The Zacks Steel Producers sector saw a strong rebound after bearing the brunt of recovery in demand and favorable steel prices in major steel consuming sectors.Healthy demand for steel in key end markets including construction and automotive represents a tailwind for the industry.Steel prices remain high despite the recent pullback, which should also boost the profitability of industry players.Ternium SA TX, Commercial Metals Company CMC, TimkenSteel Corporation TMST and Olympic Steel, Inc. ZEUS are poised to benefit from these trends.
The Zacks Steel Producers industry serves a broad range of end-use industries for various steel products including automotive, construction, appliances, containers, packaging​​​, industrial machinery, mining equipment, transportation, and oil and gas.These products include hot-rolled and cold-rolled coil and sheet, hot-dip and galvanized coil and sheet, rebar, billet and bloom, wire rod, strip mill plate, standard pipe and line pipe, and mechanical pipe products.Steel is mainly produced using two methods – blast furnace and electric arc furnace.It is seen as the backbone of manufacturing.The automotive and construction markets have historically been the largest consumers of steel.Notably, housing and construction are the largest consumers of steel, accounting for about half of the world’s total consumption.
Demand intensity in key end-use markets: Steel producers are well-positioned to benefit from rising demand in key steel end-use markets such as automotive, construction and machinery amid the coronavirus downturn.Steel demand picked up from the third quarter of 2020 as major steel-consuming industries resumed operations as global lockdowns and restrictions eased.The construction industry has rebounded after resuming projects stalled by supply chain disruptions and manpower shortages.Order activity in the non-residential construction market remained strong, underscoring the underlying strength of the sector.Steelmakers are also expected to benefit from higher order books in the auto market in the second half of 2022 as the semiconductor crisis eases and automakers ramp up production.Demand in the energy sector has also improved against the backdrop of soaring oil and gas prices.Positive trends in major markets bode well for steel demand.Steel prices remain high to boost profit margins: Steel prices recovered strongly last year and hit record levels last year against the backdrop of recovering demand in key markets, tight supplies and low steel inventories across the supply chain.Notably, U.S. steel prices surged to record highs last year after plunging to multi-year lows triggered by the pandemic in August 2020.Benchmark hot rolled coil (HRC) prices breached the $1,900 per short ton level in August 2021 and finally peaked in September.But prices have lost momentum since October, weighed down by stable demand, improving supply conditions and rising steel imports.Since the Russian invasion of Ukraine, steel prices have rebounded sharply and surged to nearly $1,500 a short ton in April 2022 due to supply concerns and increased delivery times.However, prices have since retreated, partly reflecting shorter delivery times and recession fears.Despite the recent downward correction, HRC prices remain above the $1,000/short ton level and may find support from healthy end-market demand.In the near term, still favorable prices are expected to boost profitability and cash flow of steel producers.lead to a slowdown in the country’s economy.A downturn in the country’s real estate sector has led to a slowdown in the economy.The new lockdown measures have also taken a heavy toll on the world’s second-largest economy.A slowdown in manufacturing activity has led to a contraction in Chinese steel demand.Manufacturing has taken a hit as a resurgence of the virus hits demand for manufactured goods and supply chains.Beijing’s move to ease the heat in the property market, in part through credit tightening measures, is also a concern for the country’s steel industry.
The Zacks Steel Producers industry is part of the broader Zacks Basic Materials sector.It has a Zacks Industry Rank #95 and is in the top 38% of the 250+ Zacks industries.The group’s Zacks Industry Rank, which is essentially the average of the Zacks Ranks of all member stocks, points to a bright future ahead.Our research shows that the top 50% of industries on the Zacks Rank outperform the bottom 50% by more than 2 to 1.Before we introduce some stocks you might want to consider in your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.
The Zacks Steel Producers industry has underperformed both the Zacks S&P 500 and the broader Zacks Basic Materials industry over the past year.The industry fell 19.3% over the period, while the S&P 500 lost 9.2% and the industry as a whole fell 16%.
