Steel: The Measure of Economic Progress
Steel can be rightly termed the basic building block of modern
society given its usage in almost every sphere -- ranging from
buildings, vehicles, machines or even a tin can that preserves
food. The industry's fortunes are dependent on the growth of its
user industries, namely, automobiles, consumer durables and
infrastructure. The volume of steel consumed has thus been the
barometer for measuring development and economic progress.
Increasing modernization in the 21st century has led to a doubling
of global steel production from 851 Mt (million tons) at the turn
of the century to 1,607 Mt in 2013. The size notwithstanding, the
industry remains relatively fragmented. It is also highly cyclical
and intensely competitive.
In the past two years, the continuing Euro-zone problem, economic
stagnation or slow growth in developed economies and a cooling of
emerging economies took a toll on the industry. Growth in the
Chinese economy, which in recent years has been one of the main
demand drivers for steel, slowed down. Overcapacity has also been a
perennial problem. Stiff competition in the United States from
cheaper imports and from domestic producers with new or expanded
facilities continues to result in significant oversupply of steel
compared to demand.
However, as urban population increases worldwide, so will the need
for steel to build skyscrapers and public-transport infrastructure.
Emerging economies will also continue to be a major driver of
demand due to the huge amount of steel required for urbanization
and industrialization. The demand for steel is thus expected to
remain strong in the years to come.
Global Production: Up in 2013, Starts 2014 on a Tepid
As mentioned above, world crude steel production was 1,607 Mt in
2013, reflecting a 3.5% annual climb, led by increase in Asia and
the Middle East that helped counter the declines elsewhere. China
was once again the leading producer of steel, contributing a record
48.6% of the global output at 779 Mt, a 7.5% annual rise.
Production in Japan, the second largest producer, increased 3% year
over year to 111 Mt.
The United States held the third spot, producing 87 Mt of crude
steel, which declined 2% annually. India commanded the fourth
position with a production of 81 Mt, up 5% year over year.
Production in Europe declined 1.8% year over year to 165.6 Mt of
crude steel in 2013. Even though production in Europe declined in
for the full year, the fourth quarter registered the first positive
year-over-year movement since the fourth quarter of 2011.
However, the steel industry sputtered in the New Year with world
crude steel production declining 0.4% to 130 Mt in January. China
was a drag with a 3.2% decline due to the slowdown in industrial
activities during the Chinese Lunar New Year holidays. Japan
increased 6.1% while production in India remained flat. Production
in the U.S was down 0.5%. Europe outshined the other regions with a
7.3% rise in production, continuing the positive momentum witnessed
in the fourth quarter of 2013.
Capacity Utilization Below 80%
The average capacity utilization ratio in 2013 was 78% compared
with 76% in 2012. Despite the global rise in supply in 2013, total
capacity utilization remained stubbornly below the 80% level
throughout the year. The crude steel capacity utilization ratio in
Jan 2014 was 74.4%, 2.5 percentage points lower year over year, but
up 0.2 percentage points sequentially.
Steel Prices - Drivers & Trends
Steel prices are generally volatile owing to the highly cyclical
nature of the global steel industry. Rising raw material prices
have a direct impact on steel prices. Furthermore, overcapacity, a
glut in cheaper Chinese steel imports, economic conditions and
shifts toward other substitutes significantly impact steel prices.
This was what affected steel prices in 2013. The oversupply
of steel due to imports from China in the market outstripped
demand. Add to this, the situation in Europe and tempering growth
in Asia, kept prices in check. The lower steel prices have affected
margins of major steelmakers including
United States Steel Corp.
AK Steel Holding Corp.
) for major part of the year.
A sustained downside in steel prices will materially affect the
margins of steel companies. We believe that the recovery in pricing
momentum will be driven by a reviving economy, stabilization in the
Euro-zone and a rebound in construction activity in the developing
countries, in particular China, India and South Korea.
Raw Material Trends
The primary inputs for the steel industry are iron ore and coking
coal, as well as coke, scrap, alloys and base metal. The industry
also uses large volumes of natural gas, electricity and oxygen for
its steel manufacturing operations.
The cost of iron ore is crucial as it directly affects the price of
steel. Iron ore prices had an overall good run in 2013 thanks to
Chinese demand. China is currently the largest producer of steel
and consequently the largest consumer of iron ore, accounting for
around 60% of the global seaborne market.
Recently, in Feb 2014, iron ore price has fallen below the level of
$120 a ton for the first time since July last year. This was
triggered by reports that the Chinese government and banks are
intending to curb lending to the property market and cut down steel
capacity. China's property sector consumes almost 45% of the
country's steel and thus is a key driver of iron ore prices. After
a strong spell last year, demand for steel will moderate as the
Chinese government targets the real estate sector.
In the next few years, a wave of new supply of iron ore is slated
to hit the market as large players such as
BHP Billiton Limited
Rio Tinto plc
Fortescue Metals Group Limited
) are going gung ho with their expansion plans to augment iron ore
production capacity. Brazil and India will also step up their
exports. In case this excess supply is not matched by adequate
demand, it will expose the market to the risk of a decline in
prices. On top of this, a less bright outlook for China's economy
will put iron ore prices under threat. We believe the fate of iron
ore prices now mainly hinges on Chinese demand.
Consolidation & Divestitures
Mergers and acquisitions (M&A) have remained an important
growth strategy in the steel industry, leading to additional steel
capacity, production efficiency and economies of scale. However,
consolidation was minimal in the past two years, given the economic
uncertainties. Companies focused on conserving cash, shedding
unproductive operations, cutting costs and restructuring.
