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3 Steel Producer Stocks to Watch Amid Industry Challenges
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The Zacks Steel Producers industry is buffeted by significant challenges as steel prices have experienced a sharp decline in the United States and globally this year. Soft demand in China amid economic slowdown is also a concern.
However, improved demand in the automotive space and a resilient non-residential construction market augur well for the industry. Players from the space like POSCO Holdings Inc. (PKX - Free Report) , ArcelorMittal S.A. (MT - Free Report) and Commercial Metals Company (CMC - Free Report) are worth a look despite near-term headwinds.
About the Industry
The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.
What's Shaping the Future of the Steel Producers' Industry?
Weaker Steel Prices to Hurt Margins: U.S. steel prices have seen a significant downward correction this year after a strong run in late 2023 that extended into early 2024. The benchmark hot-rolled coil (HRC) prices retreated since early 2024, plummeting to below $800 per short ton in March 2024 from $1,200 per short ton at the start of the year. A combination of factors led to the downswing, including a pullback in steel mill lead times, an oversupply of steel exacerbated by increased imports, reduced demand from key industries and global economic uncertainties. U.S. HRC prices continue their downward slide, being pressured by an influx of imports, currently hovering below the $700 per short ton level. As such, lower realized prices are expected to weigh on the profitability and cash flows of steel-producing companies over the near term.
Slowdown in China a Worry: Steel demand in China, the world’s top consumer of the commodity, has softened due to a slowdown in the country’s economy following a protracted property crisis and weak global demand. The real estate sector has taken a hard hit amid a decline in new home prices, property investment and housing sales. Notably, real estate accounts for roughly 40% of China's steel consumption. A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating due to weaker external demand for manufactured goods and a slowdown in infrastructure spending. China has also seen a slowdown in the construction sector. The sluggishness in these key steel-consuming sectors is expected to hurt demand for steel over the short term. Depressed demand in China and the oversupply in the market have also exerted pressure on global steel prices.
Strong Demand in Major Markets Bode Well: Steel producers are set to gain from strong demand across major steel end-use markets, including automotive and construction. They are expected to benefit from higher order booking from the automotive market. Steel demand in automotive is expected to rise on the back of an easing global shortage in semiconductor chips that weighed heavily on the automotive industry. Meanwhile, order activities in the non-residential construction market remain strong, underscoring the inherent strength of this industry. Infrastructure projects in the United States are on the rise, driven by government initiatives to upgrade transportation and utility networks. Demand in the energy sector has improved on the back of strength in oil and gas prices. Favorable trends across these markets bode well.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #227, which places it at the bottom 9% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Despite the industry’s bleak near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Steel Producers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 17.7% over this period compared with the S&P 500’s rise of 16.6% and the broader sector’s decline of 5.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 9.27X, below the S&P 500’s 16.81X and the sector’s 10.98X.
Over the past five years, the industry has traded as high as 13.56X, as low as 2.82X and at the median of 8.17X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Steel Producers Stocks in Focus
POSCO: South Korea-based POSCO manufactures and markets a wide range of steel products, including hot-rolled sheets, plates, wire rods, cold-rolled sheets, galvanized sheets and stainless steel globally. The company should benefit from a recovery in its steelmaking business and a rebound in demand in the automotive sector. Efforts to improve production efficiency and lower raw material costs are also likely to aid its results. The resumption of production following the refurbishments at a blast furnace at Pohang is expected to drive its steel output. PKX should also gain from cash flow management and cost-cutting initiatives.
POSCO, currently carrying a Zacks Rank #3 (Hold), has expected earnings growth of 9.6% for 2024. The Zacks Consensus Estimate for the current year has been stable over the past 60 days. PKX also has an estimated long-term earnings growth rate of 26.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PKX
ArcelorMittal: Luxembourg-based ArcelorMittal is among the leading integrated steel and mining companies globally. The company is expected to benefit from higher steel demand, aided by a recovery in demand in Europe following the end of destocking. MT is expanding its steel-making capacity and focusing on shifting to high-added-value products. Its cost-reduction initiatives will also support profitability. The company is committed to returning shareholders’ value through increased dividends and share buybacks.
ArcelorMittal currently carries a Zacks Rank #3. The company beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 36.1%. MT also has an estimated long-term earnings growth rate of 14.1%.
Price and Consensus: MT
Commercial Metals: Texas-based Commercial Metals manufactures, recycles and markets steel and metal products, related materials and services. Strong demand in North America for each of Commercial Metals' primary product lines is likely to be reflected in the company's performance. Stable underlying market fundamentals and a solid order book are expected to aid the Emerging Businesses Group segment’s results. CMC is implementing price rises across its mill products, which will likely aid growth. The company’s solid balance sheet bodes well.
Commercial Metals currently carries a Zacks Rank #3. The company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 8.4%.
