Back to top

Image: Bigstock

Steel Industry Stock Outlook - May 2017

Read MoreHide Full Article

Steel stocks were propelled “big league” following Donald Trump’s election win in Nov 2016, following a torrid year before that. The change in momentum can basically be attributed to expectations of significant infrastructure spending under the Trump administration. While nothing concrete has materialized from the new administration, particularly on the infrastructure spending front. But the industry continues to benefit from the sustained healthy demand in the automobile and construction sectors.

The new administration’s aggressive trade policies are also expected to provide more protection to the U.S. steel industry. U.S. steel makers recently applauded the Trump Administration's executive actions geared at improving duty collection along with identifying and addressing root causes of unfair trade practices that have cost the U.S. government billions of dollars in lost revenues. The executive order directs U.S. Customs and Border Protection (“CBP”) to chalk out a plan to lessen importer fraud and ensure adequate duty collection.

Per the World Steel Association’s data available through Mar 2017, global steel production improved 5.7% to 410 metric tons (Mt). Steel production in Asia was at 280.6 Mt in the quarter, a 5.4% year–over-year increase. North America’s crude steel production registered a 7.1% rise to 29.3 Mt in the quarter while the EU produced 42.5 Mt of crude steel, rising 3.8% year over year. Steel production in the C.I.S. was at 25.9 Mt, an increase of 4.0% year over year.

China, the world’s largest steel maker, delivered a 4.6% rise in steel production during the first quarter. 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. To negate these factors, efforts have been undertaken to reduce overcapacity and upgrade production in China's steel industry.

China’s economy grew at an annual rate of 6.9% in the first quarter of 2017, a tad better than the 6.8% growth in the fourth quarter and coming ahead of expectations. This marked the strongest expansion since the third quarter of 2015. The improvement is supported by faster rises in industrial output, retail sales and fixed-asset investment while fiscal spending surged. For 2017, the Chinese government projects growth figure of 6.5% compared with the 6.7% expansion in 2016, which was the slowest growth in 26 years.

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 and consequently, China’s steel demand grew 1.3% in 2016. Although, the Chinese economic outlook seems stable now and the industry continued to witness string steel demand so far in 2017. This will eventually decelerate as the government tries to retighten real estate policies. The World Steel Association expects China’s steel demand to remain flat in 2017 followed by a 2% dip in 2018.

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 and ArcelorMittal MT, remains 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 from China. American steel makers including Nucor Corp. NUE, United States Steel, AK Steel, Steel Dynamics Inc. STLD 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 the U.S. regulators to stop unfair trade practices and enforce new trade laws to rescue the crisis-hit American steel industry.

Industry Ranking - Favorable

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). We rank all the 265 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

The bullish Zacks Industry rank of 35 carried by the Steel Producers industry is a testimony to the fact that it is back in favor. The favorable rank places the industry in the top 14% of the 250+ groups enlisted. The steel-pipe and tube industry has a rank 49, putting it in the top 19% bracket. The steel specialty industry is also enjoying a place in the top 43% with a rank 109. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Sector Level Earnings Trend - Positive

As per the Zacks Industry classification, the steel industries are grouped under the broader Basic Materials sector. As of Apr 28, 70% of the sector participants on the S&P 500 index have reported quarterly numbers. Earnings for these companies increased a solid 19.9% from the same period last year while sales improved 6.5%.

As per our projections, the Basic Materials sector is one of the four sectors that are projected to witness double-digit earnings growth in the first quarter. Overall earnings for the sector are anticipated to rise 16.9% while revenues are expected to increase 2.1%.

Improved Performance

The Steel industry as a whole has struggled this year after performing strongly in the post-election period. The Zacks Steel industry is flat in the year-to-date period, underperforming the broader S&P 500 index’s +7% gain. This recent underperformance notwithstanding, the industry is up +8.4% since November 8th vs. +11.5% gain for the S&P 500 index and +7% gain for the Zacks Basic Materials sector. The industry has been losing ground since mid-February on growing uncertainty about the administration’s policy priorities.

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 expected driven by an ongoing recovery in the developed economies and an accelerating growth momentum in the emerging and developing economies. The U.S. 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.

The European economy, on the other hand, is on the road to recovery. Steel demand in the EU is expected to go up in 2017. This is a positive for companies like ArcelorMittal, which generates almost half of revenues from this region. United States 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 be the backbones of the steel industry. Projection of earnings growth, favorable Zacks Rank also instils investor confidence in the space.

At this juncture, we recommend stocks such as ArcelorMittaland Nucor Corporation, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcelorMittal has an expected long-term EPS growth rate of roughly 11.51%. It has delivered an average positive earnings surprise of 143.80% in the trailing four quarters. The company’s share price has gained 38.1% in the last year, outperforming the Steel-Producers industry’s increase of 25.5%.

Nucor delivered an average positive earnings surprise of 11.63% in the past four quarters. The stock has an expected long-term estimated growth rate of 12%. Nucor has delivered a return of 27.8% over the past year, ahead of the Steel-Producers industry’s gain of 25.5%.

However, we suggest staying away from or getting rid of Zacks Rank #5 (Strong Sell) stocks such as Haynes International, Inc. HAYN. The stock has delivered a negative average earnings surprise of 150.75% in the last four quarters. The company has also been witnessing downward estimate revisions lately.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

United States Steel Corporation (X) - free report >>