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5 Solid Steel Stocks Set to Run Higher Amid Trade Tensions

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Anindya Barman
While the steel industry faces risks from escalating trade tensions, it is gaining from favorable demand and pricing fundamentals.
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The steel industry is in good shape, thanks to favorable demand and pricing fundamentals for steel. The industry is gaining from an upturn in steel demand on the back of strong economic momentum across advanced and developing economies and strength across automobile and construction sectors – two major end-use markets.

Steel makers are also benefiting from strength 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.

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #111, which places it in the top 43% of more than 250 Zacks industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

However, the steel industry is not without its challenges. The industry continues to reel under the effects of sustained overcapacity. Escalating trade tensions between the United States and China also pose as headwinds to the industry. Recent concerns over the health of China's economy are adding to the worries.


Steel Tariffs – A Breather for U.S. Producers

While the Trump administration’s move to slap a 25% tariff on steel imports has stoked concerns of a global trade war, there is no denying the fact that the tariffs have provided the much-needed protection to the U.S. steel industry which had long been reeling under the onslaught of cheap imports.

The tariffs are leading to lower imports into the United States as reflected by a decline in imports year to date. According to the American Iron and Steel Institute (AISI), an association of North American steel makers, total and finished domestic steel imports are down 10.1% and 10% year over year, respectively, year to date (through the first seven months of 2018).

The tariffs are also boosting production capacity of domestic steel makers amid lower imports. U.S. steel industry capacity utilization rate recently broke above the 80% mark (the minimum rate required for the long-term viability of the industry), reflecting the impact of the tariffs.  

Moreover, the tariffs have provided a thrust to U.S. steel prices (reflected by the significant run-up in benchmark hot-rolled steel prices), giving American steel makers more pricing power. Higher U.S. steel prices are driving the margins of domestic steel makers. While there are still uncertainties surrounding exemptions of countries, the tariffs should provide further protection to these producers moving forward.

Trade War, China Slowdown Pose Risks

A possible slowdown in China's economy is a concern. China's manufacturing activity slowed to a 14-month low in August, affected by sluggish domestic demand and contraction in export orders. China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for August came in at 50.6, down from 50.8 in July. While the reading was above 50 (indicating growth), it was slowest since June 2017. China’s Caixin/Markit services PMI also slipped to 51.5 in August from 52.8 in July. The August reading marks the lowest level in 10 months.

The trade tensions have also raised a red flag about a possible slowdown in the Chinese economy. The United States and China, in August, levied a 25% tariff on $16 billion worth of each other’s products, ratcheting up the trade tussle between the world's two biggest economies. The Trump administration, in July, had imposed tariffs on $34 billion in Chinese goods that led to China retaliating with tariffs on American products of equal value.

Moreover, the Trump administration recently slapped a fresh tariff of 10% (rising to 25% starting 2019) on $200 billion worth of Chinese imports, slated to take effect on Sep 24. In response, China is reportedly planning to levy tariffs on $60 billion of U.S. goods. The U.S. administration has also threatened to impose tariffs on around $267 billion of additional Chinese imports.

The intensifying trade tensions between China and the United States is expected to weigh on steel demand in China, the world’s top consumer of steel. A slowing Chinese economy will also have a negative impact on infrastructure and construction spending and on the steel industry.

Overcapacity – A Lingering Concern

Fears of renewed oversupply of steel in the market triggered by a surge in production in China to record highs in the recent months have gripped the steel industry lately. Chinese steel mills have been beefing up output to take advantage of strong profit margins.

The ramp up in Chinese output, notwithstanding the ongoing trade spat between Beijing and Washington, has raised industry-wide concerns that a glut of cheap Chinese steel will put downward pressure on steel prices globally.

5 Solid Steel Stocks Worth a Bet Now

The steel industry is still challenged by excess capacity as a result of a continued surge in production in China. The industry also faces risks stemming from heightened U.S.-China trade tensions and a possible cooling of the Chinese economy.

Nevertheless, the industry is poised to gain from an upturn in global steel demand. The World Steel Association ("WSA") – the international trade body for the iron and steel industry – predicts 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. Steel demand in developing economies (excluding China) is expected to increase 4.9% in 2018.

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. 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, per the WSA.

The construction and automotive industries will also continue to be the mainstays of the steel industry. Moreover, the tariffs should provide further cushion to U.S. steel producers.

We highlight the following five steel stocks, armed with a solid Zacks rank, that are worth considering for investment right now.

ArcelorMittal MT

Luxembourg-based ArcelorMittal 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.

The company has an expected earnings growth of 4.7% for 2018. Earnings estimates for the current year have been revised 11.4% upward over the last 60 days. The stock has an expected long-term earnings per share growth rate of 4.8%. ArcelorMittal's shares have also gained around 16% over the past year.

Universal Stainless & Alloy Products, Inc. USAP

Our next pick in the space is Pennsylvania-based Universal Stainless sporting a Zacks Rank #1. The stock has gained around 35% over the past year. Earnings estimates for the current year have been revised 29.7% upward over the last 60 days.

Allegheny Technologies Inc. ATI

Pittsburgh-based Allegheny carries a Zacks Rank #1 and has an estimated earnings growth of 239.6% for 2018. It delivered positive earnings surprise in three of the trailing four quarters with an average beat of 41.7%. The Zacks Consensus Estimate for 2018 has gone up 15.6% over the last 60 days. Moreover, the stock has gained around 24% over the past year.

Steel Dynamics, Inc. STLD

Based in Indiana, Steel Dynamics carries a Zacks Rank #2 (Buy). The company has an expected earnings growth of 110.2% for 2018. Earnings estimates for the current year have been revised 5.9% upward over the last 60 days. The stock has also rallied roughly 42% over the past year.

Nucor Corporation NUE

North Carolina-based Nucor flaunts a Zacks Rank #2 and has an expected earnings growth of 123.4% for 2018. Earnings estimates for the current year have been revised 8.4% upward over the last 60 days. The stock has also gained roughly 19% over a year.

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