Zacks Industry Outlook Highlights: Steel Dynamics, United States Steel, ArcelorMittal, AK Steel Holding and Nucor
For Immediate Release
Chicago, IL – Dec 19, 2017 – Today, Zacks Equity Research discusses the Industry: Steel, Part 3, including Steel Dynamics Inc. STLD, United States Steel Corp. X, ArcelorMittal MT, AK Steel Holding Corp. AKS and Nucor Corp. NUE.
Industry: Steel, Part 3
Link: https://www.zacks.com/commentary/140388/headwinds-that-might-dent-steel-industry-growth
The steel industry is poised to benefit from solid demand in the United States and emerging markets like India. However, steel stocks have to struggle with equity market volatility and a host of other broader factors. Below, we discuss some of the key reasons and what investors in the steel sector should be wary of in the coming months and years.
Valuation Questions
Steel stocks had a roller coaster ride this year, but the industry has been a strong performer since around mid-June 2017 and has led the market since then. Year to date, the Zacks Steel industry is up +23% vs. the +18.9% gain for the S&P 500 index in that time period.
The industry has historically traded at a discount to the broader market, on most traditional valuation metrics, likely reflecting the deep cyclical nature of its business. On a trailing EV/EBITDA multiple basis (a preferred valuation metric for cyclical industries like steel), the Zacks Steel Industry (the medium level industry classification that includes steel makers as well specialty operators) is currently trading at 5.6X trailing 12-month EBITDA, at a discount to the S&P 500 index’s 11.7X multiple at present.
Over the last 10 years, the industry has traded as high as 28.1X and as low as 3.9X, with a median of 6.7X. As would be expected with all deep cyclical industries, valuation multiples top out at the bottom of business cycles and peak at the bottom. In other words, the industry is expensive when the multiple is at its low point. As you can see from the above 10-year history for this multiple, which is mirrored by other traditional multiples as well, the current multiple is closer to the bottom than to the top.
In other words, the industry’s valuation can’t be called cheap by any means, but it isn’t stretched or expensive either.
Rise in Cheap Imports in the United States
The continued surge of steel imports in to the United States has hollowed out much of the domestic steel industry. Per the latest figures released by The American Iron and Steel Institute (“AISI”), finished steel imports for the first 10 months of 2017 shot up 19.4% and 15.4% year over year, respectively.
Imports have captured almost 28% of the U.S. market, year to date. The largest offshore suppliers were South Korea, Turkey, Japan, Taiwan and Germany. Steel imports had dipped briefly last year due to Commerce Department anti-dumping and anti-subsidy duties imposed on steel products from China and some other countries.
These cheap imports hurt the margins of American steel players like Steel Dynamics Inc., United States Steel Corp., ArcelorMittal, AK Steel Holding Corp. and Nucor Corp.
Geopolitical Tensions
Performance of some key emerging and developing economies has deteriorated due to internal structural issues, lower commodity prices associated with China’s economic slowdown, and escalating political instability. Geopolitical tensions and political instability in the Middle East and Africa continues to have a negative effect. Political uncertainty in the Brazilian economy has resulted in a sharp decline in steel demand.
Can the Auto Sector Sustain the Momentum?
The global automotive sector is reporting a strong performance in 2017 with an especially strong performance in Turkey and Mexico. However, in the United States and China the auto sector could moderate and this trend is likely to extend to other countries in 2018.
Excess Capacity: Perennial Problem
The biggest obstacle to persistent growth and profitability in the steel industry is excess capacity. The industry is under relentless pressure caused by years of excess steel-making capacity, further aggravated by weak demand and uneven economic growth.
To solve this problem, steelmaking capacity needs to be reduced for the industry’s profit margin to reach a sustainable level, and to raise the capacity utilization rate from below 80% levels. The industry remains highly fragmented compared with other global businesses. However, the restructuring and consolidation needed to eliminate overcapacity is progressing at a slow pace.
Impact of Low Oil Prices
The energy sector, which was once buoyant due to shale discoveries and rising production of crude oil, accounts for 10% of steel consumption in the United States. Steel is necessary to make rigs and transport oil. Steel demand from the energy sector is being impacted as exploration companies have reduced capital expenditure budgets in the wake of tumbling oil prices.
Steel products used by the energy industry are also known as oil country tubular goods (or OCTG). U.S. Steel being the biggest supplier of these goods in North America is bearing the brunt of it.
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AK Steel Holding Corporation (AKS) : Free Stock Analysis Report
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
ArcelorMittal (MT) : Free Stock Analysis Report
United States Steel Corporation (X) : Free Stock Analysis Report
Nucor Corporation (NUE) : Free Stock Analysis Report
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