For Immediate Release
Chicago, IL – March 8, 2013 – Today, Zacks Equity Research discusses the U.S. Steel, including Vale S.A. (VALE), Rio Tinto Plc (RIO), BHP Billiton Ltd. (BHP) and Nippon Steel & Sumitomo Metal Corporation (NSSMY).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at
Steel prices are generally volatile, in line with the highly cyclical nature of the global steel industry. Rising raw material prices have a direct impact on steel prices as higher raw material prices induces a corresponding increase in steel prices.
However, in the wake of lower demand, it becomes increasingly challenging to pass on raw material price hikes to consumers. Overcapacity, glut in cheaper Chinese steel imports, economic conditions, shifts toward other substitutes significantly impact steel prices.
Steel prices improved in the first half of 2012, but declined in the back half due to a glut in imports, oversupply in the market from zealous steelmakers, weak demand in Europe and tempering growth in Asia. A sustained downside in steel prices will materially and adversely affect margins of the steel companies.
The overall negative tone of Zacks Industry Rank for the Steel industry reflects this underwhelming earnings outlook. We believe that the eventual pricing recovery will need a reviving economy, stabilization in the Euro-zone and a rebound in construction activity in the developing countries, in particular China, India and South Korea.
Raw Material Trends
The primary inputs for the steel industry are iron ore and coking coal, as well as coke, scrap, alloys and base metal. The industry also uses large volumes of natural gas, electricity and oxygen for its steel manufacturing operations.
In the first half of 2012, prices were more or less stable before plummeting to a three-year low in September. Nonetheless, prices have been on the rise based on aggressive restocking drive by Chinese steel mills. However, average iron ore prices in 2012 were much lower than the previous year.
The iron ore industry is highly concentrated with only three major players, Vale S.A. (VALE), Rio Tinto Plc (RIO) and BHP Billiton Ltd. (BHP), having significant pricing power. Iron ore prices are expected to slump in 2013 due to the economic uncertainty in China.
Mergers and acquisitions (M&A) have remained an important growth strategy in the steel industry providing additional steel capacity, production efficiency and economies of scale. However, consolidation was minimal in 2012, given the current economic uncertainties in the developed economies as well as a slowdown in the emerging regions.
In 2012, a landmark development was the merger of Japan's largest and world's sixth-largest steel maker Nippon Steel Corporation with 27th-ranked Sumitomo Metal Industries to form the world's second largest steel firm - Nippon Steel & Sumitomo Metal Corporation (NSSMY). With a combined capacity of 46.1 million tons, the merger is targeted to generate savings in the face of increasingly intense global competition.
We expect M&A activity to remain slow in 2013 until prices stabilize and the industry strikes a balance between supply and demand. Going forward, the abatement of the Euro-zone crisis, recovery in the U.S. and Chinese economy will determine the fate of such deals.
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