Steel Prices Set for Upturn on War-Led Supply Crunch: 5 Top Picks

The steel industry hit a speed bump after a bumper 2021 as steel prices cooled off after catapulting to all-time highs last year. The pullback is partly due to the improved supply-side situation driven by a rise in production, partly due to the restart of idled capacity.

Record-high prices allowed steel makers to rack up strong profits last year. However, steel prices started to retreat from the fourth-quarter of 2021, dragged down by shorter lead times and improved supply. The price decline has accelerated since the beginning of 2022.

Nevertheless, steel prices are likely to have bottomed out and look set to reverse the downward spiral as the ongoing Russia-Ukraine conflict has hit the global supply chain. This scenario bodes well for steel stocks like Nucor Corporation NUE, Olympic Steel, Inc. ZEUS, TimkenSteel Corporation TMST, Commercial Metals Company CMC and Gerdau S.A. GGB.

Russia-Ukraine Crisis to Trigger Price Surge

Steel prices escalated to historic highs last year on solid demand, higher raw material costs, tight supply and low steel supply-chain inventories globally. U.S. steel prices witnessed an unprecedented surge in 2021 on demand-supply imbalance. The benchmark hot-rolled coil (“HRC”) prices broke above the $1,900 per short ton level in August 2021 on supply tightness and robust demand. HRC prices hit a record high of $1,960 per short ton in late September, according to S&P Global Platts.

Strong pent-up demand for steel fueled a rally in steel prices in 2021. However, demand growth has slowed in the United States and globally. Demand stabilization has contributed to shorter lead times, thereby putting pressure on prices.

HRC prices lost steam since October after peaking in September 2021. Steel production rose as more capacity was brought online, partly driven by the completion of scheduled maintenances by steel mills in the final quarter of 2021. Higher steel imports also exerted downward pressure on U.S. steel prices. The strong price arbitrage triggered more steel shipments to U.S. shores despite the hefty tariffs. HRC prices, which are currently hovering above $1,100 per short ton, are down more than 40% from their September high.

However, on a positive note, global steel prices are moving up since Russia's invasion of Ukraine on supply concerns. Steel prices have witnessed a significant rally in Europe as the war threatened supplies from the two important producing nations. Both Russia and Ukraine are key producers and suppliers of steel and steel-making raw materials, including coking coal and pig iron. U.S. steel prices are also going up of late amid the supply worries.

The ongoing conflict has also led to a spike in steel input costs due to the disruptions in the supply chains. Several producers of steel and key inputs in Ukraine have idled their operations amid the Russian invasion. Supplies from Russia have also been affected by the war and the implementation of sanctions. Notably, both these countries account for a big chunk of pig iron supply to the U.S. steel industry.

The supply disruption of pig iron comes at a time when U.S. steelmakers are reeling from a steep increase in costs of scrap, the main raw material of electric arc furnace (“EAF”) steelmaking, due to high demand and short supply. EAF accounts for more than 70% of steel production in the United States, per the American Iron and Steel Institute. Some of the U.S. steelmakers are taking price hike actions in the wake of soaring raw material costs. More price increases are expected as steel producers scramble to tackle the rising input costs. Steel prices are, thus, expected to further tick higher in the coming weeks and months due to the strained supply situation. 

5 Steel Stocks to Snap Up

The prospects of an upswing in steel prices augur well for the steel industry, which has lost some momentum after having a banner year in 2021. As such, it would be prudent to add some steel stocks that offer compelling prospects. Here we pick five steel stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Nucor: Charlotte, NC-based Nucor, carrying a Zacks Rank #1, is benefiting from strength in the non-residential construction market and a recovery in the automotive market. The company is also seeing strength in heavy and agriculture equipment and improved conditions in energy markets. Higher demand is supporting its shipments. NUE should also gain from its strategic investments in its most-significant growth projects. It remains committed to boosting production capacity, which should drive profitable growth and strengthen its position as a low-cost producer.

The Zacks Consensus Estimate for Nucor’s current-year earnings has been revised 22.7% upward over the past 60 days. NUE has a trailing four-quarter earnings surprise of roughly 0.8%, on average.

Olympic Steel: Ohio-based Olympic Steel, carrying a Zacks Rank #1, 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. ZEUS’s strong balance sheet also allows it to invest in higher-return growth opportunities.

The Zacks Consensus Estimate for Olympic Steel’s current-year earnings has been revised 39.1% upward over the last 60 days. ZEUS has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 49.7%.

TimkenSteel: Ohio-based TimkenSteel carries a Zacks Rank #1.  The company is benefiting from higher industrial and energy demand and a strong pricing environment notwithstanding the semiconductor supply-chain disruptions that are affecting shipments to mobile customers. TMST is seeing continued recovery in its industrial markets. Higher end-market demand and cost-reduction actions are also aiding its performance. It is benefiting from its efforts to improve its cost structure and manufacturing efficiency.

TimkenSteel has an expected earnings growth rate of 2.8% for the current year. The consensus estimate for current-year earnings has been revised 8.2% upward over the past 60 days. TMST surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 41.3%.

Commercial Metals: Texas-based Commercial Metals, carrying a Zacks Rank #2, is gaining from robust steel demand, driven by elevated spending on the residential and construction sector in North America and recovery in the manufacturing sector. It continues to witness stellar demand for steel products across most end markets. In North America, the company is gaining from strong rebar demand, supported by solid construction growth and robust merchant bar and wire rod demand. Strength across the key end markets in both North America and Europe is supporting solid steel sales volumes. CMC also continues to gain from its ongoing network optimization efforts. It also has solid liquidity and financial positions, and remains focused on reducing debt.

Commercial Metals has expected earnings growth of 62% for the current fiscal year. The Zacks Consensus Estimate for the current fiscal-year earnings for CMC has been revised 22.7% upward over the past 60 days. The company has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 13.1%.

Gerdau: Brazil-based Gerdau, carrying a Zacks Rank #2, is benefiting from healthy demand for steel in its key operations, which is supporting its volumes. A recovery in major consumer sectors is driving its steel shipments. The strong performance of the construction industry in Brazil and the United States along with higher global steel prices are also driving its margins. The company is seeing higher production and shipments in its Brazil and North America business divisions on higher demand from the construction and industrial sectors. A recovery in light vehicle production in Brazil and the United States, along with the healthy performance of the heavy vehicle sector in Brazil is also supporting volumes in its Special Steel division. GGB is also gaining from a gradual recovery in demand from the oil and gas industry.

The consensus estimate for the current-year earnings for Gerdau has been revised 13.9% upward over the last 60 days. It has a trailing four-quarter earnings surprise of roughly 21.9%, on average. GGB also has an expected long-term earnings per share growth rate of 21.6%.

5 Stocks Set to Double

Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.