The steel industry has staged a recovery after being out of favor for much of the first half, thanks to a revival in demand in key end-markets from the coronavirus-induced slowdown and a rebound in steel prices.
With China (the top consumer of steel) seeing an economic rebound and businesses gradually resume across the world following loosening of lockdowns and restrictions, things are looking up for the steel industry for the balance of the year. Recovery across major end-use industries such as construction and automotive represents a tailwind for the steel industry. Moreover, steel prices have gained strength on an upswing in demand. However, the resurgence of coronavirus infections in Europe and rising cases in the United States may play a spoilsport.
Steel Demand Takes an Upturn on Economic Recovery
Demand for steel has picked up with the resumption of operations across major steel-consuming sectors, following the easing of restrictions globally. The automotive industry has gotten back into gear following pandemic-led shutdowns on the back of a strong recovery in customer demand. Notably, major U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships in the wake of surging demand. The automotive rebound is driving demand for flat steel products globally.
Moreover, the resumption of many projects, which were stalled earlier due to labor shortages and supply chain disruptions amid the pandemic is supporting the revival in the construction sector globally, driving demand for long and flat steel products in this major market.
Meanwhile, demand for steel has strengthened in China on a recovery in construction and automotive sectors as well as manufacturing activities. Steel demand is being driven by government spending in infrastructure projects. The demand strength is likely to continue in the coming months and is expected to pick up pace following China’s eight-day National Day holidays that starts today.
China is gradually pulling out of its virus-induced slumber, taking succour from government stimulus measures. Notably, China’s manufacturing activities have gained strength after slumping in the first quarter on a rebound in domestic demand and Beijing’s efforts to mitigate the impacts of the pandemic. The recovery in manufacturing gathered momentum in September on government stimulus to boost consumption and strong growth in new export orders driven by a rebound in overseas demand. China’s official manufacturing purchasing managers’ index expanded to 51.5 in September from 51 in August, per National Bureau of Statistics. A reading above 50 indicates expansion in activity.
The country’s automotive sector is also recuperating from the crisis wrought by coronavirus. China government’s incentives including tax rebates and attractive discounts from automakers and dealers have revived consumer demand.
Recovery in Steel Prices to Bring Better Tidings
Steel prices have come under pressure this year amid pandemic-induced demand shocks. Notably, a slump in demand led to a downswing in U.S. steel prices. The benchmark hot-rolled coil (“HRC”) prices plummeted to below the psychologically important $500 per short ton level in April on concerns over the fast-growing pandemic in the United States and demand slowdown amid production shutdowns by automakers. After gaining some ground during the second quarter on U.S. steel mills’ price hike actions, steel prices again came under pressure in July and August on demand weakness.
However, there have been some green shoots of recovery in U.S. steel prices over the past few weeks. Notably, HRC prices have been on an upswing last month, surging to roughly $600 per short ton recently on a recovery in end-market demand, especially in automotive, amid supply constraints. Lead times for steel delivery at U.S. steel mills remain extended (indicating healthier demand) while scrap prices are on the rise. Tight supply due to production disruptions and mill outages amid the pandemic is likely to lend support to HRC prices over the near term. The price recovery is likely to sustain as the key fundamental drivers remain in place.
Global steel prices are also moving up on the back of rising demand, supply shortages and higher raw material costs. Higher prices bode well for the profitability of steel companies.
Favorable Industry Rank
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #51, which places it at the top 20% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
5 Steel Stocks Worth Betting On
As the steel industry fundamentals are improving, it would be prudent to invest in stocks in this space that have compelling prospects and are well-placed for solid upside in the final quarter of 2020 leveraging improving market conditions.
We highlight the following five steel stocks, with a solid Zacks rank, that are worth considering for investment right now.
Commercial Metals Company CMC
The Texas-based company sports a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 17.3% for the current fiscal year. The Zacks Consensus Estimate for the current fiscal has been revised 1.2% upward over the last 30 days. The company also surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 38.9%. The stock is also up around 27% over the past six months.
L.B. Foster Company FSTR
The Pennsylvania-based company has a Zacks Rank #1. It delivered an earnings surprise of 4,200% in the last reported quarter. The consensus estimate for the current year also has been revised 2.9% upward over the last 30 days. The stock is also up roughly 8% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Schnitzer Steel Industries, Inc. SCHN
Oregon-based Schnitzer Steel has a Zacks Rank #1. It delivered an earnings surprise of 41.3%, on average, over the trailing four quarters. The consensus estimate for the current year also has been revised 10.2% upward over the last 30 days. Moreover, the company has seen its shares rally roughly 51% over the past six months.
South Korea-based POSCO carries a Zacks Rank #2 (Buy). It has an estimated long-term earnings growth rate of 5%. The Zacks Consensus Estimate for the current year has been revised 6.4% upward over the last 30 days. The stock is also up around 31% over the past six months.
The Luxembourg-based company carries a Zacks Rank #2. It delivered an earnings surprise of 40% in the last reported quarter. The Zacks Consensus Estimate for the current year has been revised 5% upward over the last 30 days. The company’s shares have also shot up roughly 54% over the past six months.
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