Zacks Industry Outlook Highlights: Steel Dynamics, United States Steel, ArcelorMittal, AK Steel Holding and Nucor
Zacks Equity Research
Updated
For Immediate Release
Chicago, IL – May 08, 2017 – Today, Zacks Equity Research discusses the Industry: Steel, Part 3, including Steel Dynamics Inc. (NASDAQ:STLD – Free Report ), United States Steel Corp. (NYSE: X – Free Report ), ArcelorMittal (NYSE: MT – Free Report ), AK Steel Holding Corp. (NYSE: AKS – Free Report ) and Nucor Corp. (NYSE: NUE – Free Report ).
The steel industry is poised to benefit from solid demand in the U.S 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 aware of in the coming months and years.
Valuation Questions
Going by the EV/EBITDA multiple (a preferred valuation metric for cyclical industries like steel) the” “ steel-pipe and tube ” and “ steel specialty ” have a respective trailing 12-month EV/EBITDA multipleof 24.72 and 19.52, respectively, higher than the S&P 500 EV/EBITDA multiple of 10.8. Meanwhile, the steel producers industry has a trailing 12-month EV/EBITDA multiple of 6.79, which compares favorably to the S&P 500 EV/EBITDA multiple of 10.8. Overall, valuation looks expensive for the steel industry.
A Rise in Cheap Imports in the U.S.
A slump in the domestic property market, which accounts for a significant part of China’s steel consumption, severe credit crunch and weak infrastructure investment are hurting steel demand in China.
China’s steel exports crossed the benchmark of 100 Mt for the first time last year in the wake of shrinking domestic demand and a flagging economy. Notably, China is the world’s top steel producer, contributing around half of the total global output.
The country has built up a massive excess capacity, posing a threat to the global steel industry. These cheap imports hurt the margins of American steel players like Steel Dynamics Inc. (NASDAQ: STLD – Free Report ), United States Steel Corp. (NYSE: X – Free Report ), ArcelorMittal (NYSE: MT – Free Report ), AK Steel Holding Corp. (NYSE: AKS – Free Report ) and Nucor Corp. (NYSE: NUE – Free Report ).
Slowdown in China
For 2017, the Chinese government projects growth figure of 6.5% compared with the 6.7% expansion in 2016, which was the slowest growth in 26 years. While rebalancing progresses, the Chinese economy continues to slow down.
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, Africa continues to have a negative effect. Political uncertainty in the Brazilian economy has resulted in a sharp decline in steel demand.
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 U.S. 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.
Lower oil prices would urge energy companies to preserve capital to shore up their balance sheets instead of spending money on new exploration. Thus, leading suppliers to the energy sector, such as United States Steel and Tenaris S.A (TS), are likely to be under pressure throughout the year.
In 2017-18 oil prices are anticipated to show a reasonable gain but any spike in oil prices to the levels seen in 2010-12 seems unlikely despite the recent OPEC agreement on oil production cuts.
Low Crude Steel Capacity Utilization
The crude steel capacity utilization ratio remained stubbornly below 80% in both 2014 and 2015. The average capacity utilization in the 2016 was around 69%. Excess steel capacity has been a perennial problem for the steel industry as steel prices generally move in tandem with capacity utilization rates. To remain competitive and rationalize operations, some major steel companies have resorted to idling their steel plants.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has nearly tripled the market from 1988 through 2015. Its average gain has been a stellar +26% per year. See these high-potential stocks free >>.
Get the full Report on X - FREE
Get the full Report on AKS - FREE
Get the full Report on MT - FREE
Get the full Report on NUE - FREE
Get the full Report on STLD - FREE
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com/
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
