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Demand Uptick Drives US Steel Output: Will the Upturn Last?
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U.S. raw steel production expanded on a weekly basis for the week ending Dec 5 on an improvement in capacity utilization as recovery in domestic demand continues to take hold.
According to the latest American Iron and Steel Institute ("AISI") weekly report, domestic raw steel production was 1,579,000 net tons for the week ending Dec 5, a 1.2% increase from production of 1,561,000 net tons for the week ending Nov 28.
Notwithstanding the weekly increase, production still trails the year-ago level. Production for the reported week was down 13.1% from 1,818,000 net tons registered for the same period a year ago.
Weekly Utilization Creeps Up
Capacity utilization — a key metric in the steel industry — was 71.4% for the reported week, rising from the previous week’s reading of 70.6%, indicating an improvement in activity. However, it was still well below the key 80% threshold — the minimum rate required for sustained profitability of the industry. Capability utilization rate for the reported week was down from 78.6% a year ago, per AISI.
Notably, capacity utilization rate cratered to 51.1% in May — the lowest level in many years — after remaining above the 80% the level in early 2020 as the coronavirus pandemic sapped demand across major steel-consuming markets like automotive and construction. Utilization started to improve with a rebound in demand from the slump witnessed during the first half of 2020. Domestic steel production has also picked up on an uptick in capacity utilization.
Meanwhile, adjusted year-to-date production through Dec 5 was 73,765,000 net tons at a capability utilization rate of 67.2%, down 18.3% from 90,264,000 net tons registered in the same period a year ago, AISI noted. Capability utilization rate for the period is also down from 80% recorded last year.
By regions, production from Great Lakes rose roughly 1% on a weekly basis to 555,000 net tons in the reported week. Production in the Southern region went down roughly 2% to 641,000 net tons. North East saw a roughly 12% increase in production to 144,000 net tons for the reported week. Mills in the Midwest region produced 169,000 net tons of raw steel, up around 4% from a week ago. Production rose roughly 6% in the Western region to 70,000 net tons.
Rising Demand, Prices Set the Stage for A Strong Finish to 2020
The domestic steel industry has pulled off a comeback after staying down for much of the first half, buoyed by a revival in demand and an upswing in steel prices.
Coronavirus gutted demand for steel across major end-use markets such as construction and automotive during the first half. The pandemic-led demand destruction also forced U.S. steel mills to curtail production with capacity utilization dropping to a multi-year lows during the first half.
However, demand for steel has picked up with the resumption of operations across major steel-consuming sectors, following the loosening of restrictions. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. U.S. auto sales have rebounded after bottoming in April amid lockdown restrictions, partly driven by pent-up demand and cheap borrowing costs. Notably, U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships in the wake of surging demand. Domestic steel makers are seeing strong order booking in automotive.
The construction sector has also bounced back on the heels of resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. Automotive and construction together account for a big chunk of domestic steel consumption.
The demand rebound has also helped U.S. steel industry capacity utilization rate to break above the 70% level. Moreover, U.S. steel prices have gained strength from the virus-led slump on an uptick in demand.
The benchmark hot-rolled coil (“HRC”) prices slumped 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. After gaining some traction during the second quarter, steel prices again came under significant pressure in July and August on demand weakness.
However, HRC prices started to recover in September and are on an upswing since then. Prices recently surged past $800 per short ton on U.S. steel mills’ price hike actions, tight supply and rising demand, and looks on track to surpass $900 as fundamental driving factors remain firmly in place. Notably, HRC prices reached peak level of roughly $920 per short ton in July 2018 on the back of the Trump administration’s imposition of 25% steel tariffs.
The demand-supply imbalance is the prime reason behind the spike in steel prices. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. Meanwhile, supply remains restricted due to production disruptions and mill outages. Steel scrap prices are also on the rise amid tight supply. Improved demand, rising raw material costs and supply constraints are likely to lend support to HRC prices through this month and into 2021.
A rebound in domestic steel demand and improved steel prices helped U.S. steel companies including Nucor Corporation (NUE - Free Report) and United States Steel Corporation (X - Free Report) deliver strong results in the third quarter. Strengthening demand and a favorable pricing environment are likely to help domestic steel producers finish the year on a strong note.
Steel Stocks Worth a Look
A couple of stocks currently worth considering in the steel space are Schnitzer Steel Industries, Inc. and Steel Dynamics, Inc. (STLD - Free Report) . While Schnitzer Steel sports a Zacks Rank #1 (Strong Buy), Steel Dynamics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Schnitzer Steel has expected earnings growth of 232.6% for the current fiscal year. The company also surpassed the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 61.1%. The company’s shares have also rallied around 55% over the past six months.
Steel Dynamics beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 9.1%. The consensus estimate for the current year also has been revised 5.4% upward over the last 60 days. The stock is also up roughly 31% over the past six months.
