5 Solid Steel Stocks that Thumped the S&P 500 in 2017

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The steel industry staged a recovery this year after being out of favor for long. The highly cyclical industry enjoyed a good run in 2017 notwithstanding a few lingering challenges.

The steel industry has outperformed the broader market (S&P 500) year to date. The industry has gained around 23% so far this year, topping the S&P 500’s corresponding return of roughly 18.9%.

While the overall demand fundamentals for steel is improving, the industry is still challenged by sustained overcapacity. The global steel industry continues to reel under the effects of excess capacity – the biggest obstacle to persistent growth and profitability.

Upturn in Steel Demand

The World Steel Association ("WSA") – the international trade body for the iron and steel industry – sees global steel demand to expand 7% in 2017 following a 1% rise in 2016. Steel consumption in China is expected to go up 12.4% this year as closure of most of its outdated induction furnaces are expected to lead to a jump in steel use. Global steel demand barring China is expected to rise 2.6% in 2017.

A cyclical upturn in steel demand this year has been backed by strong economic momentum across advanced and developing economies. The U.S. economy is showing strong fundamentals on the back of improving business confidence and healthy consumer spending. Steel demand in the United States is expected to rise 4.8% this year.

Moreover, Eurozone’s economic recovery continues apace, as evident from recent upbeat economic data. The region’s recovery is backed by declining unemployment and strengthening business and consumer confidence. The WSA sees steel demand in the European Union to go up 2.5% in 2017.

Demand in emerging and developing economies (barring China) is also expected to rise 2.8% this year. Developing economies are gaining from an upturn in the world economy and economic reforms across several countries including India and Brazil.

Steel Glut a Concern, but China Winter Cuts to Tighten Output

The global steel industry continued bear the brunt of a surge in production in China this year as steel mills in the world's biggest steel producing nation continued to take advantage of a spike in domestic steel prices that translates to higher profits for the Chinese steel industry.

According to the WSA, global crude steel production went up 5.6% year over year during the first ten months of 2017. Output from China, which accounts for around half of the global production, climbed 6.1% year over year during this period.

Nevertheless, Chinese steel output is expected to decline moving ahead as Beijing has started implementing a four-month reduction in production to streamline its burgeoning steel sector and control pollution during the winter months (lasting until the middle of March 2018). The Hebei province – China’s top steel producing region – is looking to shutter 50% of its steel capacity during winter in a bid to clean up the environment.

Overall, China is expected to cut its steel production capacity by around 50 million metric tons in 2017. The country’s actions to reduce its excess steel supply during winter are also expected to lend support to global steel prices moving ahead. This is also expected to tighten global steel output in the coming months.

Imports – A Pressing Problem for U.S. Mills

U.S. steel mills have been hit by a renewed tide of cheap imports this year. Imports of subsidized steel continue to flood American shores despite a string of punitive trade actions (in the form of heavy tariffs) and threats of further future measures.

Total steel imports shot up roughly 19% to around 32.9 million net tons through the first ten months of 2017 – according to the American Iron and Steel Institute (AISI), an association of North American steel makers. Finished steel imports for the same period also increased roughly 15% to around 25.4 million net tons, per the AISI.

While positive rulings in trade cases (resulting in levy of heavy tariffs) against China last year led to a decline in Chinese steel exports to the United States, imports from other countries remain at above historical levels.

According to AISI data, steel imports from China fell roughly 6% year over year through the first ten months of 2017. However, imports from other countries such as Russia, Taiwan, Germany, South Korea and Brazil have spiked over this period.

A surge in steel imports put pressure on U.S. steel prices during third-quarter 2017. Continued import pressure has not allowed steel pricing to keep pace with higher raw material costs during the quarter.

Much Hopes Pinned on Section 232

U.S. steel makers continue to pin their hopes on President Trump imposing new restrictions on imported steel. The Trump administration, in April 2017, ordered an investigation under Section 232 of the Trade Expansion Act of 1962 aimed at determining whether the imports pose a threat to national security.

However, the Trump administration has delayed the release of the report on the Section 232 probe, which was initially expected at the end of June 2017. The Commerce Department has until mid-January 2018 to conclude the investigation. A delay in the Section 232 probe has triggered a spike in steel imports into the American market in the recent months.

As the deadline for the probe approaches, a positive outcome will give the Trump administration the opportunity to take broad-based trade actions (in the form of tariffs or quotas) against cheap imports. This would provide a significant thrust to steel prices and give domestic steel makers more pricing power.

5 Market-Beating Steel Stocks

The steel industry has fared well this year outperforming the broader market, despite the headwinds still plaguing the industry as discussed above. With the help of our Zacks Stock Screener, we have shortlisted five steel stocks that have gone up 20% or more this year and have outperformed the S&P 500’s corresponding return.

Carpenter Technology Corp. CRS, sporting a Zacks Rank #1 (Strong Buy), is a leading manufacturer and distributor of specialty alloys, including stainless steel and titanium, and various engineered products made from metallic and ceramic materials. The company has seen its shares pop 37.4% year to date. The stock has an expected earnings growth of 107.8% for 2017. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

South Korea-based POSCO PKX, a Zacks Rank #2 (Buy) stock, makes hot and cold rolled steel products, heavy plate and other steel products for the construction and shipbuilding industries. The stock has gained 44.3% so far in 2017. The company has an expected earnings growth of 134.7% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Luxembourg, ArcelorMittal MT is a leading steel company, operating a balanced portfolio of cost competitive steel plants across both the developed and developing markets. The company’s shares spiked 41.9% year to date. ArcelorMittal, a Zacks Rank #3 (Hold) stock, has an expected earnings growth of 170.3% for 2017. The stock also has a long-term (three-five years) expected EPS growth rate of 11.2%.

Allegheny Technologies Inc. ATI is a global producer of specialty materials, offering nickel-based alloys and superalloys, stainless steel, titanium alloys, specialty alloys, and zirconium and other related alloys. The company’s shares have rallied 45.4% so far this year. Allegheny, a Zacks Rank #3 stock, has an expected earnings growth of 135.2% for the current year.

Headquartered in Luxembourg, Ternium S.A. TX is a leading producer of flat and long steel products. The company, carrying a Zacks Rank #3, gained 21.9% year to date. Ternium has an expected earnings growth of 31.2% for 2017.

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