Price and Consensus: CMC
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3 Steel Producer Stocks to Watch Amid Industry Challenges
The Zacks Steel Producers industry is buffeted by significant challenges as steel prices have experienced a sharp decline in the United States and globally this year. Soft demand in China amid economic slowdown is also a concern.
However, improved demand in the automotive space and a resilient non-residential construction market augur well for the industry. Players from the space like POSCO Holdings Inc. (PKX - Free Report) , ArcelorMittal S.A. (MT - Free Report) and Commercial Metals Company (CMC - Free Report) are worth a look despite near-term headwinds.
About the Industry
The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products. Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world’s total consumption.
What's Shaping the Future of the Steel Producers' Industry?
Weaker Steel Prices to Hurt Margins: U.S. steel prices have seen a significant downward correction this year after a strong run in late 2023 that extended into early 2024. The benchmark hot-rolled coil (HRC) prices retreated since early 2024, plummeting to below $800 per short ton in March 2024 from $1,200 per short ton at the start of the year. A combination of factors led to the downswing, including a pullback in steel mill lead times, an oversupply of steel exacerbated by increased imports, reduced demand from key industries and global economic uncertainties. U.S. HRC prices continue their downward slide, being pressured by an influx of imports, currently hovering below the $700 per short ton level. As such, lower realized prices are expected to weigh on the profitability and cash flows of steel-producing companies over the near term.
Slowdown in China a Worry: Steel demand in China, the world’s top consumer of the commodity, has softened due to a slowdown in the country’s economy following a protracted property crisis and weak global demand. The real estate sector has taken a hard hit amid a decline in new home prices, property investment and housing sales. Notably, real estate accounts for roughly 40% of China's steel consumption. A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating due to weaker external demand for manufactured goods and a slowdown in infrastructure spending. China has also seen a slowdown in the construction sector. The sluggishness in these key steel-consuming sectors is expected to hurt demand for steel over the short term. Depressed demand in China and the oversupply in the market have also exerted pressure on global steel prices.
Strong Demand in Major Markets Bode Well: Steel producers are set to gain from strong demand across major steel end-use markets, including automotive and construction. They are expected to benefit from higher order booking from the automotive market. Steel demand in automotive is expected to rise on the back of an easing global shortage in semiconductor chips that weighed heavily on the automotive industry. Meanwhile, order activities in the non-residential construction market remain strong, underscoring the inherent strength of this industry. Infrastructure projects in the United States are on the rise, driven by government initiatives to upgrade transportation and utility networks. Demand in the energy sector has improved on the back of strength in oil and gas prices. Favorable trends across these markets bode well.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #227, which places it at the bottom 9% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Despite the industry’s bleak near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Steel Producers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 17.7% over this period compared with the S&P 500’s rise of 16.6% and the broader sector’s decline of 5.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 9.27X, below the S&P 500’s 16.81X and the sector’s 10.98X.
Over the past five years, the industry has traded as high as 13.56X, as low as 2.82X and at the median of 8.17X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Steel Producers Stocks in Focus
POSCO: South Korea-based POSCO manufactures and markets a wide range of steel products, including hot-rolled sheets, plates, wire rods, cold-rolled sheets, galvanized sheets and stainless steel globally. The company should benefit from a recovery in its steelmaking business and a rebound in demand in the automotive sector. Efforts to improve production efficiency and lower raw material costs are also likely to aid its results. The resumption of production following the refurbishments at a blast furnace at Pohang is expected to drive its steel output. PKX should also gain from cash flow management and cost-cutting initiatives.
POSCO, currently carrying a Zacks Rank #3 (Hold), has expected earnings growth of 9.6% for 2024. The Zacks Consensus Estimate for the current year has been stable over the past 60 days. PKX also has an estimated long-term earnings growth rate of 26.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PKX
ArcelorMittal: Luxembourg-based ArcelorMittal is among the leading integrated steel and mining companies globally. The company is expected to benefit from higher steel demand, aided by a recovery in demand in Europe following the end of destocking. MT is expanding its steel-making capacity and focusing on shifting to high-added-value products. Its cost-reduction initiatives will also support profitability. The company is committed to returning shareholders’ value through increased dividends and share buybacks.
ArcelorMittal currently carries a Zacks Rank #3. The company beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 36.1%. MT also has an estimated long-term earnings growth rate of 14.1%.
Price and Consensus: MT
Commercial Metals: Texas-based Commercial Metals manufactures, recycles and markets steel and metal products, related materials and services. Strong demand in North America for each of Commercial Metals' primary product lines is likely to be reflected in the company's performance. Stable underlying market fundamentals and a solid order book are expected to aid the Emerging Businesses Group segment’s results. CMC is implementing price rises across its mill products, which will likely aid growth. The company’s solid balance sheet bodes well.
Commercial Metals currently carries a Zacks Rank #3. The company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 8.4%.
Price and Consensus: CMC