4 actions of steel producers to surf the booming industry – June 11, 2021
Zacks’ steelmaking industry has made an impressive comeback after the coronavirus crisis, thanks to a strong recovery in demand in key steel-consuming industries and a significant rise in steel prices .
Growing demand for steel in key end markets such as automotive and construction is a positive wind for the industry. Demand in China also remains strong thanks to the government’s stimulus measures. In addition, steel prices are skyrocketing due to surging demand, rising input costs and supply constraints. ArcelorMittal (YOUR – Free report), Nucor Company (NAKED – Free report), Dynamic Steel, Inc. (STLD – Free report) and Schnitzer Steel Industries, Inc. (SCHN – Free Report) are well positioned to take advantage of these trends.
About the industry
Zacks Steel Producers Industry serves a wide range of end-use industries such as automotive, construction, home appliance, containers, packaging, industrial machinery, mining equipment, transportation and oil and gas with various steel products. These products include hot and cold rolled coil and sheet, hot dip galvanized coil and sheet, rebar, billets and blooms, rods, strip mill plate, standard tubes and pipeline and mechanical tubes. Steel is mainly produced using two methods: the blast furnace and the electric arc furnace. It is considered to be the backbone of the manufacturing industry. The automotive and construction markets have historically been the biggest consumers of steel. Notably, the housing and construction sector is the largest consumer of steel, accounting for around half of total world consumption.
What is shaping the future of the steelmaking industry?
Takeover of the main end-use markets: Steel producers are expected to benefit from a recovery in demand in key steel end-use markets, such as automobiles and construction, following the downturn caused by the coronavirus. The destruction of demand induced by the pandemic put the brakes on the steel producing industry for much of the first half of 2020. However, steel demand started to recover from the third quarter of 2020 thanks to a resumption of operations in major steel-consuming sectors following the easing of bottlenecks and restrictions around the world. The recovery of the auto industry has accelerated following shutdowns caused by viruses following strong customer demand. The construction sector also rebounded from a resumption of projects that had stalled due to supply chain disruptions and labor shortages. In particular, the non-residential construction market remains resilient. With the recovery of these major markets, demand for steel is expected to increase.
Recovery of steel demand in China: The Chinese economy has recovered from the crisis caused by the pandemic, aided by strict containment measures and government stimulus measures. The resumption of construction and manufacturing activities is stimulating demand for steel in China, the world’s largest consumer of this product. Demand for steel is driven by government spending on infrastructure projects. The government’s stimulus measures are likely to boost China’s steel demand, especially in the real estate and infrastructure sectors.
Focus on steel prices: Steel prices are skyrocketing due to growing demand, supply shortages and higher raw material costs. Notably, steel prices in the United States have rebounded strongly and reached record levels after hitting multi-year lows induced by the pandemic in August 2020. Benchmark hot-rolled coil (HRC) prices have increased. started to recover in September on the backs of American steel mills. consecutive price increases, tight supply and increasing demand in the end market. Notably, HRC prices have more than tripled from their August 2020 low. One of the main reasons for the surge in US steel prices is the imbalance between supply and demand. Steel prices in China have also strengthened on the back of improving domestic demand. In addition, world steel prices are increasing due to higher demand in China. Thus, higher prices are expected to boost the profitability and cash flow of steel producing companies in the future.
Overcapacity remains a concern: The steel-producing industry remains crippled by the sustained oversupply of steel in the market, made worse by the sharp increase in Chinese production. China accounts for more than half of global steel production and contributes significantly to global steel overcapacity. The increase in steel production in China has led to high levels of finished steel inventories in the country. The glut of steel has raised concerns that China is flooding world markets with cheap steel exports. As such, China’s steel overcapacity remains a surplus.
Zacks industry rankings show optimistic outlook
Zacks ‘steelmaking industry is part of Zacks’ larger commodities business. It is ranked 23rd in the Zacks industry, which places it in the top 9% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates good prospects for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before we feature a few stocks that you might want to consider for your portfolio, let’s take a look at the recent stock market performance and industry valuation.
Industry Outperforms Sector and S&P 500
Zacks’ steelmaking industry has outperformed both the Zacks S&P 500 composite and the broader Zacks base materials industry over the past year.
The industry grew 152.1% during this period, compared to the S&P 500’s 40.9% rise and the broader industry’s 57% rise.
One-year price performance
Current industry assessment
Based on the 12-month Enterprise Value / EBITDA (EV / EBITDA) ratio, which is a multiple commonly used to value steel stocks, the industry is currently trading at 8.83X, below the 17.32X of S&P 500, but above the industry’s 8.73X.
Over the past five years, the industry has traded up to 11.62X, up to 4.83X, and the median 7.73X, as shown in the chart below.
Enterprise Value / EBITDA Ratio (EV / EBITDA)
Enterprise Value / EBITDA Ratio (EV / EBITDA)
4 actions of steel producers to watch closely
ArcelorMittal: The Luxembourg company ArcelorMittal is the world’s leading steel and mining company. It is witnessing a rebound in demand, particularly in the automotive sector, following the relaxation of containment measures. The company also remains focused on maintaining a competitive cost advantage and strategic growth through high yield projects in high growth markets. It is expanding its steel capacity and remains focused on the transition to high added value products. Its cost reduction initiatives will also support profitability.
ArcelorMittal currently sports a Zacks Rank # 1 (strong buy). Zacks’ consensus estimate for the company’s current year earnings has been revised up 45.2% in the past 60 days. The company has also beaten Zacks’ consensus estimate in each of the past four quarters, averaging 52.3%. The stock is also up about 54% in the past six months.
Price and consensus: MT
Nucor: Nucor, based in Charlotte, NC, wearing a Zacks Rank # 1, manufactures steel and steel products with operating facilities in the United States, Canada and Mexico. The company is benefiting from the strength of the non-residential construction market and a strong recovery in the automotive market. He also sees improving conditions in the heavy equipment, agriculture and renewable energy markets. Higher demand supports its shipments. Nucor should also take advantage of significant market opportunities through its strategic investments in its most significant growth projects. It remains committed to increasing its production capacities, which should lead to profitable growth and strengthen its position as a low-cost producer.
Nucor expects earnings growth of 259.9% for the current year. The consensus estimate for the current year has been revised upwards to 61.3% over the past 60 days. He has seen his shares climb about 91% in the past six months.
Price and consensus: NUE
Steel dynamics: Based in Indiana, Steel Dynamics is a leading steel producer and metal recycler in the United States, with a Zacks Rank # 1. It benefits from the dynamics of the automotive and non-residential construction sectors. Higher prices supported by strong demand should also boost the profitability of its steel operations. Steel Dynamics is also currently executing a number of projects that are expected to increase capacity and increase profitability.
The company expects earnings growth of 234.9% for the current year. The consensus estimate for the current year has been revised upwards to 59.8% over the past 60 days. The stock has also jumped about 70% in the past six months.
Price and consensus: STLD
Schnitzer steel: Oregon-based Schnitzer, ranked Zacks Rank # 1, is one of the leading manufacturers of recycled metal products in North America. Its steel manufacturing operations produce finished steel products. Its productivity gains and cost reduction actions as well as its ongoing commercial initiatives support margins. The company should also benefit from an improvement in the ferrous and non-ferrous markets, its debt reduction actions and a transition to the new One Schnitzer operating model which aims to increase its efficiency.
The consensus estimate for current year profits has been revised upwards to 57.4% over the past 60 days. The company has also beaten Zacks’ consensus estimate in each of the past four quarters by an average of 78.5%. Additionally, the stock has rebounded around 90% in the past six months.
Price and consensus: SCHN
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