We are experiencing some temporary issues. The market data on this page is currently delayed. Please bear with us as we address this and restore your personalized lists.
Chicago, IL – November 5, 2024 – Today, Zacks Equity Research discusses Steel Dynamics, Inc. STLD, Commercial Metals Co. CMC and Companhia Siderurgica Nacional SID.
The Zacks Steel Producers industry is mired in significant challenges as steel prices have experienced a sharp decline in the United States and globally this year. Soft demand in China amid an 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 Steel Dynamics, Inc., Commercial Metals Co. and Companhia Siderurgica Nacional, 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 Weigh on Margins: U.S. steel prices have seen a sharp decline this year due to a slowdown in end-market demand after a strong run in late 2023 that extended into early 2024. The benchmark hot-rolled coil (HRC) prices are down more than 40% since reaching $1,200 per short ton at the start of 2024. The downside has been influenced by a concoction of factors, including a pullback in steel mill lead times, an oversupply of steel exacerbated by increased imports, reduced demand from key industries and economic uncertainties.
Sluggish industrial production and construction activities also contributed to the decline. While the recent steel mill price hikes have led to a modest uptick in HRC prices, a significant recovery is not expected over the near term given the weak manufacturing backdrop and demand weakness. Prices are currently hovering around the $700 per short ton level. As such, lower realized prices are expected to weigh on steel-producing companies' profitability and cash flows over the near term.
China Slowdown a Concern: 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 an oversupply in the market have also exerted pressure on global steel prices.
Healthy Demand in Major Markets Bodes Well: Steel producers are set to gain from firm 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 #210, which places it at the bottom 16% 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 downbeat 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 8.7% over this period compared with the S&P 500's rise of 31.5% and the broader sector's increase of 9.7%.
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 8.79X, below the S&P 500's 19.16X and the sector's 12.15X.
Over the past five years, the industry has traded as high as 12.72X, as low as 2.78X and at the median of 8.27X.
3 Steel Producers Stocks in Focus
Steel Dynamics: Based in Indiana, Steel Dynamics is a leading steel producer and metals recycler in the United States. It benefits from strong momentum in the non-residential construction sector driven by healthy customer order activity. Steel Dynamics is also currently executing several projects that should add to its capacity and boost profitability.
STLD is ramping up operations at its new state-of-the-art electric arc furnace flat-rolled steel mill in Texas. The value-added flat-rolled steel coating lines, consisting of two paint lines and two galvanizing lines, will enhance the annual value-added flat-rolled steel capacity. It is also progressing with the construction of its aluminum flat-rolled products mill.
Steel Dynamics carries a Zacks Rank #3 (Hold). The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed once. In this time frame, it delivered an average earnings surprise of roughly 2.1%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Commercial Metals: Texas-based Commercial Metals manufactures, recycles and markets steel and metal products, related materials and services. Strong demand in North America for Commercial Metals' primary product lines is likely to be reflected in the company's results. Commercial Metals' focus on augmenting its core capabilities while expanding growth in markets, customer groups and applications will aid growth. CMC is implementing price rises across its mill products, which will support its performance. Its strong liquidity, financial position and focus on reducing debt through a strategic capital allocation approach augur well.
Commercial Metals currently carries a Zacks Rank #3. The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters while missing once. In this time frame, it delivered an average earnings surprise of roughly 10.2%. CMC has an expected earnings growth rate of 12.6% for fiscal 2025.
Companhia Siderurgica Nacional (National Steel): Brazil-based National Steel is one of the largest fully integrated steel producers in Brazil and Latin America in terms of crude steel production. SID has been benefiting from its geographically diversified portfolio and acquisitions. The company gains from solid demand in its cement business in residential and civil construction projects, which is expected to boost its sales and production. The company's pricing action also bodes well. Focus on investment in infrastructure will also aid growth.
National Steel, currently carrying a Zacks Rank #3, has an expected earnings growth rate of 416.7% for 2024. The Zacks Consensus Estimate for SID for 2024 has been revised 72.2% higher over the past 60 days.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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
