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Steel Industry Starts 2021 on Upbeat Mood: 5 Solid Picks

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Anindya Barman
·9 min read
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The steel industry has kicked off the new year on a high note building on the strong recovery that started in the final quarter of 2020. Shares of major steel companies are heading higher this month. The momentum has been driven by surging steel prices on the back of rising steel demand amid supply shortage and prospects of infrastructure stimulus package this year from the Biden administration.

Material stocks got a thrust after the U.S. Congress formally certified Joe Biden as the next President last Thursday. 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.

American steel stocks have been gaining this month on hopes that 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.

Notably, shares of major U.S. steel makers such as United States Steel Corp. X, Nucor Corporation NUE, Steel Dynamics, Inc. STLD and Cleveland-Cliffs Inc. CLF, which completed the acquisitions of AK Steel and ArcelorMittal USA last year, are up roughly 37%, 7%, 9% and 24%, respectively, this month.

The optimism can also be gauged from the fact that the Zacks Steel Producers industry has gained 10.6% so far this month, outperforming the S&P 500 Index’s 1.9% appreciation.

 


 

 

The steel industry has been urging for infrastructure package since the early days of the pandemic. Leading U.S. steel industry groups, in March 2020, had called on Congress to include significant infrastructure investment in the next stimulus package to help the nation recover from the fallout of the deadly virus outbreak.

The pandemic-induced demand destruction put a crimp on the steel industry for much of the first half of 2020. However, an upturn in demand from the key industries such as automotive and construction, and an upswing in steel prices have pulled the industry out of its funk. 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 prices are also shooting higher on an upturn in demand. Steel stocks also started to rebound in the second half of 2020 after getting hammered during the first half along with most other commodities amid the pandemic-led demand slowdown.

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 is driving demand for long and flat steel products in this major market. The construction sector has also 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 spending in infrastructure projects. A rebound in China’s demand has instilled optimism in the steel space.

Moreover, steel prices are on an upswing on the back of rising demand, supply shortages and higher raw material costs. Notably, U.S. steel prices have staged a strong recovery and hit record levels after cratering to pandemic-induced multi-year lows in August 2020. The benchmark hot-rolled coil (“HRC”) prices started to recover in September and are screaming higher since then. Prices zoomed past $900 per short ton in December on U.S. steel mills’ price hike actions, tight supply and rising demand, and are hovering near the $1,000 per short ton level last attained in 2008. In fact, HRC prices have catapulted to levels not seen in more than 10 years and doubled the lows witnessed in August.

A key reason behind the spurt in steel prices is the demand-supply imbalance. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. Moreover, 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, a situation which is likely to sustain over the short haul. Steel scrap prices are also on the rise amid tight supply. As such, there is room for further upside in HRC prices as the fundamentals driving factors remain in place.

Higher demand, elevated input costs and supply constraints are likely to continue lending support to HRC prices over the near term. Higher prices would drive profitability and cash flows of steel companies.

5 Red-Hot Steel Stocks to Buy Now

Improving fundamentals in the steel industry make this space an attractive area to invest in right now. The industry is expected to benefit from improved market conditions, aided by a recovery in China, demand upsurge across major end-markets and surging prices. Here we pick five steel stocks with Zacks Rank #1 (Strong Buy) or 2 (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, sporting a Zacks Rank #1, is the world’s leading steel and mining company. It is witnessing a rebound in demand, especially in automotive, following easing of lockdown measures. The company is expanding its steel-making capacity and remains focused on shifting to high-added-value products. Its cost reduction initiatives will also support profitability.

ArcelorMittal has expected earnings growth of 287.1% for 2021. The Zacks Consensus Estimate for earnings for 2021 also has been revised 62.2% upward over the last 60 days. Moreover, the company has seen its shares rally roughly 78% over the past three months.

Schnitzer Steel Industries, Inc. SCHN

Oregon-based Schnitzer, sporting a Zacks Rank #1, is a leading manufacturer of recycled metal products in North America. Its steel manufacturing operations produce finished steel products. Its productivity improvements and cost reduction actions along with continued commercial initiatives are lending support to margins. The company should also benefit from improvement in ferrous and nonferrous markets, its debt reductions actions and transition to its new One Schnitzer operating model which increases its efficiency.

The company has expected earnings growth of 337.2% for fiscal 2021. The consensus estimate for earnings for fiscal 2021 also has been revised 52.8% 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 77% over the past three months.

United States Steel Corp.

Pennsylvania-based U.S. Steel produces and sells flat-rolled and tubular steel products and carries a Zacks Rank #2. The company should benefit from an improvement in flat-rolled demand in the United States and Europe and higher domestic steel prices. It has decided to restart blast furnace no. 4 at Gary Works and iron ore production at its Keetac mine to meet strong customer demand. The investment in Big River Steel is also expected to be accretive to U.S. Steel’s earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency should also drive its results.

The company has expected earnings growth of 106.2% for 2021. Moreover, the consensus estimate for the current year has been revised 121.5% 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 17%. It also has an estimated long-term earnings growth rate of 8%. The stock has also shot up round 175% over the past three months.

POSCO PKX

South Korea-based POSCO, carrying a Zacks Rank #2, manufactures and markets a wide range of steel products including hot rolled sheets, plate, wire rod, cold rolled sheets, galvanized sheets and stainless steel globally. The company should benefit from a recovery in sales volumes and production from the pandemic-led slowdown, higher sales prices and a rebound in demand in the automotive sector. It should also gain from cash flow management and cost-cutting initiatives. Moreover, a recovery in industrial production is expected to support its sales and margins.

POSCO has expected earnings growth of 104.3% for 2021. The consensus estimate for 2021 has been revised 6.7% upward over the last 60 days. The company also has an estimated long-term earnings growth rate of 5%. The stock is up around 49% over the past three months.

Olympic Steel, Inc. ZEUS

Ohio-based Olympic Steel is a leading metal service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The company, carrying a Zacks Rank #2, 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.

Olympic Steel has expected earnings growth of 433.3% for 2021. The Zacks Consensus Estimate for 2021 has been revised 77.4% upward over the last 60 days. The stock has surged around 23% over the past three months.

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