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How Steel Stocks Can Strengthen Your Portfolio

In the past few years, demand for steel has been on the rise owing to the rapid growth witnessed in developing economies that helped to counter the slowdown in developed nations. Asia, particularly China, remained the principal growth driver.

However, the current scenario is slightly alarming with the conventional growth engine, China, adding an element of uncertainty to the outlook. Nevertheless, there are plenty of reasons to be optimistic about the broader steel industry, both in the short and the long term. Below, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.

Rebound in Construction

The housing and construction sector is the largest consumer of steel today, accounting for almost half of the steel consumption. The home construction market recovered at a steady pace in 2014, largely on the back of overall economic growth, improving job numbers, growing consumer confidence, moderating home prices, stabilizing mortgage rates and a low level of housing inventory. This momentum is likely to continue in 2015.

The US Architecture Billings Index (ABI), an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, remained over 50 for most of the recent months. Any score above 50 indicates an increase in billings.

Renewal of long-stalled construction projects and much awaited access to credit from lending institutions along with an improving overall economy have helped revitalize the commercial real estate sector in recent months. Moreover, requirement for emerging projects, such as education facilities and government buildings, is creating demand in the sector. The American Institute of Architects' (AIA) anticipates spending in the non residential building sector will rise 7.7% and commercial/industrial will rise 11.8% in 2015.

In the long term, as urban population increases worldwide, so will the need for steel to build skyscrapers and public-transport infrastructure. Emerging economies will continue to be major demand drivers due to the huge amount of steel required for urbanization and industrialization. Hence, the demand for steel is expected to remain strong in the years to come.

Companies like United States Steel Corp. ( X ), ArcelorMittal ( MT ), Nucor Corporation ( NUE ) and Steel Dynamics Inc. ( STLD ) will benefit from the momentum in construction.

Automotive Sector at Full Throttle

The automotive sector, which is the second-largest steel consumer, is showing significant promise despite threats from other materials. The recent slump in global oil and gas prices has been a blessing for automakers.

U.S. light-vehicle sales increased for the fifth consecutive year in 2014, improving on the 6-year high achieved in 2013. In fact, for the first time since the recession in 2008, U.S. auto sales surpassed 16 million units in 2014. The rising trend in sales is expected to continue in 2015, driven by falling fuel prices, low interest rates, enhanced job security, rising wages and household wealth, improving consumer confidence, residual pent-up demand, attractive deals and vehicle launches. Moreover, the high average age of light vehicles on U.S. roads is resulting in large replacement demand for cars as well as car parts.

Auto industry in the Asian countries, particularly China and India, are also expected to flourish over the next five to seven years. China is the biggest and fastest growing auto market in the world in terms of number of vehicles sold. With the automakers riding the wave of strong demand, steel is expected to benefit from the same in the years to come. ArcelorMittal and AK Steel Holding Corporation ( AKS ) generate a large portion of their revenues from auto companies.

Investment in Oil and Gas

In spite of the current drop in oil prices , there will be significant capital investment in the oil and gas sector over the next few years. This should support demand for premium oil country tubular goods (OCTGs). Moreover, substantial investment is expected in other parts of the oil and gas value chain, viz. distribution pipelines and refineries.

Growth in the Indian Steel Sector

India is currently the fourth largest producer of steel in the world. The Indian steel industry is expected to register exponential growth in the future, riding on increasing urbanization, and projected growth of infrastructure, automobile and real estate sectors. India's outlook has improved following the election of the new government which promises pro-business reforms. The government of India has set a target to triple Indian steel production to 300 million tons by 2025.

Imposing Anti-Dumping Duty

U.S. steel makers have taken yet another major step toward their ongoing battle against unfairly traded, cheap imports that continue to flood the American market. The petitions, which were filed by six U.S. steel makers including Nucor, U.S. Steel, AK Steel, Steel Dynamics and ArcelorMittal USA, a part of ArcelorMittal, with the U.S. Department of Commerce ("DOC") and the U.S. International Trade Commission ("USITC") charge that a torrent of significantly subsidized imports of hot-rolled steel flat products from Australia, Brazil, Japan, South Korea, the Netherlands, Turkey and the UK are considerably injuring the country's steel industry.

