The Steel Industry: A Snapshot
Steel is the one of the world's most essential materials and is
present everywhere around our lives. It is used in almost every
sphere like buildings, vehicles or even a tin can that preserves
food. The steel industry has often been considered an economic
indicator, as it has always gone hand in hand with economic
World crude steel production has grown from 851 megatons (Mt) in
2001 to 1,548 Mt in 2012. However, despite its size, the steel
industry remains relatively fragmented coupled with its highly
cyclical and intensely competitive nature.
As urban population increases globally, 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 as
these necessitate a huge amount of steel for urbanization and
industrialization. The demand for steel will thus remain strong for
years to come.
This positive long-term backdrop notwithstanding, the industry's
near- to medium-term outlook is a function of the health of the
global economy, which is far from favorable at present.
The Steel Industry: Story So Far
After witnessing sturdy growth for most of the initial phase in the
last decade, the steel industry suffered a setback due to the
recession in 2008 as consumers utilized existing inventories rather
than buying new stocks. The industry witnessed a turnaround in late
2009 and continued to grow thereafter in sync with the global
Demand for steel benefited from growth in the developing economies
that helped counter the sluggishness in developed countries. Asia,
particularly China, continued to be the principal growth driver.
Demand for steel products, nonetheless, remained below
In 2012, the continuing Euro-zone sovereign debt crisis, economic
stagnation or slow growth in developed economies and a cooling of
emerging market 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. These challenging economic
conditions continued into 2013, hinder the industry's prospects.
Furthermore, overcapacity has been a perennial problem. Stiff
competition in the United States from cheaper imports and from
domestic producers with new or expanded facilities or
under-utilized existing facilities continues to result in
significant oversupply of steel compared to demand.
Global Production Numbers
World crude steel production was a record 1,548 Mt in 2012,
outperforming the 2011 level by 1.2%. In the first three quarters
of 2013, world crude steel production increased 2.7% year over year
to 1,186 Mt. China retained its leadership position, yielding
almost 50% of the global output at 587 Mt, an 8% annual rise.
Production in Japan, the second largest producer, increased 1.4%
year over year to 82 Mt. The United States held the third position,
producing 65 Mt of crude steel, a 4% annual decline. Production in
Europe and South America were a dampener, declining 4% and 1.2%, to
124 Mt and 34 Mt, respectively. In Asia, production increased 5.9%
to 795 Mt and rose 6.8% to 19 Mt in the Middle East.
The average capacity utilization ratio in 2012 was 78.8% compared
with 80.7% in 2011. Despite the global rise in supply in 2013,
total capacity utilization continues to be low. World crude steel
capacity utilization ratio in 2013 was the lowest in Jan at 71.2%.
Even though it has rebounded; it has remained stubbornly at the 80%
level since then. It also continues to decline on year-on-year
Steel Consumption & Forecasts
Following a 2% increase in 2012, the World Steel Association
projects global steel usage to rise 3.1% in 2013 to 1.475 Mt. This
is based on the premise of an expected recovery in global steel
demand led by emerging economies. However, the Eurozone crisis
remains an overhang.
China's steel usage in 2013 is estimated to grow 6%, following 2.9%
growth in 2012 triggered by the government's stimulus measures
focused on infrastructure. High inflation and structural problems
will constrain the usage of steel in certain sectors in India and
therefore lead to a tepid 3.4% rise in 2013 after a 2.6%
improvement in 2012. After a decline in 2012, steel usage in Japan
is expected to witness a tad 0.1% improvement due to government
In the U.S. market, steel consumption is projected to be up a
meager 0.7%, falling from the 7.8% climb last year due to
continuing fiscal concerns. Last year, improvement in the
automotive and energy sectors and recovery in the construction
sector had boosted steel demand.
In Central and South America, apparent steel use is expected to
rise 2.8% in 2013 versus 3.1% increase in 2012. In Brazil,
investment in infrastructure coupled with modest re-stocking
process will lead to apparent steel use growth of 3.2% in 2013.
In Europe, the gloomy economic outlook will continue to pull down
demand by 3.8% in 2013. However, this is an improvement from the
decline of 9.5% in 2012.
