“We are witnessing a renaissance of the American steel industry,” said Curt Woodworth, steel analyst at Credit Suisse. “The industry is healthier than it ever has been, profitability is at an all-time high, balance sheets have been in their best shape for a long time. Equities are heavily undervalued.

Cleveland-Cliffs (ticker: CLF) expects to be debt free in 2022, and US Steel (X) is moving in that direction. US Steel also has a fully funded pension and health care plan. Improving the industry’s financial condition could lead to higher dividends and higher valuation.

Steel inventories are up sharply this year, but are down 20% on average from their August highs. Investors fear steel prices will collapse in 2022 as new supplies enter the market. They also want steelmakers to increase their dividends and share buybacks, as other commodity producers have done.

Woodworth argues that prices will stay higher for longer and that consensus earnings estimates for 2022 are too low. It assumes an average price of $ 1,200 per tonne for 2022, with the market discounting $ 800 or less.

Woodworth says investors overlook several bright spots. The growth in demand for steel in the United States is expected to average 3-4% per year in the coming years, he estimates. North American auto production could increase next year as chip shortages ease. Rising infrastructure spending and the development of renewable sources of electricity, especially steel-intensive wind turbines and related transmission lines, bode well.

American steelmakers are the cleanest in the world because 70% of national production comes from low-emission mini-steel plants that use scrap. The green tint of steel could bolster political support for the current 25% tariffs on many imports, which account for around 20% of the market.

Formerly an iron ore producer, Cleveland-Cliffs is now a major steelmaker, after two acquisitions last year. It has a shareholder-focused CEO in Brazil-born Lourenco Gonçalves, who owns $ 100 million of his shares. At around $ 20, shares of Cleveland-Cliffs are trading 3.4 times expected 2021 earnings of nearly $ 6 per share.

“The company bought two steelmakers at the bottom of the market and is a prudent allocator of capital,” said Michael Glick, steel analyst at JP Morgan. He has an overweight rating and a target price of $ 40. Cleveland-Cliffs has not made any commitment to capital returns, but buybacks and the launch of a dividend are possible in the coming year.

US Steel bought an attractive mini-mill operator, Big River Steel, and sold off secondary assets while using its current windfall to reduce debt. But his plan to spend $ 3 billion on a new mini-plant has not thrilled investors, as it could delay significant capital returns. US Steel is trading at $ 22, less than twice the expected earnings in 2021. Woodworth has a price target of $ 49.

Industry leader Nucor, a mini-plant operator, has been consistently profitable over the past few years. The company has a strong balance sheet with net debt of less than $ 3 billion, and it aims to return at least 40% of its net income to holders through dividends and share buybacks. Given its range of products, it should be the beneficiary of an infrastructure bill. The shares, at around $ 100, are trading at less than five times this year’s estimated earnings and are returning 1.6%.

Steel Dynamics (STLD), founded by alumni of Nucor, is a leader in environmental sustainability. Its greenhouse gas emissions are 70% lower than the industry average. The shares are trading around $ 60, four times the 2021 forecast earnings of $ 14 per share, and are returning 1.7%. The company expects to earn nearly $ 5 per share in the third quarter.

Steel Dynamics is expected to benefit from the opening of a new plant in the fourth quarter. “This is done mostly with significant capital spending,” says Glick, who predicts a higher dividend and has an overweight rating, with a price target of $ 104.

Stelco Holdings
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the Canadian steelmaker, traded lightly in US stocks (STZHF) which sell for around $ 30 on the Pink Sheets. The company has a large, modernized blast furnace on the shores of Lake Erie that has helped make it one of North America’s cheapest producers, at $ 400 a tonne. It has a net cash flow and a well-regarded CEO, Alan Kestenbaum, who owns 11% of the shares.

“We have an incredible cost advantage and the highest margins in the industry,” says Kestenbaum.

The shares are trading at twice the expected earnings this year. Stelco repurchased 13% of its shares from a major holder in August and doubled its quarterly dividend to 20 cents Canadian per share, for a current yield of 2%.

Write to Andrew Bary at [email protected]