4 Steel Growth Stocks Galvanized For Solid Upside
Zacks Investment Research | Apr 07, 2017 01:20AM ET
The steel industry – which had long been reeling under the effects of a tide of cheap imports, depressed steel prices and subdued demand – has staged a recovery of late, thanks to positive outcomes in a number of steel trade cases in the recent past and President Trump’s infrastructure spending promises.
The bullish Zacks Industry Rank of 20 carried by the Zacks categorized Steel-Producers industry is a testimony to the fact that steel stocks are back in favor. The favorable rank places the industry in the top 8% of the 250+ groups enlisted.
The Steel-Producers industry has also outperformed the broader market in the past year. The industry has gained around 46.1% in this period, much higher than the S&P 500’s corresponding return of 14.7%.
Although persistent weakness in investment globally is hindering a stronger steel demand recovery, a better-than-expected forecast for China along with continued growth in emerging economies are expected to help keep the global steel industry on a positive growth path in 2017.
The World Steel Association expects global steel demand to expand 0.5% in 2017. Demand in emerging and developing economies (barring China) is expected to rise 4% this year.
Below we highlight some key factors that have contributed to a rebound in the steel space.
Trade Actions on Cheap Imports
One of the major factors that have fueled a recovery in the steel sector is favorable developments on a number of trade cases that led to a decline in steel imports. Affirmative rulings in these cases have been be a positive catalyst for the U.S. steel industry. Steel imports fell around 15% year over year in 2016 on the back of punitive trade actions that led to levy of tariffs on imports.
U.S. regulators, in mid-2016, imposed a whopping final anti-dumping duty rate of 209.97% on imports of corrosion-resistant steel from China and also slapped a hefty final anti-dumping duty rate of 265.79% on Chinese cold-rolled steel. The U.S. Department of Commerce (DOC), in Sep 2016, also levied anti-dumping duties on imports of certain hot-rolled steel flat products by seven countries.
Moreover, the DOC, last month, issued positive final rulings in its anti-dumping duty investigations on imports of carbon and alloy steel plates from eight countries. The commerce department found that these exporters are selling these products in the U.S. at unfairly low prices and, therefore, are subject to anti-dumping duties. The U.S. International Trade Commission (ITC) is scheduled to make its final injury ruling on this case in May.
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Recovery in Steel Prices
Steel prices rebounded during second-half 2016 on the back of trade actions, reflected by a significant increase in hot-rolled and cold-rolled steel prices. Another factor that has contributed to a recovery in steel prices is higher costs of steel-making inputs such as iron ore and coking coal. Iron ore prices roughly doubled in 2016, driven by healthy Chinese demand. A number of steel companies have been raising their steel selling prices in response to an increase in raw material costs.
Moreover, China is taking measures to reduce its excess steel supply. The world’s largest steel producer has pledged to cut its steel production capacity by around 50 million metric tons in 2017, according to a government work report. China exceeded its steel capacity cut target of 45 million metric tons last year. The country’s sustained efforts to eliminate excess capacity should provide support to steel prices in 2017.
The Trump Factor
One of the industries that are well placed to gain from Trump’s infrastructure spending promises is the steel industry. Steel stocks, which had been in the dumps for most part of 2016, got a big boost following Trump’s election win in November on expectations of significant infrastructure spending in a Trump administration.
Trump has pledged to pump $1 trillion of new infrastructure spending into the U.S. economy, aimed at fixing America's "crumbling" infrastructure. The president’s call for the massive infrastructure spending is likely to have a beneficial effect on the steel industry given the expected increase in steel demand as steel is a key component in many infrastructure products. Trump’s “big” spending plans have thus painted a bullish picture for steel companies.
Moreover, Trump’s aggressive trade policies are anticipated to provide more protection to the U.S. steel industry. Trump, during his presidential campaign, repeatedly threatened to impose a 45% tariff on Chinese imports into the U.S.
U.S. steel makers recently hailed the Trump Administration's executive actions geared at improving duty collection and further identifying and addressing root causes of unfair trade practices that have cost the U.S. government billions of dollars in lost revenues. The executive order directs U.S. Customs and Border Protection (“CBP”) to chalk out a plan to lessen importer fraud and ensure adequate duty collection.
Strength Across Key End Markets
Continued momentum in the automotive space and a recovery across housing and commercial construction markets have been other key tailwinds for the steel industry.
The underlying demand trends in the housing space remain strong, supported by an improving employment levels, affordable interest/mortgage rates and a rise in income levels, which bodes well for steel demand in this key end-market. Moreover, the automotive sector continues its healthy run, backed by an improving job market, rising personal income, low fuel prices and attractive financing options, and the momentum is expected to continue this year.
4 Steel Growth Plays
As the recovery momentum in the steel space is expected to continue this year, it would be a prudent idea to invest in steel stocks that have solid growth prospects and are well poised to run higher leveraging improving steel market conditions.
Growth investors look for stocks with aggressive earnings or revenue growth potential, which should lead to higher stock prices. With the help of our Zacks Investment Research
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