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Weak Demand, Prices Mar Steel Producers Industry Outlook

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The Zacks Steel Producers industry serves a wide range of end-use industries such as automotive, construction, appliance, container, industrial machinery, transportation, and oil and gas with various steel products. These include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.

Some of the prominent industry players are ArcelorMittal (MT - Free Report) , Nucor Corporation (NUE - Free Report) , and POSCO (PKX - Free Report) .

Here are the industry’s three major themes:

  • Sluggish demand spells trouble for the steel producers industry. The industry players are facing headwinds from softer demand across major steel end-use markets such as automotive and construction in the wake of the coronavirus pandemic. Moreover, a slump in crude oil prices has led to a slowdown in demand for steel in the energy space. In particular, the coronavirus-induced economic slowdown has triggered a contraction in steel demand in China, the world's top consumer. The pandemic has slowed down activities in the construction space and put brakes on automobile production in China due to shortage of manpower and disrupted supply of auto parts. While China has crawled out of the worst of the coronavirus impact and is limping back to normalcy, business activities in the country are likely to remain sluggish over the near term. This is likely to thwart a material recovery in the demand environment for steel.
     
  • U.S. steel producers are bearing the brunt of the pandemic. The outbreak has led to a downward spiral in U.S. steel prices amid ebbing end-market demand. After gaining some momentum in late 2019 on the back of consecutive price hike actions by major U.S. steel mills and supply-side actions, domestic steel prices came under pressure during the first quarter of 2020 amid the virus crisis. The benchmark hot-rolled coil steel prices tracked downward on concerns over the fast-growing pandemic in the United States and worries over demand slowdown amid production shutdowns by automakers. Weak demand and falling prices forced some of the domestic steel makers to shutter plants, leading to lower production. While U.S. steel prices have gained some ground of late on the back of steel mills’ price hikes, the current feeble demand situation does not look favorable for a significant rebound in prices over the near term.
     
  • The steel producers industry remains hamstrung by sustained oversupply of steel in the market, made worse by continued growth in Chinese production. China, which accounts for more than half of the global steel output, is a significant contributor to global steel excess capacity. Rising steel production in China has led to high levels of finished steel inventories in the country amid weak steel demand at home. Bloated inventories have built pressure on steel prices in China and globally. As such, China’s steel overcapacity remains an overhang for the short haul.


 
Zacks Industry Rank Indicates Bleak Prospects

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #170, which places it at the bottom 33% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 109.1%.

Despite the industry’s grim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.

Industry Lags Sector and S&P 500

The Zacks Steel Producers industry has lagged both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has declined 38% over this period compared with the S&P 500’s rise of 0.6% and the broader sector’s decline of 10.1%.

One-Year Price Performance

 



 

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 6.67X, below the S&P 500’s 10.37X and the sector’s 9.47X.

Over the past five years, the industry has traded as high as 10.96X, as low as 5.13X and at the median of 7.96X, as the chart below shows.


Enterprise Value/EBITDA (EV/EBITDA) Ratio





 

Enterprise Value/EBITDA (EV/EBITDA) Ratio

 


 

Bottom Line

The steel producers industry is reeling under the effects of falling demand across major markets amid the coronavirus outbreak. A weakening China economy amid the pandemic has triggered a slowdown in steel demand in China. Weak U.S. steel prices are also hurting American steel producers. The industry is also grappling with sustained overcapacity, driven by continued growth in Chinese production.

Currently, none of the stocks in the Zacks Steel Producers industry carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). We are presenting three stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

United States Steel Corporation (X - Free Report) : The Pennsylvania-based company has delivered positive earnings surprise in each of the trailing four quarters, the average positive surprise being 23.2%. The stock also has an expected long-term earnings per share growth rate of 8%.

Price and Consensus: X

 



 

Gerdau S.A. (GGB - Free Report) : The Brazil-based company delivered an average positive earnings surprise of 20.1% in the trailing four quarters. Moreover, it has an estimated long-term earnings growth rate of 12.1%.

Price and Consensus: GGB

 



 

Shiloh Industries, Inc. SHLO: The Ohio-based company has an expected earnings growth of 207.7% for the current fiscal year. The company also delivered an average positive earnings surprise of 200% in the trailing four quarters.

Price and Consensus: SHLO

 



 

 

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