The year 2019 had been a tough one for the steel industry. Lower steel prices and weaker demand across major steel end-use markets amid a global economic slowdown and trade tensions put the industry on thin ice last year.
The U.S. steel industry, in particular, had a rough ride in 2019 notwithstanding the Trump administration’s efforts to protect it through hefty tariffs on steel imports. The American steel industry was plagued by a slump in U.S. steel prices, demand slowdown and damaging impacts of the U.S.-China trade war. All these lured investors away from the steel space last year.
The sharp decline in domestic steel prices was the major headwind faced by U.S. steel makers in 2019. The benchmark hot-rolled coil steel (HRC) prices felt gravity’s pull last year after rallying to multi-year highs on the back of steel tariffs during 2018.
U.S. steel prices marched higher during the first half of 2018, courtesy of steel tariffs. However, after the initial euphoria fizzled out, prices tracked downward in the back half of the year and declined sharply through the first three quarters of 2019, hurting the bottom lines of U.S. steel companies.
U.S. steel stocks also remain subdued for most of 2019 amid the headwinds. Nevertheless, prices gained some ground towards the end of the year on a recovery in steel prices, optimism surrounding the initial U.S.-China trade deal and the news of revival of tariffs on steel imports from Brazil and Argentina. These two South American nations were earlier exempted from steel tariffs in 2018.
Most of the American steel stocks racked up decent gains in share prices last month, suggesting an improvement in underlying steel market conditions. However, most of them still underperformed the broader market in 2019.
Is there a rebound in the cards after a gloomy 2019? Let’s take a look.
Recovery in Steel Prices to Bring Better Tidings
There have been some green shoots of recovery in steel prices over the past couple of months, raising hopes for a reversal of fortunes in 2020. After a freefall, U.S. steel prices appear to have bottomed out. Prices gained some traction during the fourth quarter of 2019. Major U.S. steel mills raised prices during this period in a bid to reverse the downswing in domestic steel prices. Some of the U.S. steelmakers have also taken steps to reduce excess capacity, partly through idling of plants.
Driven by the consecutive price hike actions by flat-rolled and plate mills and lower production, HRC prices turned upward in November from the three-year low level reached in October. Prices also gained some upward momentum in December. HRC prices hit $600 per short ton (st) during the month. Meanwhile, global steel prices are also firming up of late on U.S.-China trade deal prospects.
Tighter domestic supply coupled with steel mills’ continued push for price hikes are expected to lend support to U.S. steel prices over the near term. It is needless to say that higher prices would provide a respite to domestic steel makers and drive up their margins.
Trade Deal to Remove Uncertainties
A slowdown in global manufacturing activity, partly due to trade war, has hurt demand for steel. Softness across major end-use markets such as automotive, construction and energy has led to demand weakness.
While the tariffs were lauded by U.S. steel makers, they badly hit major industries including automotive that are key consumers of steel. The steel tariffs have driven up manufacturing costs across these industries. The automotive industry, which consumes a big chunk of steel, is among the industries that has been hit the hardest.
Moreover, a slowing Chinese economy amid prolonged trade tensions with the United States triggered a slowdown in steel demand in China, the world’s top consumer of the commodity.
Washington and Beijing, last month, agreed to a phase one trade deal that averted the implementation of a new round of tariffs on each others’ products which were scheduled to take effect on Dec 15. Moreover, the Trump administration would reduce the 15% tariff on about $120 billion of Chinese imports to 7.5%. The countries are expected to sign the trade deal in Washington on January 15.
The de-escalation in U.S.-China trade tensions, at least for now, due to the announcement of the preliminary trade deal would remove clouds of uncertainties and concerns over trade of steel and also restore confidence in the reeling U.S. steel industry. It is also expected to lead to an improved demand scenario for steel.
5 Steel Stocks Worth a Bet Now
A material improvement in the demand environment for steel is not expected anytime soon given the global slowdown. However, a recovery in steel prices and easing trade tensions would nevertheless bode well for steel companies in 2020. With these tailwinds in place, 2020 could usher in a rebound in steel sectors’ fortunes.
Thus, it would be prudent to invest in steel stocks that have compelling prospects and are well poised for upside this year. We highlight the following five steel stocks, armed with a solid Zacks Rank, that are worth considering for investment right now.
Commercial Metals Company (CMC - Free Report)
Texas-based Commercial Metals sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company has an expected earnings growth of 6.7% for fiscal 2020. The Zacks Consensus Estimate for current fiscal earnings was revised 7.8% upward over the last 60 days. The company also racked up positive earnings surprise in each of the trailing four quarters, delivering an average beat of 15.3%.
Steel Dynamics, Inc. (STLD - Free Report)
Based in Indiana, Steel Dynamics carries a Zacks Rank #1. Consensus earnings estimates for the current year was revised 4.7% upward over the last 60 days. The stock also has an expected long-term earnings per share growth rate of 12%, above the industry average of 7.6%.
Ternium S.A. (TX - Free Report)
Luxembourg-based Ternium has a Zacks Rank #1. The company beat the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 11.2%. The Zacks Consensus Estimate for 2020 earnings also increased 2.8% over the last 60 days.
Nucor Corporation (NUE - Free Report)
North Carolina-based Nucor has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for earnings in 2020 was revised 2.5% upward over the last 60 days. The company also delivered a positive earnings surprise in each of the trailing four quarters, with an average beat of 6%.
Gerdau S.A. (GGB - Free Report)
Brazil-based Gerdau carries a Zacks Rank #2. The company has an expected earnings growth of 80% for 2020. The consensus earnings estimate for the current year has gone up 20% over the last 60 days.
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