Imports of hot-rolled steel flat products from these countries have rocketed 73% between 2012 and 2014. The import rush continued this year, surging by another 54% year over year within Jan-May 2015.

The hot-rolled steel trade case follows filing of antidumping and countervailing duty petitions in July against eight countries alleged by major U.S. steel makers for illegally dumping cold-rolled steel that is used to make automotive products and appliances, among others.

Domestic steel makers, cheered the USITC's preliminary determination of injury on a trade case that was filed in June. The USITC found reasonable indications that a barrage of subsidized imports of certain corrosion-resistant steel products from China, India, Italy, Korea, and Taiwan are causing material injury to the U.S. steel industry. The DOC is expected to make preliminary countervailing duty determinations on the corrosion-resistant steel case by Aug 27, and preliminary antidumping duty determinations by Nov 10.

The American steel industry has also commended President Obama for signing two major trade bills -- Trade Promotion Authority ("TPA") and Trade Adjustment Assistance ("TAA") -- that should help domestic producers protect their turf against illegally dumped cheap steel products. U.S. steel makers are still actively pressing Congress to stop unfair trade practices and enforce new trade laws to rescue the ailing American steel industry.

The imposition of duty will boost the margins of steel companies which were forced to cut down production and idle plants, threatened by cheap steel imports.

Consolidation

Mergers and acquisitions (M&A) have always been an important growth strategy for the steel industry, leading to additional steel capacity, production efficiency and economies of scale. However, consolidation was minimal during the 2012-2013 period, given economic uncertainties as the companies were primarily focused on conserving cash, shedding unproductive operations, cutting costs and restructuring.

In 2014, some renewed activities in the space infused optimism. In Sep 2014, AK Steel acquired Dearborn, MI-based Severstal North America's integrated steelmaking assets for $700 million in cash. The facilities complement AK Steel's existing carbon steel operations, while giving it access to highly modernized and upgraded steelmaking equipment and facilities. The acquisition will also enable AK Steel to increase its profitability and operational efficiency, while allowing it to attain cost synergies by saving purchase, transportation and overhead costs.

Also, in Sep 2014, Nucor agreed to buy Gallatin Steel Company from global steel giant ArcelorMittal and Brazilian steel maker Gerdau S.A. ( GGB ) for roughly $770 million in cash. The buyout is expected to reinforce the company's foothold in the key Midwest region and allow it to better serve its flat-rolled customers in the growing pipe and tube segment. The addition of Gallatin Steel is expected to enhance Nucor's total flat-rolled product annual capacity by 16% to around 13 million tons.

Steel Dynamics completed the acquisition of Severstal Columbus, LLC for $1.625 billion in cash, also in September last year. It will expand the company's annual steel shipping capacity to 11 million tons, representing a roughly 40% rise. Steel Dynamics will get an exposure to the high-growth oil country tubular goods and automotive markets. Moreover, in a move to boost its fabrication platform, Steel Dynamics acquired certain steel decking facilities and net working capital of roughly $30 million from steel deck maker Consolidated Systems, Inc. for $45 million in cash in Sep 2015.

Bottom Line

As you can see, there are plenty of reasons to be optimistic about the steel industry for the long haul. But what about investing in the space right now?

Check out our latest Steel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this sector from now onwards.

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UTD STATES STL (X): Free Stock Analysis Report

STEEL DYNAMICS (STLD): Free Stock Analysis Report

NUCOR CORP (NUE): Free Stock Analysis Report

ARCELOR MITTAL (MT): Free Stock Analysis Report

GERDAU SA ADR (GGB): Free Stock Analysis Report

AK STEEL HLDG (AKS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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