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U.S. Steel Output Nabs Weekly Gain on Improved Utilization

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U.S. raw steel production expanded on a weekly basis on an improvement in capacity utilization. Per the latest American Iron and Steel Institute ("AISI") weekly report, domestic raw steel production registered 1,428,000 net tons for the week ending Sep 5, marking a 3.3% rise from production of 1,383,000 net tons for the week ending Aug 29.

However, the reported weekly production was down 21.2% from production of 1,813,000 net tons logged for the same period a year ago.

Weekly Raw Steel Capacity Utilization Improves

Capacity utilization — a key metric in the steel industry — was 63.7% for the reported week, rising from the previous week’s reading of 61.7%, indicating an improvement in activity. However, it was still well below the key 80% level — the minimum rate required for sustained profitability of the industry. Capability utilization rate for the reported week was down from 78% a year ago, per the AISI.

Notably, capacity utilization clocked 51.1% in May 2020, the lowest level in many years as the coronavirus pandemic decimated steel demand across major end-use markets.

U.S. steel capacity utilization started to decline in 2008 during the global financial crisis after remaining above 80% for a number of years. Utilization nosedived to almost 50% in 2009 before trending upward on recovery in the U.S. economy from the financial crisis.

Notably, the 25% tariff on steel imports, which the Trump administration had levied under Section 232 of the Trade Expansion Act of 1962, largely helped the U.S. steel industry capacity break above 80% in 2018. U.S. steel mills operated near or above that level for most part of 2019.

Meanwhile, by-region, output from Great Lakes rose roughly 5% on a weekly basis to 503,000 net tons in the reported week. Mills in the North East produced 138,000 net tons of raw steel, up around 22% from the previous week. Production in the Southern region notched up a 0.4% gain to 558,000 net tons in the reported week. The Midwest region produced 157,000 net tons of raw steel, down around 3% from a week ago. Output went down roughly 3% in the Western region to 72,000 net tons.

Overall year-to-date production still trails that of a year ago. Adjusted year-to-date production through Sep 5 was 53,269,000 net tons at a capability utilization rate of 65.9%, down 20.2% from 66,730,000 net tons recorded in the same period a year ago, the AISI noted. Capability utilization rate for the period is also considerably down from 80.6% recorded last year.

U.S. Steel Industry Prospects Brighten on End-Market Recovery

Coronavirus has taken a heavy toll on the U.S. steel industry this year. The pandemic squeezed demand for steel across major end-use markets such as construction and automotive during the first half of 2020.

The demand slowdown also forced U.S. steel mills to curtail production with capacity utilization dropping to a multi-year lows during the first half. U.S. steel prices have also come under pressure this year amid pandemic-induced demand destruction.

The benchmark hot-rolled coil (“HRC”) prices plummeted to below the $500 per short ton level in April on concerns over the fast-growing pandemic in the United States and demand slowdown amid production shutdowns by automakers. Driven by U.S. steel mills’ price hike actions, HRC prices gained some ground during the second quarter breaking above that level. However, prices again came under pressure in the past two months on demand weakness.

Nevertheless, a recovery in market conditions of late from the virus-led slump represents a tailwind for the U.S. steel industry. U.S. automakers began resuming production in May after a nearly two-month shutdown due to the virus crisis. The restart of production is likely to help revive demand for steel in this major market. Moreover, the resumption of many projects that were stalled earlier due to supply chain disruptions and manpower shortage is expected to support the recovery in the U.S. construction sector. U.S. steel prices are also gaining some traction this month on a recovery in end-market demand, especially in automotive.

Notably, United States Steel Corporation (X - Free Report) , in its second-quarter call, said that automotive original equipment manufacturers are approaching normal production levels and healthy order activity has continued into the third quarter. The company also expects construction demand to remain strong, especially for value-add construction products.

Steel Dynamics, Inc. (STLD - Free Report) also stated that it seeing a rise in steel demand as automotive sector and its related supply chain have restarted production. The company envision steel demand to improve in the second half. Moreover, Nucor Corporation (NUE - Free Report) expects to benefit from strength in the non-residential construction market in the third quarter.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are TimkenSteel Corporation (TMST - Free Report) and Olympic Steel, Inc. (ZEUS - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TimkenSteel has expected earnings growth of 22.4% for the current year. The Zacks Consensus Estimate for the current year has been revised 47.8% upward over the last 60 days. The company also delivered an earnings surprise of 28.3%, on average, over the trailing four quarters.

Olympic Steel delivered an earnings surprise of 34.5% in the last reported quarter. The Zacks Consensus Estimate for the current year has been revised 37.1% upward over the last 60 days.

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