Is Now a Good Time to Buy Steel Stock?
The steel industry, like many others this year, has come under significant pressure from supply chain constraints related to the pandemic. But some interesting things are happening now.
But before I get to that, I want to give you some perspective.
So, as most of us probably know, the main ingredient in steel is iron ore. And there are four main regions that produce this, namely Australia (around 37% share in 2020), Brazil (around 16%), China (around 14%) and India (around 9%). . Since these countries have the highest production, any disruption / overproduction on their part has a significant impact on the market.
Throughout the past year, as the world reeled from the impact of the pandemic, iron ore production in Brazil, which also experienced a dam failure, was hit hard. Australia has largely closed the gap. Production from Brazil returns this year, with the country shipping 12% more than it did last year.
The iron ore shortage pushed prices up 34% to their peak on July 19, 2021, even as Brazil started to come back. And since then, prices have plunged about 44%.
Now, what has happened in between is a glut of inventory in China, which can be attributed to a number of factors. China, which produces more than half of the world’s steel, has decided to reduce the production of this raw material to reduce carbon emissions (the Chinese steel industry accounts for 10 to 20% of its carbon emissions). He allegedly asked 20 steelworks in Tangshan City to suspend their operations for a week. Handan, Anhui, Gansu, Fujian, Jiangsu, Jiangxi, Shandong and Yunnan provinces have been ordered to maintain production at 2020 levels.
Wider and longer restrictions could be likely, as the Beijing Winter Olympics quickly approach (for a few weeks from February 4). And China could very well cut back on production until that is done. He appears to be handling the situation, as he has raised tariffs on the export of steel-related products despite reduced demand due to the ongoing real estate crisis (home sales have fallen 20%, according to Bloomberg).
A report by Wood Mackenzie cited by CNBC indicates that China’s first half of 2021 crude steel production rose 12% from a year ago. So, between the increase in production in the first half of the year, falling demand and export restrictions, China is likely to be able to stay the course on production until the end of the Winter Games.
But it does mean that iron ore stocks are piling up both inside and outside China, causing prices to fall.
With restrictions on Chinese steel exports and increased demand for housing and infrastructure in the United States, domestic steelmakers are increasing production. Steel production in the United States increased by about 16% in the first six months of 2021, according to the American Iron and Steel Institute.
Production for the week ending July 3, 2021 is 41% higher than the comparable week of last year. The Great Lakes region is currently stronger than the South and Midwest regions, comprising smaller players.
The increase in production means higher utilization rates, which, according to the American Iron and Steel Institute, reached 83% in the week ending July 3, up from 58.3% a year.
Given the strong demand and limited supply, steelmakers benefit from robust prices. BLS data shows, for example, that the prices of cold-rolled steel sheet and strip have steadily increased over the past year.
So now the demand is very high, the prices are very high, the utilization rates and production are increasing while the cost of raw materials is decreasing. These factors should lead to high profitability for steelmakers, making them attractive investment options.
In Zacks’ universe, two steel related industries are doing well at this point. The Steel Industry – Producers (top 7% of over 250 industries classified Zacks), is hosted in the Basic Materials sector while the Steel Industry – Tubes and Pipes (top 4%) is hosted in the industrial products sector. Both industries are trading well below the S&P 500 as well as their median valuations over the past year. They are therefore attractive at these valuations.
Now let’s see some actions-
A theme common to these actions is the very robust revision of estimates for the current and subsequent years. And that indicates above-market growth, as revisions to estimates in most industries have started to moderate as analysts gain greater control over the COVID disruption.
Zacks # 1 (strong buy) ranked Valmont Industries, Inc. VMI for example, its estimates for 2021 have increased by 83 cents (8.3%) and those for 2022 by 82 cents (7.2%) since it released strong results for the June quarter. The company is expected to increase sales and profits by 18.5% and 32.0% respectively this year. This will be followed by revenue growth of 7.3% and profit growth of 13.3% the following year.
After posting strong earnings for the June quarter, the No.1 ranked Tenaris SA TS saw its profit estimates for 2021 and 2022 jump 36 cents and 30 cents, respectively. But estimates for the two years have continued to increase since then by an additional 6 cents and 5 cents, representing total increases of 50.6% and 30.7%, respectively.
Analysts expect revenues and profits to increase 17.9% and 495.2% in 2021. In 2022, they expect revenues to increase by 21.6% and profits to increase by 18.9%.
# 1 ranked Nucor Corp. Naked has constantly increasing estimates. But in the past seven days alone, Zacks’ consensus estimate for 2021 earnings has jumped 98 cents (5.1%) and 2022 earnings by $ 1.30 (11.9%). Revenue and profit for 2022 is still down from the 75.5% revenue growth and 508.1% profit growth analysts expect in 2021.
Ternium SA TX has a solid history of beating estimates. The No.1-ranked company, which is expected to grow its revenue by 77.9% and profits by 460.6% this year, has seen its estimates rise significantly in the past 30 days. As a result, Zacks’ consensus estimate for 2021 is up $ 1.05 (6.6%) and that for 2022 is up $ 2.07 (22.5%).
# 1 ranked ArcelorMittal MT also posted strong results for the June quarter, beating estimates by the usual large margin. The company’s estimates have risen steadily over the past 90 days. The 2021 estimate is up $ 4.71 (57.5%) during this period. The 2022 estimate is up $ 4.34 (85.4%). Analysts currently expect revenue and profits to rise 43.7% and 1,775.3% respectively in 2021, before falling the following year.
Price performance since the start of the year
Image source: Zacks Investment Research
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ArcelorMittal (MT): Free Stock Analysis Report
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