While the automobile and construction sectors boosted steel demand in the U.S. in 2014, surging steel imports and falling oil prices played major spoilsports for the industry. Moreover, the steel industry’s perennial concern -- overcapacity -- added fuel to the fire.
Per the World Steel Association, global steel production increased a meager 1.2% to 1,662 metric tons (Mt) in 2014. Among the top steel-producing countries, China was the clear winner, churning out 50% of the total at 823 Mt, an increase of 0.9% year over year (yoy). Also sharing the podium were Japan at 111 Mt (up 0.1% yoy) and United States, with production at 88 Mt, a 1.7% rise.
Economic slowdown in China, the largest steel consumer and 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 in is expected to rise only 0.8% in 2015 as per the World Steel Association’s short range outlook published in October last year.
In Central and South America, falling commodity prices and delayed structural reforms will affect steel demand. In Brazil, high inflation, overvalued currency, soaring labor costs and infrastructure bottlenecks are curtailing investment activities, which in turn will negatively impact steel demand. In the Commonwealth of Independent States (CIS, also known as the Russian Commonwealth), geopolitical tensions will constrain demand.
Apart from this, the European economy appears to be on a long road to recovery, as evident from the slight growth of 0.2% in Eurozone GDP in the third quarter of 2014. Germany and France, two of its largest economies, have avoided recession by a whisker.
Also, the eurozone’s current growth pace is only about half the potential growth rate and the GDP is still more than 2% below its level at the start of 2008. These adverse economic factors will affect companies like ArcelorMittal (NYSE:MT), which generates almost half of its revenues from the region and United States Steel (NYSE:X) that has significant operations in Europe.
Steel imports surged to alarmingly high levels in the back half of the year, which is a negative for steel plays like Steel Dynamics (NASDAQ:STLD), ArcelorMittal, AK Steel Holding (NYSE:AKS) and United States Steel (NYSE:X). And to top it all, the slump in oil prices had a negative impact on steel prices given the industry’s 10% exposure to the energy sector.
Steel demand of energy companies is expected to go down as exploration companies reduce their capital expenditure budgets. U.S Steel, which is the biggest supplier to energy companies in North America, along with AK Steel and ArcelorMittal would be impacted by the slowdown.
Iron, one of the primary raw materials for steelmakers, lost 50% of its value in 2014. Given that steel companies enter into long-term supply agreements with their suppliers, they could not take full advantage of lower iron ore prices.
As these supply agreements are renegotiated this year, they are likely to be executed at lower prices and help in reducing unit production costs of the steel players. While companies like ArcelorMittal and U.S. Steel that produce most of their iron ore requirements through captive mines are unlikely to benefit from this, companies like AK Steel will have a competitive edge as they are less vertically integrated.
However, an improving demand scenario in the United States gives a ray of hope. The housing market is expected to continue its good run in 2015 as the Fed will maintain its patient stance on interest rates. The automobile sector, which is the second largest steel consumer, will also benefit immensely from the lower gasoline prices and strong job market.
Looking at the steel companies in our coverage, Nucor Corporation (NYSE:NUE), which is a key supplier for real estate companies, as well as ArcelorMittal and AK Steel generate a large portion of their revenues from auto companies. Much hope is pinned on India, which is expected to act as the next growth driver riding on the back of its construction and manufacturing sectors, rapid urbanization and structural reforms from the new government.
Sector Level Earnings Trend
The fourth-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). Currently, 42.9% of the stocks in the sector have reported their fourth-quarter results. The sector’s 10% year-over-year decline in earnings shows that it has not fared well on the scoreboard.
Taking into account the other companies that are yet to report their results, earnings of the Basic Material sector is expected to decline 4.8% for the fourth quarter, drastically down from the 17.6% increase in the third quarter of 2014.
Going forward, the sector will recover with 3.2% rise in the first quarter of 2015 and 7.8% in the second. However, earnings are again projected to decline 0.2% in third-quarter 2015 and surge 17.7% in the fourth quarter.
Overall, in 2014, the sector will log earnings growth of 1.5% and accelerate to growth of 9.2% in 2015.
Industry Ranking: 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 258+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (Zacks Industry Rank between #87 and #172) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #173 and higher) is negative.
The steel industry in lounging in the bottom tier with the “steel producers” with a Zacks Industry Rank #221, “steel-pipe and tube” and “steel specialty” industries with Rank #245. This indicates a negative outlook.
What’s in Store for the Industry?
Steel demand in the U.S. is expected to grow on the back of an improving economy, strong momentum in the automotive markets and a turnaround in the construction sector. However, the energy sector’s steel demand could be subdued in 2015, given the trending low oil prices.
While India will pick up pace, China will continue to be a deterrent. The slowdown in the European Union also poses concern. The steel industry will certainly grow, albeit at a muted pace. We believe recovery in steel pricing will be driven by a reviving economy and a rebound in construction activity in the U.S. and developing countries, China and India in particular.