Shares of U.S. steel makers got a lift yesterday on reports that President Donald Trump is considering a roughly $1 trillion infrastructure proposal to stimulate the U.S. economy rattled by the coronavirus pandemic.
According to a Bloomberg report, the Trump administration’s big spending plan would mostly be focused on traditional infrastructure projects. The bulk of the spending would be made on building roads and bridges. A portion of the funds would be reserved for rural broadband and 5G wireless networks. President Trump is slated to discuss rural broadband access at a White House event on Thursday.
Steel Stocks Rally on Hopes of a Demand Boost
U.S. steel stocks, which have been out of favor this year amid the pandemic-led slowdown, got a new lease of life on hopes that the massive infrastructure spending would have a beneficial effect on the domestic steel industry given the expected increase in steel consumption.
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 purchase of AK Steel earlier this year, popped roughly 10%, 6%, 5% and 7%, respectively. Shares of ArcelorMittal MT, which is among the biggest steelmakers in North America and caters to a broad U.S. manufacturing base, also gained around 4% yesterday.
United States Steel, Steel Dynamics, Cleveland-Cliffs and ArcelorMittal currently carry a Zacks Rank #3 (Hold), while Nucor has a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Urge for Infrastructure Spending
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.
According to American Iron and Steel Institute (“AISI”), five major U.S. steel industry groups, in a letter to Congress in March, said that a long-term, robustly funded infrastructure package will create a path forward for jobs and growth. Such investment will not only meet the urgent transportation system requirements but will also create high-paying jobs, allowing businesses and families to recover from this “extremely difficult economic shock,” they added.
The industry groups also said that 38% of America’s 616,000 bridges were in need of either replacement or rehabilitation, per the Federal Highway Administration’s National Bridge Inventory. They noted that “With such a staggering backlog of substandard bridges, there is significant opportunity to put Americans back to work and back on the road to economic recovery.”
The letter further stated that such infrastructure investment will put more Americans back to work and drive commerce and supplies across the nation by including Buy America provisions and using domestically produced and fabricated steel.
President Trump, in March, also lent his support for the infrastructure spending. Trump has been considering a colossal $2-trillion infrastructure plan to leverage the low interest rate environment in an effort to rev up the U.S. economy.
"With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4," Trump had tweeted in March.
Notably, since his 2016 presidential campaign, Trump has been calling for more infrastructure investment aimed at fixing America's "crumbling" infrastructure.
U.S. Steel Industry Reeling Under Virus Crisis
Coronavirus has dealt a fresh blow to the U.S. steel industry, which bore the brunt of a sharp decline in domestic steel prices and damaging impacts of the U.S.-China tariff war in 2019.
The U.S. steel industry witnessed some recovery in late 2019 on the back of an uptick in domestic steel prices. Shares of U.S. steel companies also gained some ground toward the end of 2019 on a recovery in prices and the de-escalation in trade tensions.
However, the lethal coronavirus outbreak has wreaked havoc on the U.S. steel industry. The pandemic has led to a slowdown in steel demand across major markets such as construction and automotive. The construction sector felt the pinch as certain projects were postponed or disrupted amid the outbreak. Disruptions in the supply chain and manpower shortages have also put a brake on automotive production. Moreover, a sharp decline in crude oil prices has hurt demand for steel in the energy space. The prospects of a material recovery in demand look slim amid the current difficult global environment.
Ebbing end-market demand has forced U.S. steel mills to idle operations and scale down production with capacity utilization rate (a major indicator of the health of the U.S. steel industry) sinking to multi-year lows. This has led to a slump in U.S. steel production this year.
Meanwhile, U.S. steel prices have come under pressure this year amid the pandemic-induced demand destruction. The benchmark hot-rolled coil (HRC) fell below the $500 per short ton level in April on demand slowdown due to production shutdowns by automakers. However, steel mills’ price hike actions have helped HRC prices to gain some ground and break above that level of late. However, a significant rebound in U.S. steel prices is not expected over the near term given the current muted demand environment.
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United States Steel Corporation (X) : Free Stock Analysis Report
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Nucor Corporation (NUE) : Free Stock Analysis Report
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