ArcelorMittal, the world's largest steelmaker by volume, sold its
15% stake in iron ore mines in Canada for $1.1 billion to a
consortium that included South Korean steelmaker
) and Taiwan-listed steelmaker China Steel. The divestiture is in
line with the company's effort to get rid of production
overcapacity in Europe as well as to reduce its debt.
Despite its strategy of growing through acquisitions, ArcelorMittal
had suspended M&A activity in 2008 and 2009. After the notable
acquisition of Baffinland Iron Mines in 2011, ArcelorMittal resumed
acquisitions in Nov 2013 by announcing the acquisition of
ThyssenKrupp Steel USA from
) through a joint venture partnership with
Nippon Steel & Sumitomo Metal Corporation
). The acquisition will complement ArcelorMittal's existing
operations in the United States and strengthen its product
ThyssenKrupp, one of the top 20 steel producing companies in the
world and the biggest steelmaker in Germany, is undergoing a
radical restructuring in which it is trying to sell assets to slash
debt. The sale of the loss-making Steel Americas business will
allow the company to focus on its core Steel Europe and engineering
We expect M&A activity to remain slow in 2014 until prices
stabilize and the industry strikes a balance between supply and
demand. Going forward, the abatement of the Euro-zone crisis,
recovery in the U.S. and Chinese economy will determine the fate of
such deals. M&A activity is expected to go up in the Indian
steel industry. The country has become the world's third largest
steel consumer and has the prospects to take the second spot.
Q4 Scorecard, Sector-wise
Top & Bottom Line, So Far So Good: We are in the last leg of
the fourth quarter earnings season. 92% of the companies in the
sector have already reported their financial results. Earnings
increased 30% while revenues edged up 1.4%. In fact, the basic
materials sector has displayed an upbeat beat ratio (percentage of
companies coming out with positive surprises) this quarter.
Major surprises came up during this reporting season, leading to a
rekindled interest in the so far faltering steel sector. After
incurring losses through the major part of 2013, some notable steel
names like United States Steel and AK Steel Holding returned to
profit, delivering solid earnings surprises of 203.85% and 80%,
Projections for 2014 & 2015
Taking into account all the companies yet to report fourth-quarter
results, earnings of the Basic Material sector are expected to
increase 21.4% in the quarter. For 2014, earnings at the sector are
expected to grow at a rate of 1.6% in Q1, then 16.5% in Q2 and
12.4% in Q3. Overall, in 2014, the sector's earnings are projected
to grow 10.5%. In fiscal 2015, the growth will accelerate further
Industry Ranking: Overall Negative
Within the Zacks Industry classification, the steel industry falls
under the broader Basic Materials sector (one of 16 Zacks sectors).
We rank all of 260 industries in the 16 Zacks sectors based on the
earnings outlook for the constituent companies in each industry.
This ranking is available in the
Zacks Industry Rank
The way to align the ranking and outlook from the complete list of
Zacks Industry Rank for the 260+ companies is that the outlook for
the top one-third of the list (Zacks Industry Rank of #87 and
lower) is positive, while the outlook for the bottom one-third
(Zacks Industry Rank #174 and higher) is negative.
The steel producers, steel specialty industry and the steel-pipe
and tubes producers are currently in the bottom tier with a
respective Zacks Industry Rank #202, #254 and #256. This indicates
a bearish outlook for the industry.
Please note that the Zacks Rank for stocks, which are at the core
of our Industry Outlook, has an impressive track record, verified
by outside auditors, to foretell stock prices, particularly over
the short term (1 to 3 months). The rank along with Earnings ESP
helps to predict the probability of earnings surprises.
What's in Store for the Industry?
The overall scenario is expected to improve in 2014. Steel demand
will grow in the U.S. on the back of an improving global economy
and the strong momentum in the automotive markets. The turnaround
in the construction sector will definitely provide a much needed
boost to steel.
China's steel usage is however expected to lose steam due to
government's ongoing attempt to restructure the economy away from
exports and towards domestic consumption. A slowdown in the real
estate market and weaker infrastructure investment growth is likely
to lead to slower growth in steel demand during 2014.
India on the other hand will pick up pace. Demand in Japan will
also increase due to rebuilding activity in the major earthquake
affected areas. Tokyo is also gearing up to host the 2020 Olympic
Macroeconomic conditions in the Euro-zone began to stabilize in
2013. The momentum has continued into 2014. After two years of
contraction, steel demand is likely to improve thanks to a rise in
demand from the automobile sector and recovery in the construction
Overall, with the global economy gradually on the mend and
activities picking up in automotive and construction, prospects
look bright for the steel industry this year. The World Steel
Association expects continued recovery in steel demand in 2014 and
projects global steel usage to increase 3.3% in 2014. Improving
demand is also expected to perk up steel prices.
AK STEEL HLDG (AKS): Free Stock Analysis Report
BHP BILLITN LTD (BHP): Free Stock Analysis
ARCELOR MITTAL (MT): Free Stock Analysis Report
NIPPON STEEL CP (NSSMY): Get Free Report
NUCOR CORP (NUE): Free Stock Analysis Report
RIO TINTO-ADR (RIO): Free Stock Analysis Report
THYSSEN A G (TYEKF): Get Free Report
VALE SA (VALE): Free Stock Analysis Report
UTD STATES STL (X): Free Stock Analysis Report
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