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Coronavirus has taken a heavy toll on most commodities this year and steel is no exception. A slowdown in demand across major end-use industries put a crimp on the steel industry for much of the first half of 2020. In particular, the pandemic dealt a fresh blow to the U.S. steel industry, which reeled under the effects of a sharp decline in domestic steel prices and the U.S.-China tariff war last year.
However, with China (the top consumer of steel) seeing an economic rebound and businesses gradually resume across the world following easing of lockdowns and restrictions, things are looking up for the steel industry for the remainder of the year. Recovery across major steel-consuming sectors such as automotive and construction augurs well for the steel industry.
China Rebound, End-Market Recovery Boost Prospects
China, which came out of the lockdown ahead of other countries, is clawing its way back from the pandemic-triggered slump. The world’s second-largest economy is slowly getting back on its feet, taking succour from government stimulus measures.
China’s manufacturing sector, which bore the brunt of the Sino-U.S. trade war for most part of 2019, suffered another shock amid the pandemic. Manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to blunt the spread of the virus.
However, manufacturing activities have picked up since then on a rebound in domestic demand and Beijing’s efforts to mitigate the impacts of the pandemic. China’s official manufacturing purchasing managers’ index (“PMI”) expanded for the sixth consecutive month in August on strength in its services sector. While the manufacturing PMI eased slightly to 51 from 51.1 in July due to flooding in parts of China, it remained in the expansion territory.
Moreover, China’s automotive sector is recuperating from the crisis wrought by coronavirus. Government stimulus including tax rebates and attractive discounts from automakers and dealers have revived consumer demand.
China’s car sales increased in August on continued easing of the impacts of the pandemic. Overall auto sales spiked 11.6% year over year last month to roughly 2.19 million units, per China Association of Automobile Manufacturers. Sales of commercial vehicles shot up 41.6% year over year while the same for passenger cars rose 6% for the month.
Government stimulus is likely to continue to cushion China’s economy moving ahead. Beijing is looking to rev up the economy with big infrastructure spending and is also taking steps to boost domestic consumption. China, earlier this year, unveiled a roughly $500 billion stimulus focused on tax cuts, infrastructure projects and job creation to get the economy back on track.
Notably, World Steel Association — the international trade body for the iron and steel industry — expects steel demand in China to be driven, in the second half of 2020, by the construction sector that has already attained full productivity. Construction is forecast to be supported by infrastructure investment driven by China’s new infrastructure push. The automotive industry is also expected to be backed by incentive measures.
As such, a recovery in construction and automotive sectors as well as manufacturing activities is expected to drive demand for steel in China through the second half.
The U.S manufacturing sector is also gaining momentum on a recovery in the overall economy as major parts of the country have reopened for business after coronavirus-led shutdowns. The recovery strengthened for the U.S. manufacturing sector in August with activities rising at the fastest pace since November 2018. According to the Institute for Supply Management, the U.S manufacturing PMI clocked 56% in August, rising from July’s reading of 54.2% on strong growth in new orders. A reading above 50 indicates expansion in activity.
Moreover, U.S. automakers began resuming production in May after a nearly two-month shutdown due to the virus crisis. The restart of production is likely to help resuscitate steel demand in this major market. Moreover, the resumption of many projects that were stalled earlier due to labor shortages and supply chain disruptions amid the pandemic is expected to support the revival in the U.S. construction sector. U.S. steel prices have also gained some ground of late on a recovery in end-market demand, especially in automotive.
Favorable Industry Rank
The Zacks Steel Producers industry currently carries a Zacks Industry Rank #81, which places it at the top 32% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
5 Steel Stocks Worth a Bet
The steel industry is expected to benefit from improving market conditions, aided by a recovery in China and revival of demand across major end-use industries. As the industry’s fundamentals are improving, it would be prudent to invest in steel stocks that have compelling prospects.
We highlight the following five steel stocks, with a solid Zacks rank, that are worth considering for investment right now.
L.B. Foster Company FSTR
The Pennsylvania-based company sports a Zacks Rank #1 (Strong Buy). It delivered an earnings surprise of 4,200% in the last reported quarter. The Zacks Consensus Estimate for the current year also has been revised 161.5% upward over the last 60 days. The stock is also up roughly 33% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.
Companhia Siderurgica Nacional SID
Brazil-based Companhia Siderurgica, carrying a Zacks Rank #2 (Buy), beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The consensus estimate for the current year has been revised 575% upward over the last 60 days. The stock has also shot up roughly 112% over the past six months.
Olympic Steel, Inc. ZEUS
Ohio-based Olympic Steel has a Zacks Rank #2. It delivered an earnings surprise of 34.5% in the last reported quarter. The Zacks Consensus Estimate for the current year has been revised 37.1% upward over the last 60 days. The stock is also up roughly 16% over the past six months.
Ternium S.A. TX
Luxembourg-based Ternium carries a Zacks Rank #2. It beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 137.2%. The consensus estimate for the current year also has been revised 300% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 9%. Its shares have also surged roughly 60% over the past six months.
TimkenSteel Corporation TMST
Ohio-based TimkenSteel carries a Zacks Rank #2. It has expected earnings growth of 22.4% for the current year. The Zacks Consensus Estimate for the current year has been revised 47.8% upward over the last 60 days. The company also delivered an earnings surprise of 28.3%, on average, over the trailing four quarters.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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National Steel Company (SID): Free Stock Analysis Report
Olympic Steel, Inc. (ZEUS): Free Stock Analysis Report
L.B. Foster Company (FSTR): Free Stock Analysis Report
Ternium S.A. (TX): Free Stock Analysis Report
Timken Steel Corporation (TMST): Free Stock Analysis Report
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