Things Look Better in 2014
The overall scenario is expected to improve in 2014. World steel
demand is expected to increase 3.3% to 1,523 Mt driven by a further
pickup in global steel demand with the developed economies
increasingly contributing to growth. Even though risks within the
developed world are expected to dwindle, there will remain some
uncertainty in the developing countries due to unresolved
structural issues, political instability and volatile financial
China's steel usage is expected to lose steam and grow 3% over the
2013 projections, as the government's efforts to rebalance the
economy will hold back investment activities. India on the other
hand will pick up pace and grow 5.6%, fueled by accelerated
attempts to implement structural reforms. Japan's recovery will be
short lived as steel demand is projected to dip 1.6% due to a new
consumption tax, manufacturing production relocation from Japan and
inflating energy prices.
In 2014, steel use in the U.S. is projected to rise 3% fuelled by
the improving global economy and the automotive, energy and
residential construction sectors. Central and South America is
expected to grow 5% in 2014. Brazil's steel consumption is expected
to grow 3.8% in 2014. However, Europe is expected to recover a
modest 2.1% in 2014.
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 as higher raw material prices
induce a corresponding increase in steel prices.
However, in the wake of lower demand, it becomes increasingly
challenging to pass on raw material price hikes to consumers.
Furthermore, overcapacity, glut in cheaper Chinese steel imports,
economic conditions and shifts toward other substitutes
significantly impact steel prices.
Steel prices had shown improvement in the first half of 2012, but
started declining in the latter half due to a glut in imports,
oversupply in the market from zealous steelmakers, weak demand in
Europe and tempering growth in Asia. The scenario continues to be
the same in 2013 as well.
A sustained downside in steel prices will materially and adversely
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 for the global economy as it
affects the price of steel. In the first half of 2012, iron ore
prices were more or less stable before plummeting to a three-year
low of $88.50 per ton in September last year. The price was dragged
down by low buying activity due to a weak economic environment. It
recovered by the end of 2012 due to aggressive restocking driven by
Chinese steel mills.
In the first quarter of 2013, iron ore prices attained a high of
$160 per ton, aided by strong steel production in China, seasonally
weaker supply of the seaborne iron ore and increased demand growth
from steel end-consumers, particularly the Chinese construction
sector. However, iron ore prices remained volatile in the second
quarter with an average price of $137.4 per ton in April, $124.7
per ton in May and then down to an average price of $114.5 per ton
in June. The volatility owed much to the uncertain outlook for
steel demand in China.
The picture has changed as iron ore prices entered a bull market in
the third quarter, averaging a healthy $133 per ton as sentiment
improved across the Chinese metals sector. Chinese steel producers
replenished their inventories after two quarters of de-stocking.
Steel production surged due to the stimulus aimed at stabilizing
the country's economy. With inventories of iron ore at low levels,
increased demand from the steel industry triggered a rise in demand
for iron ore.
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 Ltd
Rio Tinto plc
) are going gung ho with their expansion. Once the stocking cycle
is over and iron ore supplies hit the market, prices are expected
to go down.
Consolidation & Divestitures, Expansion Plans
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 2012, given the current economic
uncertainties in the developed economies as well as a slowdown in
the emerging regions.
In 2012, a landmark deal was the merger of Japan's largest and
world's sixth-largest steel maker Nippon Steel Corporation with
27th-ranked Sumitomo Metal Industries to form the world's second
largest steel firm -
Nippon Steel & Sumitomo Metal Corporation
). With a combined capacity of 46.1 million tons, the merger was
targeted to generate savings in the face of increasingly intense
Despite the considerable scope for consolidation in the steel
sector, companies are holding back and instead focusing on
conserving cash. They are waiting for a stronger and more
sustainable economic upturn to spur a wave of consolidation. They
are instead focusing on shedding unproductive operations, cutting
costs and restructuring.
), the world's largest steel producer, kicked off 2013 with the
sale of 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.
), one of the top 20 steel producing companies in the world and the
biggest steelmaker in Germany, completed the sale of its stainless
steel operations Inoxum to Finland's Outokumpu for $3.7 billion in
Dec 2012. ThyssenKrupp also completed the sales of its Tailored
Blanks business, the market leader in laser-welded blanks for the
automotive industry to Chinese steel producer Wuhan Iron and Steel
Corporation in July 2013.