Based on the trailing 12-month enterprise value to EBITDA (EV/EBITDA) ratio, which is a common multiple for evaluating steel stocks, the sector is currently trading at 2.27 times, which is lower than the S&P 500′s 12.55 times and the industry’s 5.41 times X.Over the past five years, the industry has traded as high as 11.62X and as low as 2.19X with a median of 7.22X, as shown in the chart below.
Ternium: Luxembourg-based Ternium has a Zacks Rank #1 (Strong Buy) and is a leading Latin American producer of flat and long steel products.It is expected to benefit from strong demand for steel products and higher realized steel prices.Healthy demand from industrial customers and an improving auto market may help its shipments in Mexico.Healthy demand for construction materials is also expected to support shipments in Argentina.Ternium also benefits from the cost competitiveness of its facilities.Texas has also moved to increase liquidity and strengthen its finances in the wake of the pandemic.You can view the full list of today’s Zacks #1 Rank stocks here.The Zacks Consensus Estimate for Ternium’s current-year earnings has been revised up 39.3% over the past 60 days.Texas’ earnings have also beaten the Zacks Consensus Estimate over the trailing four quarters, averaging 22.4%.
Commercial Metals: Texas-based Commercial Metals, with a Zacks Rank #1, manufactures, recycles and sells steel and metal products, related materials and services.It benefited from strong steel demand stemming from a growing downstream backlog and the level of new construction work entering the project pipeline.It continues to witness strong demand for steel products in most end markets.A healthy construction market is likely to support strong rebar and wire rod demand in North America.Steel sales in Europe are expected to remain firm due to increased demand from construction and industrial end markets.CMC also continues to benefit from its ongoing network optimization efforts.It also has solid liquidity and financial profile and continues to focus on reducing debt.Commercial Metals has an expected earnings growth rate of 31.5% for the current fiscal year.The Zacks Consensus Estimate for CMC’s current fiscal year earnings has been revised up 42% over the past 60 days.The company also beat the Zacks Consensus Estimate in three of the trailing four quarters.It has an average return surprise of about 15.1% over this time frame.
Olympic Steel: Ohio-based Olympic Steel, with a Zacks Rank #1, is a leading metal service center focused on processing carbon, coated and stainless flat rolled, coil and plate, aluminum, tinplate of direct sales and distribution, and metal-intensive branded products.ZEUS benefited from its strong liquidity position, actions to reduce operating expenses, and strength in its Tubing and Specialty Metals businesses.Improved industrial market conditions and a rebound in demand are expected to support its sales.The company’s strong balance sheet also allows it to invest in higher-return growth opportunities.The Zacks Consensus Estimate for Olympic Steel’s current-year earnings has been revised up 84.1% over the past 60 days.ZEUS has also surpassed the Zacks Consensus Estimate in three of the trailing four quarters.It has an average return surprise of about 44.9% over this time frame.
TimkenSteel: Ohio-based TimkenSteel manufactures alloyed steels as well as carbon and microalloyed steels.Although semiconductor supply chain disruptions impacted shipments to mobile customers, the company benefited from higher industrial and energy demand and a favorable pricing environment.The industrial market for TMST is continuing to recover.Higher end-market demand and cost-cutting actions also contributed to its performance.It is benefiting from efforts to improve cost structure and manufacturing efficiency.TimkenSteel has a Zacks Rank #2 (Buy) and is expected to post earnings growth of 29.3% for the year.Consensus estimates for current-year earnings have been revised up 9.2% over the past 60 days.The TMST has beaten the Zacks Consensus Estimate in each of the trailing four quarters, averaging 39.8%.
Want the latest advice from Zacks Investment Research?Today, you can download the 7 best stocks for the next 30 days.Click to get this free report Ternium SA (TX): Free Stock Analysis Report Commercial Metals Company (CMC): Free Stock Analysis Report Olympic Steel, Inc. (ZEUS): Free Stock Analysis Report Timken Steel Corporation (TMST): Free Stock Analysis Report To read this article on Zacks.com, click here.
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