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Zacks Industry Outlook Highlights: ArcelorMittal, United States Steel, Nucor and AK Steel Holding

For Immediate Release

Chicago, IL – October 23, 2014 – Today, Zacks Equity Research discusses the Steel, including ArcelorMittal (MT-Free Report), United States Steel Corp. (X-Free Report), Nucor Corporation (NUE-Free Report) and AK Steel Holding Corporation (AKS-Free Report).

Industry: Steel

Link: http://www.zacks.com/commentary/34971/

Per the latest data available from the World Steel Association, global steel production increased 2.1% to 1,231 metric tons (Mt) in the first 9 months of 2014. China churned out 50% of the total at 550 Mt, an increase of 2.3% year over year (yoy). Production in the European Union rose 2.9% to 128 Mt. United States shared the podium holding the third position, with production climbing 2.3% to 91 Mt. Japan nudged up 0.8% to 83 Mt.

Given the weaker-than-expected performance in the emerging and developing economies in the first half of 2014, the World Steel Association has trimmed its short-range outlook for global steel usage, which is now expected to increase 2% in 2014, down from its prior forecast of 3.1%. For 2015, world steel demand is projected to grow at the same pace and reach 1,562 Mt. A slowdown in China, due to the structural transformation of the country’s economy, was mainly instrumental in bringing down the outlook.

Economic slowdown in China -- the largest steel consumer, accounting for almost half of global steel consumption -- has dealt a massive blow to the global steel industry. In stark contrast to the high demand levels in China in the past years, steel usage is the country is expected to cool down and rise only 1% in 2014, while declining further to 0.8% growth in 2015.

In Central and South America, falling commodity prices and delayed structural reforms will affect steel demand. In Brazil, apparent steel usage will decline as high inflation, overvalued currency, high labor costs and infrastructure bottlenecks are curtailing investment activities. In the Commonwealth of Independent States (CIS, also known as the Russian Commonwealth), geopolitical tensions will constrain demand.

Recent reports of weakness in the Euro-zone economy, particularly its leading economy Germany, signal a slowdown in the much awaited recovery in the region. Companies like ArcelorMittal (MT-Free Report), which generates almost half of its revenues from the region will be affected. Even United States Steel Corp. (X-Free Report) has significant operations in Europe.

However, the picture is not so bleak everywhere. Steel demand is expected to grow in the U.S., riding on the back of an improving global economy, strong momentum in the automotive markets, demand in the energy sector and a turnaround in the construction sector. India will also pick up the pace driven by its construction and manufacturing sectors, and structural reforms from the new government.

Much hope is pinned on India to act as the next growth driver, given its high population and rapid urbanization. Demand in Japan will be up in 2014, aided by governmental economic policies.

Sector Level Earnings Trend

The third-quarter earnings season has just taken off. Within the Zacks Industry classification, the steel industry falls under the broader Basic Materials sector (one of the 16 Zacks sectors). As of date, 14.3% of the stocks in the sector have reported their third-quarter numbers putting up a 180.4% year-over-year increase in earnings on the scoreboard. The sector has an impressive beat ratio (percentage of companies coming out with positive surprises) of 66.7% so far.

Taking into account the other companies that have yet to report their results, earnings of the Basic Material sector is expected to go up 10.2% for the third quarter, up from the 8.6% increase in the second quarter of 2014. Currently, the sector’s earnings are expected to witness a 3.8% rise in the fourth quarter and 15.3% in first-quarter 2015. Overall, in 2014, the sector will log earnings growth of 8.7%, and accelerate to growth of 18.5% in 2015. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

Industry Ranking: Overall Negative

We rank all of the 260 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available in the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 260+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #87 and lower) is positive, the middle one-third (Zacks Industry Rank between #89 and #176) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is negative.

The steel producers feature in the top tier with a Zacks Industry Rank #69, indicating a positive outlook. The “steel-pipe and tube” and “steel specialty” industries are currently in the bottom tier with Zacks Industry Ranks of #249, indicating a negative outlook. Overall, the outlook for the industry is weighted more toward negative.

Please note that the Zacks Rank for stocks, which are at the core of our Industry Outlook, has an impressive track record, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months). The rank, along with the Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Way to Find Earnings Surprises) helps in predicting the probability of earnings surprises.

What’s in Store for the Industry?

Overall, steel industry will grow, but at a muted pace supported by the automobile industry and construction sector as well as the energy sectors. Looking at the steel companies in our coverage, Nucor Corporation (NUE-Free Report), which is a key supplier for real estate companies, and United States Steel Corp., a key supplier for energy companies, will benefit from the strong end markets. Companies like ArcelorMittal and AK Steel Holding Corporation (AKS-Free Report) generate a large portion of their revenues from auto companies.

China will continue to be a deterrent factor and the slowdown in the European Union poses concern. We believe recovery in steel pricing will be driven only by a reviving economy and a rebound in construction activity in the U.S. and developing countries, China and India in particular.

We expect M&A activity in the steel space to continue at a slow pace in 2014 until the price stabilizes and the industry strikes a balance between supply and demand. However, M&A activity is the Indian steel industry is expected to go up as the country is the world’s third-largest steel consumer and has the potential to take the second spot.

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