Should You Buy Steel Stocks Now?

After enjoying sturdy growth for most of the past decade, the steel industry suffered a setback in 2008 due to the recession, as consumers started utilizing existing inventories rather than buying new stock. However, the industry turned around in late 2009 and continued to grow thereafter, in tandem with global economic recovery.

Demand for steel benefited from the spurt of growth witnessed in the developing economies that helped counter the sluggishness in developed economies. Asia -- particularly China -- continued to act as the principal growth driver.

At present, even though concerns over China’s future growth has added an element of uncertainly to the outlook, there are plenty of reasons to be optimistic about the broader steel industry for both 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 construction industry took the worst hit in the recession, and in turn, pulled down the steel industry with it. However, an uptrend has been noticed in real estate activity, like new home starts and construction spends, over the past few quarters.

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 part of 2014 and reached 55.8 in July -- its highest level since 2007. Any score above 50 indicates an increase in billings. The latest score in September was 55.2, up from a mark of 53.0 in August.

Long-stalled construction projects are being renewed and long awaited access to credit from lending institutions along with an increasing comfort level in the overall economy has helped revitalize the commercial real estate sector in recent months. Moreover, requirement for emerging projects, such as education facilities and government buildings, is leading to demand in the sector.

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 also continue to be major demand drivers due to the huge amount of steel required for urbanization and industrialization. The demand for steel is thus expected to remain strong in the years to come.

Automotive Sector in Top Gear

The automotive sector is the second largest steel consumer and is showing significant promise. According to IHS Automotive, a unit of IHS Inc. (IHS), in 2014, global automobile sales are expected to go up to 85 million units from 82.84 million in the earlier year.

The U.S. auto market looks robust and is expected to surpass sales of 16 million units in 2014. Auto industry in Asian countries, particularly China and India, are also expected to flourish over the next 5 to 7 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 demand is expected to benefit from the same in the years to come.

Imposing Anti-Dumping Duty

Steel demand in the energy sector has been growing at a rapid pace. To capitalize on the growing U.S. energy infrastructure demand, foreign manufacturers had flooded the U.S market with cheap imports. Trade cases were filed by US companies, affected by the surge in imports, against their foreign counterparts.

The U.S. International Trade Commission (:USITC) ruled that OCTG (oil country tubular good) imports from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam will be subject to duties. South Korea was a major player considering that OCTG exports to the United States from the country were worth $818 million in 2013, more than the combined imports from the other countries.

The imposition of duty is welcome news, as it raises expectation for favorable ruling in the other pending cases. This will boost margins of steel companies which have been forced to cut down production and idle plants, threatened by cheap steel imports.

Consolidation

Mergers and acquisitions (M&A) have remained an important growth strategy in the steel industry, leading to additional steel capacity, production efficiency and economies of scale. However, consolidation was minimal in the past two years, given the economic uncertainties as companies primarily focused on conserving cash, shedding unproductive operations, cutting costs and restructuring.

In the third quarter, we saw some renewed activity in the space which infuses optimism. In July, AK Steel Holding Corporation (AKS) signed a deal to buy 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. AK Steel will also be able to attain cost synergies by saving purchase, transportation and overhead costs.

In September, Steel Dynamics, Inc. (STLD) completed the acquisition of Severstal Columbus, LLC for $1.625 billion in cash, that 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 with the addition of Columbus. Further, Columbus provides geographic diversification and growth opportunities for Steel Dynamics.

Also, in September, Nucor Corporation (NUE) agreed to buy Gallatin Steel Company from global steel giant ArcelorMittal (MT) and Brazilian steel maker Gerdau S.A. (GGB) for roughly $770 million in cash. The acquisition of Gallatin Steel is in sync with Nucor's strategy of profitable growth. 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.

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.

AK STEEL HLDG (AKS): Free Stock Analysis Report
GERDAU SA ADR (GGB): Free Stock Analysis Report
ARCELOR MITTAL (MT): Free Stock Analysis Report
NUCOR CORP (NUE): Free Stock Analysis Report
STEEL DYNAMICS (STLD): Free Stock Analysis Report


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