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Demand Uptick Drives US Steel Output: Will the Upturn Last?
U.S. raw steel production expanded on a weekly basis for the week ending Dec 5 on an improvement in capacity utilization as recovery in domestic demand continues to take hold.
According to the latest American Iron and Steel Institute ("AISI") weekly report, domestic raw steel production was 1,579,000 net tons for the week ending Dec 5, a 1.2% increase from production of 1,561,000 net tons for the week ending Nov 28.
Notwithstanding the weekly increase, production still trails the year-ago level. Production for the reported week was down 13.1% from 1,818,000 net tons registered for the same period a year ago.
Weekly Utilization Creeps Up
Capacity utilization — a key metric in the steel industry — was 71.4% for the reported week, rising from the previous week’s reading of 70.6%, indicating an improvement in activity. However, it was still well below the key 80% threshold — the minimum rate required for sustained profitability of the industry. Capability utilization rate for the reported week was down from 78.6% a year ago, per AISI.
Notably, capacity utilization rate cratered to 51.1% in May — the lowest level in many years — after remaining above the 80% the level in early 2020 as the coronavirus pandemic sapped demand across major steel-consuming markets like automotive and construction. Utilization started to improve with a rebound in demand from the slump witnessed during the first half of 2020. Domestic steel production has also picked up on an uptick in capacity utilization.
Meanwhile, adjusted year-to-date production through Dec 5 was 73,765,000 net tons at a capability utilization rate of 67.2%, down 18.3% from 90,264,000 net tons registered in the same period a year ago, AISI noted. Capability utilization rate for the period is also down from 80% recorded last year.
By regions, production from Great Lakes rose roughly 1% on a weekly basis to 555,000 net tons in the reported week. Production in the Southern region went down roughly 2% to 641,000 net tons. North East saw a roughly 12% increase in production to 144,000 net tons for the reported week. Mills in the Midwest region produced 169,000 net tons of raw steel, up around 4% from a week ago. Production rose roughly 6% in the Western region to 70,000 net tons.
Rising Demand, Prices Set the Stage for A Strong Finish to 2020
The domestic steel industry has pulled off a comeback after staying down for much of the first half, buoyed by a revival in demand and an upswing in steel prices.
Coronavirus gutted demand for steel across major end-use markets such as construction and automotive during the first half. The pandemic-led demand destruction also forced U.S. steel mills to curtail production with capacity utilization dropping to a multi-year lows during the first half.
However, demand for steel has picked up with the resumption of operations across major steel-consuming sectors, following the loosening of restrictions. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. U.S. auto sales have rebounded after bottoming in April amid lockdown restrictions, partly driven by pent-up demand and cheap borrowing costs. Notably, U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships in the wake of surging demand. Domestic steel makers are seeing strong order booking in automotive.
The construction sector has also bounced back on the heels of resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. Automotive and construction together account for a big chunk of domestic steel consumption.
The demand rebound has also helped U.S. steel industry capacity utilization rate to break above the 70% level. Moreover, U.S. steel prices have gained strength from the virus-led slump on an uptick in demand.
The benchmark hot-rolled coil (“HRC”) prices slumped 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. After gaining some traction during the second quarter, steel prices again came under significant pressure in July and August on demand weakness.
However, HRC prices started to recover in September and are on an upswing since then. Prices recently surged past $800 per short ton on U.S. steel mills’ price hike actions, tight supply and rising demand, and looks on track to surpass $900 as fundamental driving factors remain firmly in place. Notably, HRC prices reached peak level of roughly $920 per short ton in July 2018 on the back of the Trump administration’s imposition of 25% steel tariffs.
The demand-supply imbalance is the prime reason behind the spike in steel prices. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. Meanwhile, supply remains restricted due to production disruptions and mill outages. Steel scrap prices are also on the rise amid tight supply. Improved demand, rising raw material costs and supply constraints are likely to lend support to HRC prices through this month and into 2021.
A rebound in domestic steel demand and improved steel prices helped U.S. steel companies including Nucor Corporation (NUE - Free Report) and United States Steel Corporation (X - Free Report) deliver strong results in the third quarter. Strengthening demand and a favorable pricing environment are likely to help domestic steel producers finish the year on a strong note.
Steel Stocks Worth a Look
A couple of stocks currently worth considering in the steel space are Schnitzer Steel Industries, Inc. and Steel Dynamics, Inc. (STLD - Free Report) . While Schnitzer Steel sports a Zacks Rank #1 (Strong Buy), Steel Dynamics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Schnitzer Steel has expected earnings growth of 232.6% for the current fiscal year. The company also surpassed the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 61.1%. The company’s shares have also rallied around 55% over the past six months.
Steel Dynamics beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 9.1%. The consensus estimate for the current year also has been revised 5.4% upward over the last 60 days. The stock is also up roughly 31% over the past six months.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>