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Steel Industry Outlook: US Shows Resilience, China Lags

Per the latest data available from the World Steel Association, global steel
production increased 2.1% to 1,231 metric tons (Mt) in the first 9 months of
2014. China churned out 50% of the total at 550 Mt, an increase of 2.3% year
over year (yoy). Production in the European Union rose 2.9% to 128 Mt. United
States shared the podium holding the third position, with production climbing
2.3% to 91 Mt. Japan nudged up 0.8% to 83 Mt.

Given the
weaker-than-expected performance in the emerging and developing economies in the
first half of 2014, the World Steel Association has trimmed its short-range
outlook for global steel usage, which is now expected to increase 2% in 2014,
down from its prior forecast of 3.1%. For 2015, world steel demand is projected
to grow at the same pace and reach 1,562 Mt. A slowdown in China, due to the
structural transformation of the country’s economy, was mainly instrumental in
bringing down the outlook.

Economic slowdown in China — the largest
steel consumer, 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 is the country is expected
to cool down and rise only 1% in 2014, while declining further to 0.8% growth in

In Central and South America, falling commodity prices and delayed
structural reforms will affect steel demand. In Brazil, apparent steel usage
will decline as high inflation, overvalued currency, high labor costs and
infrastructure bottlenecks are curtailing investment activities. In the
Commonwealth of Independent States (CIS, also known as the Russian
Commonwealth), geopolitical tensions will constrain demand.

reports of weakness in the Euro-zone economy, particularly its leading economy
Germany, signal a slowdown in the much awaited recovery in the region. Companies
like ArcelorMittal (
MTAnalyst Report), which generates almost
half of its revenues from the region will be affected. Even United States Steel
Corp. (
XAnalyst Report) has significant
operations in Europe.

However, the picture is not so bleak everywhere.
Steel demand is expected to grow in the U.S., riding on the back of an improving
global economy, strong momentum in the automotive markets, demand in the energy
sector and a turnaround in the construction sector. India will also pick up the
pace driven by its construction and manufacturing sectors, and structural
reforms from the new government.

Much hope is pinned on India to act as the next growth driver, given its high
population and rapid urbanization. Demand in Japan will be up in 2014, aided by
governmental economic policies.

Sector Level Earnings

The third-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). As of date, 14.3%
of the stocks in the sector have reported their third-quarter numbers putting up
a 180.4% year-over-year increase in earnings on the scoreboard. The sector has
an impressive beat ratio (percentage of companies coming out with positive
surprises) of 66.7% so far.

Taking into account the other companies that
have yet to report their results, earnings of the Basic Material sector is
expected to go up 10.2% for the third quarter, up from the 8.6% increase in the
second quarter of 2014. Currently, the sector’s earnings are expected to witness
a 3.8% rise in the fourth quarter and 15.3% in first-quarter 2015. Overall, in
2014, the sector will log earnings growth of 8.7%, and accelerate to growth of
18.5% in 2015. (For a detailed look at the earnings outlook for this sector and
others, please read our
Earnings Trends
Industry Ranking: Overall

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
The way to align the ranking and outlook from the complete list
of Zacks Industry Rank for the 260+ companies is that the outlook for the top
one-third of the list (Zacks Industry Rank of #87 and lower) is positive, the
middle one-third (Zacks Industry Rank between #89 and #176) is neutral, while
the outlook for the bottom one-third (Zacks Industry Rank #174 and higher) is

The steel producers feature in the top tier with a Zacks
Industry Rank #69, indicating a positive outlook. The “steel-pipe and tube” and
“steel specialty” industries are currently in the bottom tier with Zacks
Industry Ranks of #249, indicating a negative outlook. Overall, the outlook for
the industry is weighted more toward negative.

Please note that the Zacks
Rank for stocks, which are at the core of our Industry Outlook, has an
impressive track record, verified by outside auditors, to foretell stock prices,
particularly over the short term (1 to 3 months). The rank, along with the
Expected Surprise Prediction (ESP) (Read:
Earnings ESP: A Better Way to Find Earnings Surprises
) helps in predicting
the probability of earnings surprises.

What’s in Store for the

Overall, steel industry will grow, but at a muted pace
supported by the automobile industry and construction sector as well as the
energy sectors.  Looking at the steel companies in our coverage, Nucor
Corporation (
NUEAnalyst Report), which is a key supplier
for real estate companies, and United States Steel Corp., a key supplier for
energy companies, will benefit from the strong end markets. Companies like
ArcelorMittal and AK Steel Holding Corporation (
AKSAnalyst Report) generate a large portion
of their revenues from auto companies.

China will continue to be a
deterrent factor and the slowdown in the European Union poses concern. We
believe recovery in steel pricing will be driven only by a reviving economy and
a rebound in construction activity in the U.S. and developing countries, China
and India in particular.

We expect M&A activity in the steel space to continue at a slow pace in
2014 until the price stabilizes and the industry strikes a balance between
supply and demand. However, M&A activity is the Indian steel industry is
expected to go up as the country is the world’s third-largest steel consumer and
has the potential to take the second spot.


Yaang Pipe Industry

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