Chicago, IL – January 22, 2016 – Today, Zacks Equity Research discusses the Steel, including United States Steel Corp. (X), ArcelorMittal (MT), Steel Dynamics Inc. (STLD), AK Steel Holding Corp. (AKS) and Nucor Corporation ( NUE). Industry: Steel Link: https://www.zacks.com/commentary/68925/steel-industry-stock-outlook---jan-2016 The year that went by was the most turbulent for the steel industry since the global financial crisis of 2008–2009. While the automobile and construction sectors continue to support demand, the steel industry is currently facing three major headwinds: falling prices, economic slowdown in China and foreign steel imports into the U.S.
Steel companies saw their market capitalizations dwindle to unprecedented levels in 2015 with the likes of United States Steel Corp. (X), ArcelorMittal (MT), Steel Dynamics Inc. (STLD) and AK Steel Holding Corp. ( AKS) falling to multiyear lows.
Per the World Steel Association, global steel production decreased 2.8% to 1471 metric tons (Mt) in the January-November period as production shrank across all regions. China, the world’s largest steel maker, continued to disappoint with a 2.2% decline.
Economic slowdown in China has dealt a massive blow to the global steel industry. China's steel industry is still reeling under overcapacity with barely any signs of recovery. The PMI for the Chinese steel industry has stayed below the mark of 50 for 20 straight months, signaling a persistent conflict between supply and demand. China’s GDP moderated to 6.8% for the fourth quarter, its lowest reading since the financial crisis. The 6.9% growth for 2015 was a marked deceleration from the 7.3% gain last year and its weakest in 25 years.
Steel usage in China is expected to dip 2% in 2016 according to the World Steel Association’s short range outlook published last October. Moreover, China’s move to devaluate its currency has triggered accelerated steel exports from the country amid waning demand at home. A cheaper yuan has made Chinese exports less expensive in overseas markets.
In addition, the steel industry is faced with dwindling investments, financial market turbulence and geopolitical conflicts in many developing regions. The industry’s low-growth outlook will persist until other developing regions of sufficient size and strength can support another major growth cycle.
U.S. steel mills remain hobbled by depressed capacity utilization and a torrent of unfairly traded imports. The domestic market continues to be inundated with cheap imports from overseas producers, especially from China. American steel makers including Nucor Corporation ( NUE), United States Steel, AK Steel, Steel Dynamics and ArcelorMittal USA, have suffered heavily from high levels of imports. This has resulted in declining orders, idling of mills and layoffs across the board.
And to top it all, the slump in oil has pulled down prices of steel as well given the industry’s 10% exposure to the energy sector. The oil price has currently fallen below $30 a barrel apprehending a further glut in oil supply after the historic lifting of embargoes on Iran. Steel demand from energy companies is expected to go down on declining capital expenditure budgets. U.S Steel, which is the biggest supplier to energy companies in North America (along with AK Steel and ArcelorMittal) continues to be affected by the slowdown.
Furthermore, iron ore prices have been caught in a downward spiral. This was due to a weaker Chinese steel market and surging supplies from big miners. Since steel companies enter into long-term supply agreements, they have not been able to take full advantage of lower iron ore prices. When these supply agreements are renegotiated this year, they are likely to be executed at lower prices. This will ease some of the pain by way of reducing unit production costs.
While companies like ArcelorMittal and U.S. Steel that procure most of their iron ore requirements through captive mines are unlikely to benefit from price drops, companies like AK Steel will have a competitive edge as they are less vertically integrated.
Sector Level Earnings Trend
Within the Zacks Industry classification, the steel industry falls under the broader Basic Materials sector (one of the 16 Zacks sectors). The sector put up a disappointing 14.4% year-over-year decrease in earnings on the scoreboard for the third quarter.
Of the 10% of the companies in the sector reporting their numbers so far, the beginning to the fourth-quarter earnings season does not look promising with a 98% drop in earnings. Taking into account all the companies that are yet to report, a 30.7% drop is projected for the fourth quarter.
The scenario will improve somewhat in the first half of 2016, with expected declines of 7.5% in the first and 4.4% in the second, still in negative territory. However, a dramatic recovery is projected for the latter half of the year with 11.3% growth in the third and 29.1% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
Industry Ranking – Negative
Within the Zacks Industry classification, the “steel producers,” “steel-pipe and tube” and “steel specialty” industries are grouped under the Basic Materials sector (one of 16 Zacks sectors). We rank all of the 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.
The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #173) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.
The “steel-pipe and tube” “steel producers” and “steel specialty” industries are relegated to the bottom tier with respective Zacks Rank of #216, #222 and #252, depicting a negative outlook.
What’s in Store for the Industry?
The World Steel Association expects global apparent steel use to grow a meager 0.7% in 2016 to 1,523 Mt after suffering a decline in 2015. The U.S. steel industry continues to be under the threat of cheaper imports in the wake of a stronger dollar and lower oil prices.
China will remain a deterrent factor as uncertainty persists regarding the impact of government measures aimed at stabilizing the decelerating economy. The International Monetary Fund projects China’s growth to slow further to 6.3% in 2016 and 6% in 2017, which represent further slowdowns from 2015. Currency devaluation will make Chinese exports competitive in the global markets. Thus, we could see a further increase in Chinese steel exports this year as the country seeks to increase overall exports to counter the domestic slowdown.
Meanwhile, a number of countries, including the U.S., have initiated anti-dumping investigations against Chinese steel exports. In December, the U.S. also slapped anti-dumping duties on imports of corrosion-resistant steel products from China. These actions are expected to help American steel makers defend their turf against illegally dumped steel products.
Much hope is pinned on India, which is expected to act as the next growth engine, given its progressing construction and manufacturing sectors, rapid urbanization and structural reforms. The European economy is on the slow road to recovery. Steel demand in the EU is expected to go up 2.2% in 2016. This is a positive for companies like ArcelorMittal, which generates almost half of its revenues from the region. United States Steel also has significant operations in Europe.
Although the steel industry will remain under pressure for some time, it is certainly expected to grow thereafter, riding on the back of automotive and construction industries.
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 >> Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today. Find out What is happening in the stock market today on zacks.com. 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 UTD STATES STL (X): Free Stock Analysis Report ARCELOR MITTAL (MT): Free Stock Analysis Report STEEL DYNAMICS (STLD): Free Stock Analysis Report AK STEEL HLDG (AKS): Free Stock Analysis Report NUCOR CORP (NUE): Free Stock Analysis Report To read this article on Zacks.com click here.
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