After incurring two consecutive years of record losses,
ThyssenKrupp is undergoing radical restructuring in which it is
trying to sell assets to slash debt and refocus the group on its
core European business.
For over a year ThyssenKrupp has been trying to sell its
loss-making Steel Americas business, which comprises steel slab
plant in Brazil and a processing mill in Alabama for over a year.
ThyssenKrupp has faced a succession of costly write-downs since its
decision to build the plants. The sale would allow the company to
focus on its core Steel Europe and engineering assets. According to
latest reports, the company now intends to completely exit its
American steel operations while expanding its operations in Brazil.
The long-term growth potential in Brazil remains strong.
Infrastructure work will boost steel demand in the nation as the
FIFA World Cup is slated to be held in Brazil in 2014 and Rio de
Janeiro will host the summer Olympics in 2016. As mentioned
earlier, apparent steel use is projected to rise 3.2% in the region
ArcelorMittal also recently announced its plans to restart an
expansion project at its Monlevade and Juiz de Fora sites in
Brazil. The project expansion is expected to increase the annual
production capacity from 3.75 million tons to 4.9 million tons.
We expect M&A activity to remain slow in 2013 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
What's in Store from the Major Consumer Markets
Let's have a look at the performance of major consumer markets.
Historically, the automotive and construction markets have been the
largest consumers of steel, consuming more than half of the total
steel produced. The industry caters to large automakers such as
General Motors Co.
Ford Motor Co.
Toyota Motor Corp.
Honda Motor Co. Ltd.
The automobile sector has performed impressively this year, buoyed
by economic recovery and escalating demand in the U.S. and Asia.
Average age of vehicles on U.S. roads reached an all-time high of
11.4 years in Aug 2013, leading to high replacement demand for
The robust growth rate in the sector has been fueled by strong
pent-up demand, easier car financing, launch of several redesigned
and fuel-efficient vehicles, improving employment rates and rebound
in consumer confidence, thanks to an increasing belief that the
housing market is recovering.
The construction sector has been showing signs of upturn in
construction activity. The architecture billing index (ABI), an
economic indicator, which provides an approximate 9- to 12-month
glimpse into the future of non-residential construction spending
activity, was at 54.3 in September despite uncertainty regarding
the federal government shutdown. This also marked a year of steady
non-residential billings growth.
The strength in recent readings in the ABI signals an impending
healthy upturn in non-residential activity. The American Institute
of Architects projects a 2.3% increase in spending in 2013 for
non-residential construction projects with next year's projection
at 7.6% increase.
The residential housing sector is also showing signs of strong
momentum in 2013 with housing starts and housing permits at highest
levels in more than four years as record-low mortgage rates, rising
rents and reduced prices of properties are luring buyers. However,
the partial government shutdown in October and confusion over a
debt default had increased uncertainty in the construction sector.
The Fed made no changes to its stimulus program during the
September FOMC meeting, which coupled with the lifting of the
government shutdown, sparked optimism about builder and consumer
sentiment bouncing back. However, all eyes will now be on the
outcome of the FOMC meeting today and it remains to be seen whether
Fed would consider a small taper. The market is hoping that the Fed
will not spring any surprise this time and leave the stimulus in
place, at least for the next few months.
The steel industry will benefit from the strong momentum in the
automotive markets. The turnaround in the so-far faltering
construction sector will definitely provide a much-needed boost to
the sector. The outlook for other key markets - transportation,
energy, industrial and agricultural sectors also remains favorable.
Sector Level Performance in Q2 and Q3 So Far
Looking Back at Overall Q2 Results
- Looking at results of all the companies in the Basic material
sector, earnings dipped 9.9% in the second quarter, deteriorating
from the 1.6% decline in earnings witnessed in the first quarter of
2013. However, revenues for the sector went down 1.4% in the second
quarter, worsening from the flat sales in the first quarter.
Top & Bottom Line, So Far So Good -
We are in the midst of the third quarter earnings season. In the
basic material sector, 45.8% of the companies have reported to
date. Earnings increased 26.8%, reversing the 7.6% decline recorded
in the second quarter by these companies who have reported so far.
