect

After being in the dumps for a major part of 2016, steel stocks got a big boost following President Trump’s win that November on expectations of significant infrastructure spending. The president’s call for such spending is expected to lead to an 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.

President Trump, on Mar 8, signed proclamations imposing steep tariffs on steel and aluminum imports in a major move to protect the domestic producers of these metals, rebuild the long-struggling U.S. steel and aluminum industries as well as safeguard American jobs.

Steel Import Drops: Respite to Beleaguered U.S. Players

The tariffs are welcome news for American steel makers as it will lead to lower imports into the United States, which would in turn boost demand for American steel. This will provide the domestic players with more pricing power.

Per the American Iron and Steel Institute (“AISI”), an association of North American steel makers, total and finished steel imports have dipped 3.0% and 1.7%, respectively, in the first three months of 2018 compared with the prior-year period. For 2018, annualized total and finished steel imports is projected to decline 8.8% and 7.6%, respectively, from the prior year. Finished steel import market share was an estimated 26% in March and is estimated at 25% for the year.

On prospects of higher steel demand as a result of the latest U.S. trade measures, United States Steel Corp. (X - Free Report) stated recently that it will restart one of its Granite City Works blast furnaces and steelmaking facilities. The company expects to call back around 500 employees starting this month. Both the blast furnaces of Granite City Works and its steelmaking facilities were idled in December 2015 in response to challenging market conditions, including unfairly traded imports.

Another U.S. steel major, Nucor Corp. (NUE - Free Report) also recently announced that it will build a rebar micro mill in Florida. This $240-million investment will be Nucor’s second rebar micro mill.

Moreover, the tariffs are anticipated to boost production capacity of domestic steel makers amid lower imports. The U.S. Department of Commerce earlier stated that the trade actions are aimed at increasing domestic steel production to roughly 80% operating rate from its present capacity of 73%. This is the minimum rate needed for the long-term viability of the industry.

Construction Sector to Remain Key Demand Driver

The homebuilding market remains a pillar of strength for the economy, as well as 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 4% in 2018 and continue at that pace of growth through 2019. The recently enacted tax reform as well as Trump’s promised infrastructure package will boost demand in the sector. Nucor and Commercial Metals Company (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 requirement for steel to build skyscrapers and public transportation infrastructure should see an uptrend as well. Emerging economies will continue to be major catalysts, owing to the huge amount of steel needed for urbanization and industrialization. Hence, demand for steel is anticipated to remain robust in the years to come. Companies like United States Steel, ArcelorMittal (MT - Free Report) , Nucor and Steel Dynamics Inc. (STLD - Free Report) would gain from momentum in construction.

Automotive Sector Drives Steel Demand

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 globally 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. (AKS - Free Report) 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”).

Steady Growth in Developed Economies

Developed economies are expected to witness growth of 1.8% in steel demand in 2018. In the United States, strong demand and investment fueled by high confidence, rising income and low interest rates will drive steel demand. While rising investment is buoying the manufacturing sector, the construction sector looks good on rising housing prices and steady non-residential sector growth.

The recent tax reform will also lead to higher investment and consequently boost steel demand. The announced infrastructure plan will be a catalyst for steel demand in the long term. In the EU, broadening recovery across countries, higher investments, pickup in non-residential construction and strong manufacturing activities will be catalysts.

Developing Countries to Support Growth

Steel demand in developing economies (excluding China) is expected to increase by 4.9% and 4.5% in 2018 and 2019, respectively. Recovery in oil and commodity prices has led to a revival in steel demand in the Middle East, and if geopolitical stability is achieved, steel demand for the region will be driven by reconstruction activities.

Recovery in Russia will be supported by credit expansion, easing monetary policy and improving consumer and business confidence. In Brazil, recovery of construction activities has been sluggish while in other Latin American countries, recovery is underway and growth is likely to accelerate if reforms are implemented.

The Indian economy is stabilizing from the impact of currency reform and GST implementation last year. 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.

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.

Steel Dynamics can be a solid addition to one’s portfolio. The stock currently has a Zacks Rank #1 and a long-term estimated earnings growth rate of 32%. Over the past 90 days, its estimates for 2018 and 2019 have gone up 21% and 12%, respectively. The company has an average positive earnings surprise history of 3.15% over the trailing four quarters.

Ternium S.A. (TX - Free Report) has an expected long-term EPS growth rate of 39%. It also carries a Zacks Rank #1. Over the past 90 days, its estimates for 2018 and 2019 have gone up 33% and 17%, respectively. The company has an average positive earnings surprise history of 50.23% over the past four quarters.

Nucor, which carries a Zacks Rank #2 (Buy), has an estimated long-term earnings growth rate of 20%. Its estimates for fiscal 2018 and fiscal 2019 have moved up 20% and 8%, respectively, over the past 90 days. The company has an average positive earnings surprise history of 3.78% over the trailing four quarters.

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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