Steel Producers Extend Their One-Year Gains On Strong Demand

Earnings and revenue growth are returning to the steel industry, boosting stocks like Steel Dynamics NASDAQ: STLD, Nucor NYSE: NUE and Arcelor Mittal NYSE: MT. 

We can use the VanEck Vectors Steel ETF NYSEARCA: SLX as a proxy for industrywide performance. The ETF, which tracks the NYSEARCA Steel Index. The ETF is up 29.31% year-to-date and 84.25% over the past year, although it’s down 3.66% for the month of May. 

However, global manufacturing overcapacity is a hurdle. 

In recent years, a growing number of tariffs and steel industry restrictions reduced imports from overseas producers into the U.S. The pandemic complicated the issue, with steel producers’ customers temporarily closed their factories or drastically reduced capacity. 

However, demand for goods bounced back much faster than many had expected back in the spring of 2020, meaning steel producers faced high demand, while global supply chains are still struggling. 

The U.S. and European Union are set to begin discussions about capacity and tariffs. 

Arcelor Mittal, the Luxembourg-based large-cap steel producer, published information about the talks on its Web site.  

“Unfairly traded imports have a dramatic impact on our ability to command fair prices for our products and operate our facilities at sustainable levels. At the heart of the issue is global excess capacity, driven by government subsidies and other trade distortions,” the company said.

It noted that global steel production more than doubled, increasing to 2 billion tons in 2019 from 936 million tons in 2000. 

“Almost all of it has been attributed to growth outside of the United States, which has seen its share of global production shift from 12% in 2000, to 5% in 2019,” said Arcelor Mittal. “While the U.S. has increased production in each of the last three years, global production has increased at a faster rate, leaving the U.S. unable to capture additional share.”

Arcelor Mittal added that Chinese steel production in China exceeded one billion tons for two years in a row, increasing by 8% to 1.1 billion tons in 2019. “China’s production in 2019 was nearly eight times their production in 2000 (142 million tons). Chinese steel production now represents over half (53%) of global production,” the company said.

So what has this meant for the performance of Arcelor or its steel-industry peers? 

Arcelor, which is the world’s largest steelmaker, produces semi-finished and finished steel products for the automotive and appliance industries. The stock is up 43.76% year-to-date and 286.84% over the past year. Shares are trading between $32 and $33, finding support above their 10-day moving average. 

The company reported first-quarter results on May 6, reporting earnings per share of $1.93 on revenue of $16.2 billion, both up from the year-ago quarter. The company beat analysts’ views on the top- and bottom lines. 

Shares are currently extended beyond a buy point, but the pullback to the 10-day line may offer a buy opportunity.

Fellow large-cap steel maker Nucor has been on a tear since its earnings report on April 22, advancing more than 33% since then. The stock vaulted 20% the week ended May 7. Upside trading volume is already heavier-than-normal for the month, with nine trading days still to come. 

Charlotte, North Carolina-based Nucor has a similar customer base in the automotive and appliance markets. It also sells to the construction and machinery industries. 

The company reported earnings per share of $3.10, up $2.13 from the previous year. Revenue was $7 billion, up 25%. Both numbers came in below estimates, yet the company touted strong demand, which sent investors scurrying to pick up shares. 

Nucor is extended well beyond a buy point, so it’s best to wait for a moving average pullback before initiating a purchase. 

Indiana-based Steel Dynamics, with a market cap of $13.37 billion, is also following the trend of steelmakers zooming higher in the past few months. The stock is up 75.75% year-to-date and 191.07% in the past year. Shares closed Tuesday at $63.29.

Here, too, the story driving growth is increased demand. Steel Dynamics recycles scrap metal to create rolled products for the construction and automotive industries. It also makes structural beams and other materials, and rails for North American railroads. The company was founded by three executives who previously worked at Nucor. 

Steel Dynamics has also seen increased sales and earnings in the past two quarters, as the company rebounds from the industry-wide slowdown that began two years ago. Shares are finding support at their 10-day moving average, which could offer a buy opportunity. However, investors who take a position now should be prepared for another interim pullback, as shares are currently extended.