The steel industry has started recovering after being out of favor for many years due to a revival in global demand from key end-markets and a rebound in steel prices with the reopening of economies. Moreover, with the arrival of an effective vaccine for coronavirus, steel demand is expected to increase significantly, as infrastructure projects will pick up pace.
The steel industry was one of the top priorities for Trump’s tariffs and trade policies. While experts do not see a tariff-cut when Biden assumes office, his infrastructure plan has an emphasis on “Buy American” projects. Consequently, the VanEck Vectors Steel ETF (SLX) gained 29.8% in the past month.
The global steel production volume is estimated to grow at a CAGR of 4.5% to reach 2175 million tonnes in 2024. With China being the only economy to register economic growth so far this year, the country will be at the forefront of the global steel supply.
Given this background, Arcelor Mittal (MT), Cleveland-Cliffs Inc.(CLF), and United States Steel Corporation (X) are three fundamentally strong steel stocks that are well-positioned to deliver hefty returns next year.
Arcelor Mittal (MT)
MT is the world’s leading steel and mining company that owns and operates steel manufacturing and mining facilities worldwide. The company primarily produces flat steel products and long steel products that are used in the automotive, energy, agriculture, heavy equipment, and transportation industry.MT has its steel manufacturing plants in nearly 18 countries that serve customers in over 160 countries. It operates through five segments –NAFTA, Europe, Brazil, AICS, Mining, and Others.
MT expects to achieve net-zero carbon emissions by 2050 by focusing on Hydrogen-DRI and Smart Carbon technologies. MT also completed its common share buyback program worth $500 million earlier last month as a part of its deleveraging objective. The company is expected to close the sale of its US operations to Cleveland-Cliffs (CLF) in the current quarter.
In the third quarter ended September 2020, MT reported net sales of $13.3billion, growing 21% sequentially. All steel segments saw improved demand with Brazil and ACIS showing particularly encouraging profitability improvement. Steel shipments for the quarter came in at 17.5 Mt compared to the quarter-ago value of 14.8 Mt. MT reported a loss of $0.21 per share, significantly improving from the quarter-ago loss of $0.50 per share.
The company will now offer its customers green steel by way of a certification system linked to CO2 savings that will be achieved through investment in decarbonization technologies, starting in 2020, with plans to scale up this offer to 600kt by 2022. Hence, analysts expect EPS to rise 213.1% next year and grow at a rate of 272.2% per annum in the next five years.
MT closed yesterday’s trading session at $18.16, gaining 3.5% year-to-date. The stock is up 33.5% in the past month and is currently trading just 3.9% below its 52-week high of $18.89.
How does MT stack up for the POWR Rating?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating
The stock is also ranked #1 out of 28 stocks in the Steel industry.
Cleveland-Cliffs Inc. (CLF)
CLF is a market leader engaged in the operations of iron ore worldwide. The company operates primarily through two segments-Mining & Pelletizing and Metallics. Both of these segments own operational iron ore mines. The company is headquartered in Cleveland, Ohio, and primarily supplies iron ore pellets from its mines and pellets plant in Michigan and Minnesota.
AK Steel, one of CLF’s subsidies, has recently been recognized as the 2019 supplier of the year by General Motors Company (GM) for maintaining the highest standards of quality, execution, innovation, and total enterprise cost.
For the third quarter ended September 2020, the company reported revenue of $1.6billion growing196.3% year-over-year. In the mining and pelletizing segment, the realized product revenue rate per ton increased 2.5% year-over-year to $98.06. However, the company reported a loss of $0.03 per share, which surpassed the consensus estimate by 66.7%.
CLF also received an antitrust clearance from the US Department of Justice to acquire MT’s US operations, enabling the company to carry out its successful expansion plan. This is going to significantly benefit the company’s bottom line next year. Hence, analysts expect EPS to rise 325.9% next year.
CLF closed yesterday’s trading session at $11.01, with a year-to-date gain of 31.1%. Moreover, the stock is presently trading just 5.1% below its 52-week high of $11.60.
CLF’s strong fundamentals are reflected in its POWR Rating, it has a “Strong Buy” rating with an “A” in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Within the Industrial-Metals industry, it is ranked #8 out of 33 stocks.
United States Steel Corporation (X)
X is one of the leading manufacturers and suppliers of steel products in North America and Europe. Based in Pittsburgh, Pennsylvania, the company primarily produces strip mill plates, tin mills, rounds, iron ore, spiral welded pipes, and heating radiators. It operates through three segments – Flat-Rolled Products, US Steel Europe, and Tubular Products.
X has recently closed a $63.4 million-worth Environmental Improvement Revenue Bonds to finance its low-emission and low carbon electric arc furnace in Alabama.
In the third quarter, the company’s net sales increased by 11.9% sequentially to $2.34 billion. The company’s US Steel Europe segment reported an EBIT of $13 million compared to the year-ago loss of $46 million. X doubled its steelmaking capacity from 1.65mnt to 3.3mnt. However, the company reported a loss of $1.21per share.
X has recently launched a start-up of its newly constructed and technologically advanced electric arc furnace (EAF) steelmaking facility at Fairfield, Alabama. The EAF incorporates the company’s mini-mill strategy. Hence, analysts expect EPS to rise by 76.7% next year.
With a year-to-date gain of 24.4%, X closed yesterday’s trading session at $14.19. The stock is presently trading 2.7% below its 52-week high of $14.88.
X is rated “Strong Buy” in our POWR Ratings system, consistent with the strength of the steel sector and its insulated business model. It also has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank. It is also ranked #8 out of 28 stocks in the Steel industry.
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MT shares were trading at $19.70 per share on Wednesday afternoon, up $0.27 (+1.39%). Year-to-date, MT has gained 12.31%, versus a 15.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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