An Update on the Steel Industry

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

An Update

A while ago I wrote an article about why you should stay away from the steel industry. Here is an update since then. I said to stay away from US Steel (NYSE: X) and AK Holdings (NYSE: AKS) and that ArcelorMittal (NYSE: MT) was the best play out there because it traded below .5 of its book value and had a 5% dividend yield. So far I am two for three as AK Holdings has fallen by 15%, ArcelorMittal is up 15%, and US Steel (the one I got wrong) is up 22.5%. This is what is happening now in the steel industry.

Crushed Hopes But Growth "On Its Way"

In 2012 many were hoping for a rebound in the global economy and thus a rebound in steel consumption. That seemed not to be the case as growth in India, China, and Brazil all slowed down and Europe continued to murk through a recession. Steel consumption grew 6.2% in 2011, but that slowed down to 2.1% this year. Growth is expected to pick up a bit in 2013 to 3.2% according to the World Steel Association, but that remains to be seen with Europe's economy getting worse and with the US unable to break political gridlock. The steel industry is clearly feeling the pain of overcapacity, with AK Holdings down 48% YTD, ArcelorMittal, the world’s largest steel maker, down 7.5%, and US Steel down 13% YTD. But it's not all bad news, as Nucor Corp (NYSE: NUE) is actually up 7.25% YTD and Steel Dynamics (NASDAQ: STLD) is flat YTD. The reason why the steel industry is getting hurt is because of overcapacity.

Too Much Steel But Stimulus Measures Might Help

Right now steel mills are asking for 1.3605 (according to WSJ) to 1.55 (according to the WSA) billion tons fn steel, but 1.6326 billion metric tons are going to be produced. That leaves a glut of 80 to 270 million tons on top of the surplus already there. This has led steel prices to plummet. But there is a bright spot in this: A lot of fiscal stimulus measures are going to take place. There is China's large investment program, Indonesia’s $200 billion infrastructure build out over the next five years, and Japan's new leadership wants to pump billions into Japan's economy by increasing infrastructure spending.

All this will lead to increased steel demand, which will help soak up some of the surplus. Increased stability in Africa and the Middle East will increase steel demand. There is also strong growth in the United States, with steel demand expected to go from 96.5 million metric tons in 2012 to 100 million metric tons in 2013. Right now there is an 8.8 million metric ton surplus in the US, which is up 0.8% year over year.

China, Europe And Japan

China by far consumes the most steel, with 639.5 million metric tons expected to be used in 2012. China announced $1.74 trillion worth of infrastructure investments a few months ago, but analysts at Barclay's don't see this causing a "boom." While it will increase growth, it won't push China's GDP growth over 10% (into "miracle" territory). China's steel consumption is expected to grow to 659.2 million metric tons in 2013. Europe saw steel consumption fall 5.6% in 2012 to 144.5 million metric tons. That is expected to rise to 148 million metric tons in 2013, which is 2.4% growth.

I'm very skeptical of this growth due to rising unemployment, which now stands at 10.7% for the European Union. Japan's steel consumption is expected to grow by 2.2% in 2012 as Japan rebuilds and then fall by 2.9% due to a strong yen in 2013. But, with the election of Abe and his push to lower the yen to 120 for 1 US dollar, this could be reversed and provide some support for steel prices.

Final Thoughts

While the new fiscal measures will help out the steel industry in 2013, overcapacity will continue to plague the industry, and unless China starts rapidly growing expect low or negative margins for the near future. While steel makers are cutting down on production and curbing investment to build new plants, the industry is too fractured to "work together." The top five steel producers only make up 18.2% of total production. I would stay away from the steel industry until global GDP growth starts picking up again. That includes ArcelorMittal this time.

callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services recommend Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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