See feature articles below: Steel Industry
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Report For: Steel Industry
Shares for many steel producers are up this week as investors looked at the trade sanctions against Chinese steel makers imposed by the Department of Commerce for cold rolled steel being shipped into the US. While most of the US steel makers suffered losses during Q1, the sanctions against China are being seen as a positive for the industry.
The steel industry continues to face a challenging economic environment due to the economic slowdown in China, volatility in financial markets, sluggish growth in global trade, and low prices of oil and other commodities. Although the automobile and construction sectors continue to support demand, the steel industry is reeling from inadequate investment, and continued weakness in the manufacturing sector and foreign steel imports into the U.S.
The world’s largest steelmaker, ArcelorMittal (MT), along with United States Steel Corp. (X) and AK Steel Holding Corp. (AKS), reported losses during the first quarter due to lower average steel selling prices. High levels of imports and lower drilling activities by energy companies continued to put pressure on pricing and shipments.
In the first quarter of 2016, per the World Steel Association, global steel production decreased 3.6% to 386 metric tons (Mt) as production shrank across all regions. China, the world’s largest steel maker, again disappointed with a 3.2% decline.
Economic slowdown in China has dealt a massive blow to the global steel industry. Overcapacity and lower steel prices are hurting margins of Chinese steel producers. To mitigate these factors, efforts have been undertaken to reduce overcapacity and upgrade production in China’s steel industry.
China’s economy grew at an annual rate of 6.7% in the first quarter of 2016, marking its slowest in seven years. For 2016, the government expects the growth rate to remain in the range of 6.5–7%. Having stubbornly remained below 50 for the past two years, the Purchasing Managers’ Index (PMI) for the Chinese steel industry rose to 57.3 in April. A reading above 50 marks growth, while that below 50 suggests contraction, which means that the PMI for the Chinese steel industry touched its peak since Mar 2013. However, it is still too early to predict a recovery for certain.
Meanwhile, according to the World Steel Association’s short range outlook published in April, steel usage in China is expected to fall 4% in 2016. The severe depression in construction activities is leading to a slowdown in the manufacturing sectors, especially metal products, as well as to slower growth in the automotive sector. A recovery in the Chinese construction sector does not seem likely in the near future either.
In addition, the steel industry is challenged by dwindling investments, turbulence in the financial market and geopolitical conflicts in many developing regions. U.S. steel mills remain affected 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), U.S. Steel, AK Steel, Steel Dynamics Inc. (STLD) and ArcelorMittal USA, a part of ArcelorMittal, have suffered heavy losses from high levels of imports. This has resulted in declining orders, idling of mills and layoffs across the board.
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. Steel demand from energy companies continues to be weak due to declining capital expenditure budgets. U.S Steel, the biggest supplier to energy companies in North America, along with AK Steel and ArcelorMittal, remains affected by the slowdown.
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 15.9% year-over-year decrease in earnings on the scoreboard for the first quarter.
In fact, sector growth will remain in the negative territory in the first half of 2016, with an expected decline of 14.8% in the second quarter. However, a dramatic recovery is projected during the latter half of the year, with 5.7% and 18.6% growth in the third and fourth quarters, respectively. (For a detailed look at the earnings outlook for this sector and others, pleaseread our Earnings Trends report.)
Within the Zacks Industry classification, the “steel producers,” “steel-pipe and tube” and “steel specialty” industries are grouped under the Basic Materials sector. We rank all of the 257 industries under 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” and “steel producers” are currently in the top-most tier with respective Zacks Ranks of #63 and #78, which translates into a positive outlook. The “steel specialty” industries, on the other hand, are relegated to the bottom tier with a Zacks Rank #249, depicting a negative outlook.
What’s in Store for the Industry?
The World Steel Association expects global apparent steel use to dip 0.8% in 2016 to 1,488 Mt, after the decline in 2015. The U.S. steel industry continues to face the threat of cheaper imports in the wake of a stronger dollar and lower oil prices. However, the U.S. Department of Commerce (DOC) has imposed a hefty final anti-dumping duty rate of 265.79% on imports of cold-rolled steel from China. The DOC also levied a massive final countervailing duty rate of 256.44% on Chinese imports, higher than the preliminary duty rate of 227.29% imposed in Dec 2015. This should prove to be a major boost for U.S. steel companies in their battle against unfairly-traded, cheap imports into the country’s market.
China will remain a deterrent factor as uncertainty persists related to the impact of government measures aimed at stabilizing the decelerating economy. The International Monetary Fund (IMF) projects China’s growth to slow down further to 6.2% in 2016. Moreover, currency devaluation would make Chinese exports competitive in the global markets. Thus, we foresee a further increase in Chinese steel exports this year, as the country seeks to increase overall exports to counter the domestic slowdown.
Meanwhile, 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, on the other hand, is on a slow road to recovery. Steel demand in the EU is expected to inch up 1.4% in 2016. This is a positive for companies like ArcelorMittal, which generates almost half of its revenues from this region. U.S. Steel also has a significant presence in Europe.
Although the steel industry will remain under pressure for some time, it is certainly expected to grow thereafter on the back of the automotive and construction industries.
Source – Zacks
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