The Zacks Steel Producers industry serves a wide range of end-use industries such as automotive, construction, appliance, container, industrial machinery, transportation, and oil and gas with various steel products. These include hot-rolled and cold-rolled coils and sheets, hot-dipped and galvanized coils and sheets, reinforcing bars, billets, wire rods, strip mill plates, standard and line pipe, and mechanical tubing products.
Here are the industry’s three major themes:
• Sluggish steel demand poses problems for the steel producers industry. The trade war-induced slowdown in China’s economy has triggered a contraction in steel demand in China, the world’s top consumer. Signs of weakness across the country’s major steel end-use markets — construction and automotive — as reflected by sluggish real-estate investment growth and falling car sales have clouded the steel demand outlook. The world’s largest automobile market contracted for the second straight year in 2019 amid a slowing domestic economy and tariff war with the United States. A weakening manufacturing sector is also expected to limit steel demand growth in the United States. While the de-escalation in trade tensions due to the recent announcement of the preliminary trade deal offers a glimmer of hope, a material improvement in the demand environment for steel is not expected anytime soon given the global economic slowdown.
• The industry continues to reel under the effects of sustained oversupply of steel in the market, made worse by continued growth in Chinese production. China, which accounts for roughly half of the global steel output, is a significant contributor to global steel excess capacity. Notwithstanding a slowdown in the Chinese economy and Beijing’s efforts to cut steel capacity, its steel mills continue to crank up output to take advantage of healthy profit margins. Chinese production increased at a fast pace during 2019. A glut of cheap Chinese steel has put downward pressure on both its own and global steel prices. China’s steel overcapacity remains an overhang for the industry over the near term.
• The 25% tariff on steel imports, which the Trump administration levied last year, drove up production capacity of U.S. steel producers. Improved capacity also provided a boost to domestic steel production. However, higher production, partly driven by restarted mills, contributed to the sharp decline in U.S. steel prices last year. In fact, after rallying to multi-year highs in 2018 on the back of Trump-imposed tariffs, U.S. steel prices fell back to the pre-tariff levels in 2019. Sliding steel prices, softening demand across major domestic end-markets and trade tensions weighed on U.S. steel producers last year. Driven by consecutive price hike actions by major U.S. steel mills and supply-side actions, U.S. steel prices have lately gained some traction. However, a significant recovery in prices is not expected over the near term given the oversupply in the market and weak domestic steel demand.