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Zooming Prices Usher in Buoyant Times for Steel Makers: 5 Picks

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The steel industry is currently enjoying a bull run, courtesy of solid demand and pricing fundamentals. The industry has staged an impressive comeback after being ravaged by the coronavirus pandemic.

Coronavirus-induced demand destruction wreaked havoc on the steel industry for much of the first half of last year. However, strong pent-up demand from major steel-consuming industries such as automotive and construction, the global economic recovery and skyrocketing steel prices have pulled the industry out of its funk. Steel prices have witnessed an unprecedented surge this year underpinned by strong underlying supply and demand fundamentals.

The industry’s rebound started to gain momentum toward the end of the September quarter last year on resumption of operations across major steel end-use markets following easing of lockdowns and restrictions across the globe.

Steel makers are seeing strong order booking in automotive. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. Notably, the virus-led shutdowns in the North American automotive industry last spring forced U.S. steel mills to curtail production amid a slump in steel demand. The strong automotive rebound is driving demand for flat steel products globally.

Moreover, the revival in the construction sector globally is spurring demand for long and flat steel products in this major market. Steel makers are benefiting from the strength in non-residential construction market, reflected by strong order activity.

A strong rebound in demand has also led to a sharp recovery in U.S. steel industry capacity utilization rate on the restart of idled capacity. U.S. capacity utilization rate broke above the important 80% level late last month for the first time since the start of the pandemic in March 2020, and is currently hovering above that level.

Steel prices are also on a tear on an upturn in demand, tight supply, higher raw material costs and low steel supply-chain inventories globally. Notably, with domestic steel prices hitting record highs, U.S. steel stocks are flying high after getting thumped along with most other commodities last year as the pandemic gutted demand. Surging steel prices and prospects of infrastructure stimulus package this year from the Biden administration have provided a thrust to shares of major steel companies.

U.S. steel prices plummeted at a breakneck pace last year as coronavirus shattered demand in major markets. The benchmark hot-rolled coil (“HRC”) prices cratered to a pandemic-induced multi-year low of roughly $440 per short ton in August 2020.

However, HRC prices started to recover since then and have catapulted to levels not seen since 2008 on U.S. steel mills’ back-to-back price hike actions, supply constraints and solid demand. Prices cruised above the $1,600 per short ton level for the first time in May 2021 and remain above that level this month. Notably, HRC prices have shot up nearly four-fold from the August 2020 low and are fast approaching the $1,700 per short ton level.

The demand-supply imbalance is the prime reason behind the strong run-up in steel prices. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. On the other hand, production disruptions along with lower steel imports due to the hefty Section 232 tariffs have tightened steel supplies. Prices of ferrous scrap, the main raw material for electric-arc furnace steel producers, also remain elevated amid tight supply. U.S. steel mills are benefiting from spread expansion as a significant spike in HRC prices has more than offset higher ferrous scrap costs.

There is room for further upside in HRC prices as demand continues to outpace supply. The price rally is expected to continue into the third quarter as the fundamental driving factors remain firmly in place.

Favorable Zacks Industry Rank

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #19, which places it in the top 8% of more than 250 Zacks industries. The favorable rank reflects the industry’s strength. 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.

Price Performance

The Zacks Steel Producers industry has outperformed the broader market in a year’s time. While the industry has rallied 144.1%, the S&P 500 has returned 38.4%.

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

5 Solid Steel Stocks to Scoop Up

The steel industry is firing on all cylinders thanks to soaring steel prices and the demand upsurge across major end-markets. Strong fundamentals make the steel space an attractive area to invest in right now. Here we pick five steel stocks with a Zacks Rank #1 (Strong Buy) that are good options for investment right now.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Nucor Corporation (NUE - Free Report) : Charlotte, NC-based Nucor is benefiting from strength in the non-residential construction market and a strong recovery in the automotive market. It is also seeing improved conditions in heavy equipment, agriculture and renewable energy markets. Higher demand is supporting its shipments. Nucor should also gain from considerable market opportunities from its strategic investments in its most-significant growth projects. It remains committed to boost production capacity, which should drive profitable growth and strengthen its position as a low-cost producer.

Nucor has expected earnings growth rate of 285.3% for the current year. The Zacks Consensus Estimate for earnings for the current year has been revised 42.2% upward over the last 60 days. It has seen its shares shoot up around 130% over the past year.

ArcelorMittal (MT - Free Report) : Luxembourg-based ArcelorMittal is witnessing a rebound in demand, especially in automotive, following the easing of lockdown measures. The company also remains focused on maintaining a competitive cost advantage and strategically growing through high-return projects in high-growth markets. It is expanding its steel-making capacity and remains focused on shifting to high-added-value products. Its cost-reduction initiatives will also support profitability.

ArcelorMittal has expected earnings growth rate of a whopping 1,163.6% for the current year. The consensus estimate for the company’s current-year earnings has been revised 20.3% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 52.3%. The stock has also rallied roughly 186% over a year.

Steel Dynamics, Inc. (STLD - Free Report) : Based in Indiana, Steel Dynamics is benefiting from momentum across the automotive and non-residential construction sectors. Higher prices aided by strong demand are also expected to drive the profitability of its steel operations. Steel Dynamics is also currently executing a number of projects that should add to capacity and boost profitability.

The company has expected earnings growth rate of 247.5% for the current year. The consensus estimate for the current year has been revised 42% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 10.5%. The stock has also surged roughly 132% over the past year.

United States Steel Corporation (X - Free Report) : Pennsylvania-based U.S. Steel is benefiting from strong demand across end markets and higher domestic steel prices. It is witnessing strong consumer-driven demand and pent-up infrastructure demand. The investment in Big River Steel is also expected to be accretive to U.S. Steel’s earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency should also drive its results.

The company has expected earnings growth rate of 284.6% for the current year. The Zacks Consensus Estimate for the current year has been revised 61.7% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 24%. The stock has also shot up roughly 217% over the past year.

Ternium S.A. (TX - Free Report) : The Luxembourg-based company is expected to benefit from a recovery in shipments and higher realized steel prices. Its shipments in Mexico are likely to be aided by strong demand from industrial customers. Higher demand for durable goods and construction materials is also expected to support shipments in Argentina. Ternium is also benefiting from the cost competitiveness of its facilities. The company is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic.

Ternium has expected earnings growth rate of 291.4% for the current year. It also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 126.3%. The consensus estimate for the current year also has been revised 61% upward over the last 60 days. The company’s shares have also popped roughly 114% over a year.

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