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4 Red-Hot Steel Stocks Forged for Solid Upside in 2H18

Anindya Barman
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The steel industry has staged a recovery supported by a cyclical upturn in steel demand on the back of strong economic momentum in advanced and developing economies and strength across automobile and construction sectors -- two major end-use markets.

Steel makers are also gaining from a recovery in steel prices. In particular, steel prices are on an upswing in the United States courtesy of the Trump administration’s trade actions to curb imports, reflected by the run-up in the hot-rolled steel prices.

The Zacks Steel Producers industry has outperformed the broader market in a year’s time. The industry saw a rise of around 21% in this period, higher than the S&P 500’s corresponding gain of roughly 12%.


 

While the overall demand fundamentals for steel is improving, the industry is still buffeted by sustained overcapacity. The global steel industry continues to bear the brunt of the effects of excess capacity – the biggest obstacle to persistent growth and profitability.

Upswing in Global Steel Demand

Demand outlook for steel is encouraging as the World Steel Association ("WSA") – the international trade body for the iron and steel industry –  sees global steel demand to expand 1.8% in 2018 as favorable global economic scenario, a rebound in commodity prices and strong investment will drive steel demand in both developed and developing economies.

Per the WSA, the outlook for steel demand in the United States is strong, backed by strong investment and consumption triggered by rising income and low interest rates. The tax reform will also lead to higher investment and consequently boost steel demand.

In the Eurozone, broadening recovery across countries, robust domestic demand, resumption in investment as well as pickup in non-residential construction and strong manufacturing activities will support steel demand.

Steel demand in developing economies (excluding China) is expected to increase 4.9% in 2018, per the WSA. Recovery in oil and commodity prices has led to a revival in steel demand in the Middle East, and if geopolitical stability is achieved, steel demand for the region will be driven by reconstruction activities. India is anticipated to act as the next growth engine, given its progressing construction and manufacturing sectors along with rapid urbanization and structural reforms.

Trade Tariffs Instil Optimism

While President Donald Trump’s protectionist trade actions have stoked concerns of a global trade war, there is no denying the fact that they have provided much-needed protection to the American steel industry. The 25% tariffs on steel imports, which the Trump administration levied in March, are expected to lead to lower imports into the United States, which would in turn boost demand for American steel and drive profitability of U.S. steel makers.

The trade tariffs appear to bear fruit as reflected by a decline in U.S. steel imports. According to the American Iron and Steel Institute (“AISI”), an association of North American steel makers, total steel imports dipped 2.7% year over year in the first five months of 2018. Imports also fell 23% on a monthly comparison basis in May. For 2018, annualized total steel imports are expected to decline 3.4% year over year, per the AISI.

The Trump administration, last month, moved ahead with tariffs on steel and aluminium imports from Canada, Mexico and the European Union (EU) following the expiration of temporary exemptions on these major U.S. allies. Canada and Mexico are two major sources of steel imports to the United States, together representing roughly a quarter of U.S. steel imports. While there are still uncertainties surrounding the tariffs, the impacts of the trade actions on imports are likely to be felt more deeply in the second half of 2018.

Meanwhile, steel prices have been rising in the United States on the back of the trade actions, reflected by the spike in hot-rolled steel prices. Higher U.S. steel prices drove the performance of domestic steel makers in the first quarter and the momentum is likely to continue in the second quarter as well as for the remainder of 2018.

The tariffs are also expected to boost production capacity of domestic steel makers amid lower imports. The U.S. Department of Commerce earlier this year said that the trade actions are aimed at increasing domestic steel production from its present capacity of 73% to approximately an operating rate of 80% –  the minimum rate required for the long-term viability of the industry.

Too Much Steel Remains a Worry

The global steel industry continues to reel under a surge in production in China as steel mills in the world's biggest steel producing nation continue to take advantage of strong profit margins amid a spike in domestic steel demand.

According to a recent WSA report, global crude steel production went up 6.6% year over year to 154.9 million tons (Mt) in May. Production from China, which accounts for around half of the global steel output, shot up 8.9% year over year to a new record high of 81.1 Mt. Steel mills in the country are beefing up output after the four-month production restriction to curb pollution during the winter months was lifted in March 2018.

The surge in output came despite Beijing’s ongoing efforts to reduce the country’s massive excess steel capacity and streamline its burgeoning steel sector. The lifting of the capacity restrictions has triggered fears of renewed oversupply.

4 Steel Stocks Worth a Look

The steel industry is poised to benefit from solid demand in the United States and emerging markets. As the industry's fundamentals are improving, it would be prudent to invest in steel stocks that have compelling prospects and are well poised to run higher in the second half of 2018 leveraging favorable steel market conditions. We highlight the following four steel stocks, armed with a solid Zacks rank, that are worth considering for investment right now.

Schnitzer Steel Industries, Inc. SCHN          

Portland, OR-based Schnitzer Steel is an attractive choice with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Schnitzer Steel has an expected earnings growth of 137.9% for the current fiscal year. The Zacks Consensus Estimate for fiscal 2018 has gone up 7.7% over the last 60 days. The company also beat the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 0.7%. The stock has also gained 36.7% in a year’s time.

Ternium S.A. TX

Our next pick in the space is Luxembourg-based Ternium flaunting a Zacks Rank #1. It has an expected earnings growth of 35.9% for the current year. Earnings estimate for 2018 has improved 22.6% 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 50.2%. Moreover, the stock has gained 23.3% over a year.

ArcelorMittal MT

Luxembourg-based ArcelorMittal sports 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 40.1%. Earnings estimate for 2018 has improved 23.3% over the last 60 days. ArcelorMittal's shares have also gained around 28.3% over the past year.

Allegheny Technologies Inc. ATI

Pittsburgh-based Allegheny carries a Zacks Rank #2 (Buy) and has an estimated earnings growth of 187.5% for 2018. It delivered positive earnings surprise in three of the trailing four quarters with an average beat of 38.7%. The Zacks Consensus Estimate for 2018 has gone up 1.5% over the last 60 days. Moreover, the stock has gained 47.6% over the past year.

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