Steel-Producers Stock Outlook: More Upside In The Cards

- Jul 26, 2018-

       The steel producers industry that includes producers of a range of steel products seems to be in good health and poised for growth in the near term. In particular, prospects for the U.S. steel producers industry appear upbeat, courtesy of President Trump’s protectionist trade actions.

While the Trump administration’s move to slap a 25% tariff on steel imports has stoked concerns of a global trade war, there is no denying the fact that the tariffs have provided the much-needed protection to the American steel producers industry, which had long been grappling with the onslaught of cheap imports and has suffered significant reduction in production and employment.

The tariffs are expected to lead to lower imports into the United States, which would in turn boost demand for American steel and drive profitability of domestic steel producers. The tariffs are also expected to boost production capacity of U.S. steel makers amid lower imports.

The hefty tariffs would also give American steel producers more pricing power and help to level the playing field. Steel prices are on an upswing in the United States on the back of the trade tariffs, reflected by the recent run-up in benchmark hot-rolled prices. The pricing momentum is likely to continue in the near term, thereby providing a boost to margins of U.S. steel producers.

The steel producers industry is also poised to gain from an upturn in global steel demand. The World Steel Association ("WSA") -- the international trade body for the iron and steel industry -- predicts global steel demand to expand 1.8% in 2018 as favorable global economic scenario, a rebound in commodity prices and strong investment will drive steel demand in both developed and developing economies. The outlook for steel demand in the United States is strong, backed by strong investment and consumption triggered by rising income and low interest rates.

Industry Tops on Shareholder Returns  

The Zacks Steel Producers industry, which is a 25-stock group within the broader Zacks Basic Materials Sector, has outperformed the S&P 500 and its own sector over the past year. While the stocks in this industry have collectively gained 16.3%, the Zacks S&P 500 Composite and Zacks Basic Materials Sector have rallied 14.5% and 9.9%, respectively.

The outperformance can be attributed to a rally in U.S. steel stocks following the levy of trade tariffs on imports. The tariffs have provided a breather to American steel stocks and instilled optimism in the long-struggling U.S. steel industry. In fact, U.S. steel stocks have been gaining momentum since late 2017 on expectations of a broad-based trade action.

The Trump administration, in May 2018, moved ahead with tariffs on steel and aluminium imports from Canada, Mexico and the European Union (EU) following the expiration of temporary exemptions on these major U.S. allies. This is a welcome move as Canada and Mexico are two major sources of steel imports to the United States, together representing roughly a quarter of U.S. steel imports.

The trade tariffs appear to be bearing fruit as reflected by a decline in U.S. steel imports through the first half of 2018. While there are still uncertainties surrounding the tariffs, their impacts on imports are likely to be felt more deeply in the second half of 2018.

One-Year Price Performance

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