Zacks Industry Outlook Highlights Nucor Corporation, Steel Dynamics, Ternium and Olympic Steel

Chicago, IL – April 6, 2023 – Today, Zacks Equity Research discusses Nucor Corporation NUE, Steel Dynamics, Inc. STLD, Ternium S.A. TX and Olympic Steel, Inc. ZEUS.

Industry: Steel

Link: https://www.zacks.com/commentary/2074682/4-top-steel-producer-stocks-to-play-the-industry-strength

The Zacks Steel Producers industry is poised to ride on a recovery in demand in automotive, a major market, as the semiconductor crisis gradually eases and automakers ramp up production. The sizable infrastructure investment also augurs well for the U.S. steel industry. The companies in this space are also expected to benefit from a rebound in steel prices.

A resilient non-residential construction market and healthy demand in the energy space also act as tailwinds for the industry. Players from the industry like Nucor Corporation, Steel Dynamics, Inc., Ternium S.A. and Olympic Steel, Inc. are well-placed to gain from these trends.

The Zacks Steel Producers industry serves a vast spectrum of end-use industries such as automotive, construction, appliance, container, packaging, industrial machinery, mining equipment, transportation, and oil and gas with various steel products. These products include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets and blooms, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.

Steel is primarily produced using two methods — Blast Furnace and Electric Arc Furnace. It is regarded as the backbone of the manufacturing industry. The automotive and construction markets have historically been the largest consumers of steel. Notably, the housing and construction sector is the biggest consumer of steel, accounting for roughly half of the world's total consumption.

Demand Strength in Major End-use Markets: Steel producers are set to gain from strong demand across major steel end-use markets such as automotive, construction and machinery. They are expected to benefit from higher-order booking from the automotive market in 2023. Steel demand in automotive is expected to improve this year on the back of an easing of a global shortage in semiconductor chips that weighed heavily on the automotive industry for nearly two years.

Low dealer inventories and pent-up demand should also be supporting factors. Order activities in the non-residential construction market remain strong, underscoring the inherent strength of this industry. Demand in the energy sector has improved on the back of strength in oil and gas prices. Favorable trends across these markets augur well for the steel industry.

Auto Recovery, Infrastructure Spending to Drive Steel Prices: Steel prices witnessed a sharp correction globally in 2022 as the Russia-Ukraine conflict, skyrocketing energy costs in Europe, persistently high inflation, interest rate hikes and the slowdown in China due to new COVID-19 lockdowns dwindled demand for steel across key end-use markets. Notably, U.S. steel prices tumbled after surging to roughly $1,500 per short ton in April 2022 due to supply concerns stemming from the Russia-Ukraine war.

The benchmark hot-rolled coil ("HRC") prices cratered to near the $600 per short ton level in November 2022. The downward drift partly reflects weaker demand and fears of a recession. However, HRC prices have rebounded lately to above $1,000 per short ton, driven by U.S. steel mills’ price hike actions, low import levels, supply tightness partly due to mill outages and a recovery in demand.

A rebound in automotive demand is also expected to boost steel prices this year. The massive infrastructure development project should also act as a catalyst for the American steel industry and U.S. HRC prices in 2023. The sizable federal infrastructure spending should favor the U.S. steel industry, given the expected rise in consumption of the commodity.

Slowdown in China a Worry: Steel demand in China, the world's top consumer of the commodity, has softened since the second half of 2021 due to a slowdown in the country's economy. A downturn in the country's real estate sector contributed to the slowdown. New lockdowns are also taking a significant toll on the world's second-largest economy.

A slowdown in manufacturing activities has led to a contraction in demand for steel in China. The manufacturing sector has taken a beating as the virus resurgence has hurt demand for manufactured goods and supply chains. China has also seen a slowdown across the construction and property sectors. The country's real estate sector has taken a hard hit from repeated lockdowns. The slowdown in these key steel-consuming sectors is expected to hurt demand for steel over the short term.

The Zacks Steel Producers industry is part of the broader Zacks Basic Materials Sector. It carries a Zacks Industry Rank #33, which places it at the top 13% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. 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.

Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.

The Zacks Steel Producers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.

The industry has gained 4.1% over this period compared with the S&P 500's decline of 8.9% and the broader sector's decline of 8.4%.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing steel stocks, the industry is currently trading at 5.44X, below the S&P 500's 12.58X and the sector's 8.14X.

Over the past five years, the industry has traded as high as 11.84X, as low as 2.55X and at the median of 6.32X.

Nucor: Charlotte, NC-based Nucor, sporting a Zacks Rank #1 (Strong Buy), makes steel and steel products with operating facilities in the United States, Canada and Mexico. Nucor is expected to gain from the strength in the non-residential construction market and improved demand in automotive. Higher demand is expected to drive its shipments. Nucor should also gain from considerable market opportunities from its strategic investments in its most-significant growth projects. NUE remains committed to boosting production capacity, which should drive growth and strengthen its position as a low-cost producer.

Nucor's earnings beat the Zacks Consensus Estimate in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 7.7%, on average. The Zacks Consensus Estimate for 2023 earnings for NUE has been revised 13.6% upward over the past 60 days. You can see the complete list of today's Zacks #1 Rank stocks here.

Steel Dynamics: Based in Indiana, Steel Dynamics is a leading steel producer and metals recycler in the United States, sporting a Zacks Rank #1. It benefits from strong momentum in the non-residential construction sector driven by healthy customer order activity. Steel Dynamics is also currently executing a number of projects that should add to its capacity and boost profitability. STLD is ramping up operations at its Sinton Flat Roll Steel Mill. The planned investment in a new state-of-the-art low-carbon aluminum flat-rolled mill continues its strategic growth.

The consensus estimate for Steel Dynamics for 2023 has been revised 30.9% upward over the past 60 days. STLD also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 11.3%.

Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #1, is a leading metals service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin plate, and metal-intensive branded products. It is benefiting from its strong liquidity position, actions to lower operating expenses, and strength in its pipe and tube and specialty metals businesses.

Improving industrial market conditions and a rebound in demand are expected to support its volumes. The company's strong balance sheet also allows it to invest in higher-return growth opportunities.

The Zacks Consensus Estimate for Olympic Steel's 2023 earnings has been revised 33.1% upward over the past 60 days. ZEUS has also outpaced the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 26.2%.

Ternium: Based in Luxembourg, Ternium, carrying a Zacks Rank #2 (Buy), is a leading producer of flat and long steel products in Latin America. It is expected to benefit from strong demand for steel products. Its shipments in Mexico are likely to be aided by healthy demand from industrial and commercial customers.

A recovery in steel prices in the region is also likely to aid its results. The company is also seeing healthy demand in industrial and construction sectors in Argentina. Moreover, TX is benefiting from the cost competitiveness of its facilities. It is also taking actions to boost liquidity and strengthen its financial position.

The Zacks Consensus Estimate for Ternium's 2023 earnings has been revised 49.7% upward over the last 60 days. TX also beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 0.9%.

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