Revenues went up 5.4%, faring much better than the 2.9% dip in the
- Of the companies reported, the Basic Material sector had a beat
ratio (percentage of companies coming out with positive surprises)
of 81.8% compared with the 54.5% beat in the second quarter. Even
though results are looking better at the moment than the previous
quarter, it is too early to cheer.
Q3 & Beyond: What Zacks Predicts
The Basic Material sector is one of the sectors experiencing
material negative estimate revisions, largely reflecting the
overall negative tone of guidance provided by companies. All steel
players have been plagued by weak steel demand, oversupply in the
U.S. steel industry and increased steel imports in the domestic
market, which affected steel prices, hurting margins in the
process. The weak global conditions are a deterrent for volumes.
Keeping aside the preliminary numbers, earnings for all the
companies in the Basic Material sector are expected to rise 2.4% in
the third quarter and revenues are expected to edge up 0.9%.
However, it is expected to improve in the fourth quarter as
earnings are expected to increase 8.7% and revenues are expected to
In the first quarter of 2014, the sector's earnings are expected to
rise 9.5% despite a meagre 2.5% rise in revenues. In the second
quarter of 2014, earnings are projected to surge 19.5%, while
revenues are expected to increase by 1.9%.
Yearly Numbers -
In 2013, the sector's earnings are expected to dip 0.4%, while
revenues are expected to grow 0.7%. In 2014, earnings growth is
projected at 18.3% and revenues at 3.8%.
For more information about earnings for this sector and others,
please read our '
Record Earnings, But Outlook is Uncertain
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 259 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 page.
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 industry features in the top 1/3rd with a Zacks
Industry Rank #69. However, the steel-pipe and tubes producers with
a Zacks Industry Rank #206 and the steel specialty industry with a
Zacks Rank #220 make it to the bottom one third. This indicates
that the overall outlook is skewed to the 'Negative' side.
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 Expected
Surprise Prediction (ESP) helps in predicting the probability of
To Sum Up
Steel has been out of favor of late. However, revival in
global economy's growth rate could brighten the outlook for the
steel industry. Manufacturing activity in China grew at its
fastest pace in seven months in October. The preliminary HSBC China
Manufacturing Purchasing Managers' Index for October increased to
50.9 from September's final reading of 50.2 as the government
readies a series of key economic reforms. This adds further
evidence to China's ongoing growth rebound.
On the flip side, manufacturing numbers out of Europe were
disappointing. The purchasing managers' index for the Euro zone
declined to 51.5 in October from 52.2 in September. As per
preliminary financial data, the U.S. Manufacturing Purchasing
Managers Index fell to 51.1 in Oct, the lowest since October 2012,
from 52.8 in September. This is mainly due to the 16-day U.S.
government shutdown that has slowed overall U.S. growth slightly in
the fourth quarter of 2013.
Overall, global economic and political uncertainty, complicated by
political issues in the U.S., will continue to be a headwind for
the industry in the fourth quarter of 2013. Things will look up
thereafter as the impact of the U.S. government impasse wears off.
Pricing will also remain near the current low levels for the
remainder of the year.
In 2013, the steel industry will continue to face headwinds in the
form of overcapacity and surge of imports. The steel companies are
going through a restructuring process, which will have a positive
impact on operations in the medium and long term. Some major
industry trends are strategic cost reduction, vertical integration
and capital optimization.
Global steel demand is expected to improve gradually in 2013 and
thereafter in 2014. Growth in the United States will be supported
by strong momentum in the auto sector and recovery in construction
markets. Efforts of the Chinese government to rebalance its economy
will contribute to the domestic and global steel demand. India will
also stoke steel demand in the future, thanks to a rising middle
class along with increased urbanization.
Steel selling prices will improve hand-in-hand with improved demand
across most regions along with higher raw material prices. In
addition to raw material prices, the sustainability of higher steel
prices will continue to depend on an increase in sustainable real
demand, and no further worsening of the Euro-zone debt crisis.
BHP BILLITN LTD (BHP): Free Stock Analysis
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report
ARCELOR MITTAL (MT): Free Stock Analysis Report
NIPPON STEEL CP (NSSMY): Get Free Report
POSCO-ADR (PKX): Free Stock Analysis Report
RIO TINTO-ADR (RIO): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
To read this article on Zacks.com click here.