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Zacks Industry Outlook Highlights: Steel Dynamics, United States Steel, ArcelorMittal, AK Steel Holding and Nucor

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For Immediate Release

Chicago, IL –August 31, 2017 – Today, Zacks Equity Research discusses the Industry: Steel, Part 3, including Steel Dynamics Inc. (NASDAQ:STLD Free Report), United States Steel Corp. (NYSE: X Free Report), ArcelorMittal (NYSE:MT Free Report), AK Steel Holding Corp. (NYSE: AKS Free Report) and Nucor Corporation (NYSE: NUE Free Report).

Industry: Steel, Part 3

Link: https://www.zacks.com/commentary/126686/cheap-imports-overcapacity-hamper-steel-industry

The steel industry is poised to benefit from solid demand in the United States and emerging markets like India. However, steel stocks have to struggle with equity market volatility and a host of other broader factors. Below, we discuss some of the key reasons and what investors in the steel sector should be wary of in the coming months and years.

Valuation Questions

Going by the EV/EBITDA multiple (a preferred valuation metric for cyclical industries like steel) the steel-pipe and tube and steel specialty have a trailing 12-month EV/EBITDA multiple of 19.55 and 16.06, respectively, higher than the S&P 500 EV/EBITDA multiple of 10.81. Meanwhile, the steel producers industry has a trailing 12-month EV/EBITDA multiple of 7.24, which compares favorably with the S&P 500 EV/EBITDA multiple of 10.81. Overall, valuation looks expensive for the steel industry.

A Rise in Cheap Imports in the United States

The continued surge of steel imports in to the United States has hollowed out much of the domestic steel industry. Per the latest figures released by The American Iron and Steel Institute (AISI), total steel imports in the first seven months of 2017 surged 22% year over year. Imports have captured almost 28% of the U.S. market, year to date. The largest offshore suppliers were South Korea, Turkey, Japan, Taiwan and Germany. Steel imports had dipped briefly last year due to Commerce Department anti-dumping and anti-subsidy duties imposed on steel products from China and some other countries.

These cheap imports hurt the margins of American steel players like Steel Dynamics Inc. (NASDAQ:STLDFree Report), United States Steel Corp. (NYSE: XFree Report), ArcelorMittal (NYSE:MTFree Report), AK Steel Holding Corp. (NYSE: (AKS - Free Report) – Free Report) and Nucor Corporation (NYSE: NUEFree Report).

Geopolitical Tensions

Performances at some key emerging and developing economies have deteriorated due to internal structural issues, lower commodity prices associated with China’s economic slowdown, and escalating political instability. Geopolitical tensions and political instability in the Middle East, Africa continue to have a negative effect. Political uncertainty in the Brazilian economy has resulted in a sharp decline in steel demand.

Excess Capacity: Perennial Problem

The biggest obstacle to persistent growth and profitability in the steel industry is excess capacity. The industry is under relentless pressure caused by years of excess steel-making capacity, further aggravated by weak demand and uneven economic growth. To solve this problem, steelmaking capacity needs to be reduced for the industry’s profit margin to reach a sustainable level, and to raise the capacity utilization rate from below 80% levels.

The industry remains highly fragmented compared with other global businesses. However, the restructuring and consolidation needed to eliminate overcapacity is progressing at a slow pace.

Impact of Low Oil Prices

The energy sector, which was once buoyant due to shale discoveries and rising production of crude oil, accounts for 10% of steel consumption in the United States. Steel is necessary to make rigs and transport oil. Steel demand from the energy sector is being impacted as exploration companies have reduced capital expenditure budgets in the wake of tumbling oil prices.

Steel products used by the energy industry are also known as oil country tubular goods (or OCTG). U.S. Steel being the biggest supplier of these goods in North America is bearing the brunt of it.

Lower oil prices would urge energy companies to preserve capital to shore up their balance sheets instead of spending money on new exploration. Thus, leading suppliers to the energy sector, such as United States Steel, are likely to be under pressure throughout the year.

Low Crude Steel Capacity Utilization

The crude steel capacity utilization ratio remained stubbornly below 80% in both 2014 and 2015. The average capacity utilization in the 2016 was around 69%. Excess steel capacity has been a perennial problem for the steel industry as steel prices generally move in tandem with capacity utilization rates. To remain competitive and rationalize operations, some major steel companies have resorted to idling their steel plants.

Zacks Industry Rank

Within the Zacks Industry classification, health insurers are broadly grouped in the Medical sector (one of the 16 Zacks sectors).

We rank 265 industries into 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank is #177 (bottom 34%). The ranking is available on the Zacks Industry Rank page.

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