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Steel Industry Rides on Zooming Prices: 5 Red-Hot Stocks to Buy

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·8 min read
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The steel industry has forged an impressive comeback after being rattled by the fallout from the deadly coronavirus pandemic. Coronavirus-induced demand destruction put a dent on the industry during the first half of 2020. Steel stocks also got hammered along with most other commodities amid the virus-led demand downturn.

However, skyrocketing steel prices and an upswing in demand from key end-use industries such as automotive and construction have pulled the steel industry out of its pandemic-induced slumber and put it on a solid footing. Notably, automotive and construction together account for a big chunk of steel consumption.

Recovery started to gain steam toward the end of the third quarter of 2020 on resumption of operations across major steel-consuming sectors following easing of lockdowns and restrictions across the word. Steel makers are seeing strong order booking in automotive. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. The automotive rebound is driving demand for flat steel products globally.

Moreover, the revival in the construction sector globally has spurred up demand for long and flat steel products in this major market. The construction sector has bounced back on the heels of a resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient.

Meanwhile, a strong recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity. Steel demand is being driven by China government’s infrastructure spending spree to rev up its economy.

Moreover, steel prices are shooting higher on an upturn in demand, supply shortages and higher raw material costs. Notably, U.S. steel prices have staged a strong recovery and hit record levels. The benchmark hot-rolled coil (“HRC”) prices started to recover in September 2020 after cratering to a pandemic-induced multi-year low of roughly $440 per short ton in August, and are screaming higher since then. HRC prices have catapulted to levels not seen since 2008 on U.S. steel mills’ back-to-back price hike actions, tight supply and surging end-market demand. HRC prices zoomed past $1,200 per short ton for the first time in February 2021 and remain above that level this month.

A key reason behind the run-up in steel prices is the demand-supply imbalance. Amid surging demand, supply remains restricted due to the idling of blast furnaces and production disruptions associated with mill outages. These coupled with lower steel imports due to the pandemic and tariffs have resulted in the tightening of steel supplies. Steel scrap prices are also on the rise amid tight supply. Moreover, extended lead times for steel delivery at U.S. steel mills indicate healthier demand. There is room for further upside in HRC prices as demand continues to outpace supply.

Moreover, steel prices have strengthened in China on the back of surging domestic demand. Global steel prices are also moving up on higher demand in China. Higher prices would drive profitability and cash flows of steel companies. Notably, major U.S. steel companies recently provided upbeat profit outlook for the first quarter of 2021 based on strong demand and higher prices.

A strong rebound in demand has also led to a sharp recovery in U.S. steel industry capacity utilization rate and an uptick in domestic steel production. Notably, the pandemic-led demand slowdown forced U.S. steel mills to idle furnaces and curtail production last year with capacity utilization dropping to multi-year lows during the first half.

Meanwhile, shares of major steel companies are shooting higher, driven by record-high steel prices and prospects of infrastructure stimulus package this year from the Biden administration.

Biden has proposed spending $2 trillion over four years to boost clean energy and rebuild infrastructure. The planned investment includes building and repairing roads, bridges, water systems, electricity grids and broadband aimed at fixing America's "crumbling" infrastructure.

The sizable infrastructure spending would have a beneficial effect on the U.S. steel industry given the expected increase in consumption of the commodity that is used to make almost everything from rail tracks to roads to bridges and tunnels.

Solid Zacks Industry Rank

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #5, which places it in the top 2% of more than 250 Zacks industries. The favorable rank reflects the industry’s strength. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Price Performance

The Zacks Steel Producers industry has outperformed the broader market in a year’s time. While the industry has rallied 162.4%, the S&P 500 has returned 61.7%.

5 Solid Steel Stocks to Snap Up

Strong fundamentals make the steel space an attractive area to invest in right now. The industry is poised to run higher on the back of strengthening market conditions, aided by a recovery in China, demand upsurge across major end-markets and soaring steel prices. Here we pick five steel stocks with Zacks Rank #1 (Strong Buy) that are good options for investment right now.

You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcelorMittal MT: Luxembourg-based ArcelorMittal is seeing a rebound in demand, especially in automotive, following the easing of lockdown measures. Moreover, the company is expanding its steel-making capacity and remains focused on shifting to high-added-value products. Its cost-reduction initiatives and higher steel selling prices will also drive profitability.

ArcelorMittal has expected earnings growth of 714.3% for 2021. The Zacks Consensus Estimate for earnings for 2021 also has been revised 62.5% upward over the last 60 days. Moreover, the company has seen its shares rally roughly 123% over the past six months.

Nucor Corporation NUE: Charlotte, NC-based Nucor is expected to benefit from the strength in the non-residential construction market. Nucor also remains committed to boost production capacity, which should drive profitable growth and strengthen its position as a low-cost producer. The company should also gain from considerable market opportunities from its strategic investments in its most significant growth projects.

Nucor has expected earnings growth of 122.5% for 2021. Moreover, the consensus estimate for the current year has been revised 112.3% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 46.7%. The stock has also shot up 55% over the past six months.

Schnitzer Steel Industries, Inc. SCHN: The Oregon-based company’s productivity improvements and cost cost-reduction actions along with continued commercial initiatives are lending support to its margins. The company should also benefit from an improvement in ferrous and nonferrous markets, its debt reductions actions and transition to its new One Schnitzer operating model which is designed at increasing its efficiency.

The company has expected earnings growth of 690.7% for fiscal 2021. The consensus estimate for earnings for fiscal 2021 also has been revised 45.9% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 72.7%. Moreover, its shares have surged roughly 109% over the past six months.

Olympic Steel, Inc. ZEUS: Ohio-based Olympic Steel is benefiting from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses. Moreover, improving industrial market conditions and a rebound in demand are expected to support its volumes.

The company has expected earnings growth of 843.2% for 2021. The Zacks Consensus Estimate for the current year has been revised 150% upward over the last 60 days. The stock has also surged roughly 129% over the past six months.

Ternium S.A. TX: The Luxembourg-based company is expected benefit from a recovery in shipments and higher realized steel prices. Its shipments in Mexico are likely to be aided by strong demand from industrial customers. Higher demand for durable goods and construction materials are also expected to support shipments in Argentina. Ternium is also benefiting from the cost competitiveness of its facilities. The company is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic.

Ternium has expected earnings growth of 128.2% for 2021. It also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 197.8%. The consensus estimate for the current year also has been revised 33.3% upward over the last 60 days. The company’s shares have also popped roughly 98% over the past six months.

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ArcelorMittal (MT) : Free Stock Analysis Report

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