US Steel Output on an Upswing: Demand Revival Buoys Prospects

U.S. raw steel production continues to leap on a weekly basis on an improvement in capacity utilization — a key metric in the steel industry. According to the latest American Iron and Steel Institute ("AISI") weekly report, domestic raw steel production was 1,484,000 net tons for the week ending Oct 3, a 0.3% increase from production of 1,480,000 net tons for the week ending Sep 26. This follows a 2.4% rise on a weekly comparison basis for the week ending Sep 26.

However, the weekly production still trails that of a year ago. Production for the reported week was down 17.7% from 1,803,000 net tons registered for the same period a year ago.

Weekly Utilization Ticks Up

Capacity utilization was 66.6% for the reported week, rising from the previous week’s reading of 66.1%, indicating an improvement in activity. However, it was still well below the key 80% threshold — the minimum rate required for sustained profitability of the industry. Capability utilization rate for the reported week was down from 77.7% a year ago, AISI noted.

Notably, after remaining above the 80% the level in early 2020, capacity utilization rate tumbled to 51.1% in May — the lowest level in many years as the coronavirus pandemic decimated demand across major steel end-use markets. Utilization has started to pick up with a recovery in steel demand from the slump witnessed during the first half of 2020.

Meanwhile, by-region, output from Great Lakes rose roughly 1% on a weekly basis to 531,000 net tons in the reported week. Production in the Southern region slipped roughly 3% to 575,000 net tons in the reported week. Mills in the North East produced 144,000 net tons of raw steel, up around 13% from the previous week. The Midwest region produced 168,000 net tons of raw steel, up around 3% from a week ago. Output fell roughly 10% in the Western region to 66,000 net tons.

Overall year-to-date production still lags the year-ago level. Adjusted year-to-date production through Oct 3 was 59,444,000 net tons at a capability utilization rate of 66.2%, down 19.6% from 73,936,000 net tons registered in the same period a year ago, per AISI. Capability utilization rate for the period is also considerably down from 80.3% recorded last year.

Demand Recovery, Price Upturn Boost U.S. Steel Industry’s Prospects

Coronavirus has taken a heavy toll on the U.S. steel industry this year. The pandemic gutted demand for steel across major end-use markets such as construction and automotive during the first half.

The sharp decline in demand also forced U.S. steel mills to scale back production and idle operations with capacity utilization plummeting to a multi-year lows during the first half. U.S. steel prices have also come under pressure this year amid pandemic-induced demand shocks.

The benchmark hot-rolled coil (“HRC”) prices plummeted to below the psychologically important $500 per short ton level in April on concerns over the fast-growing pandemic in the United States and demand slowdown amid production shutdowns by automakers. After gaining some ground during the second quarter on U.S. steel mills’ price hike actions, steel prices again came under significant pressure in July and August on demand weakness.

However, HRC prices started to recover in September and are leaping ahead this month. Prices surged past $600 per short ton recently on a recovery in end-market demand, especially in automotive, amid supply constraints. Lead times for steel delivery at U.S. steel mills remain extended (indicating healthier demand) while steel scrap prices are on the rise. Tight supply due to production disruptions and mill outages amid rising demand is likely to lend support to HRC prices through the fourth quarter of 2020. The price rally is likely to sustain as the key fundamental drivers remain in place.

Meanwhile, a rebound in end-market conditions of late from the virus-led slowdown bodes well for the U.S. steel industry. Demand for steel has picked up with the resumption of operations across major steel-consuming sectors, following the easing of restrictions.

In particular, the U.S. automotive industry has gotten back into gear following coronavirus-led shutdowns on the back of a strong recovery in customer demand. U.S. auto sales have rebounded sharply after hitting a pandemic-induced low in April. U.S. automakers are ramping up production to boost lean vehicle inventories at dealerships in the wake of surging demand. The rebound in the domestic automotive industry represents a tailwind for the U.S. steel industry.

Notably, United States Steel Corporation X last month said that is encouraged by the pace at which the market is improving. The company has responded to an improving order booking by restarting three blast furnaces, which it temporarily idled in response to the coronavirus pandemic.

Moreover, Steel Dynamics, Inc. STLD expects to benefit from higher shipments in the third quarter driven by improved automotive and strong construction demand. It also noted that the pricing of flat-roll steel has stabilized and improved during the second half of the third quarter, aided by favorable customer demand.

Nucor Corporation NUE also recently noted that its downstream products segment as well as its bar and structural mills is benefiting from the resiliency of non-residential construction markets.

Steel Stocks Worth a Look

A couple of stocks currently worth considering in the steel space are Schnitzer Steel Industries, Inc. SCHN and L.B. Foster Company FSTR. While Schnitzer Steel sports a Zacks Rank #1 (Strong Buy), L.B. Foster carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Schnitzer Steel delivered an earnings surprise of 41.3%, on average, over the trailing four quarters. The Zacks Consensus Estimate for the current year also has been revised 10.3% upward over the last 30 days. The company has seen its shares rally roughly 43% over the past six months.

L.B. Foster delivered an earnings surprise of 4,200% in the last reported quarter. The consensus estimate for the current year also has been revised 2.9% upward over the last 30 days. The stock is also up roughly 15% over the past six months.

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