Steel production and consumption stand as vital economic expansion markers. The constraints brought on by last year's macroeconomic challenges have reversed into significant growth potential, preparing the sector for enormous growth in the years to come by adopting new technologies and riding the wave of rapid urbanization.
To that end, it could be wise to invest in fundamentally sound steel stocks ArcelorMittal S.A. (MT), Commercial Metals Company (CMC), and Olympic Steel, Inc. (ZEUS), which hold the potential to yield substantial returns. Before delving into the highlighted stocks, let's explore the current dynamics of the steel industry.
Last year, the rebound from the pandemic's impact was hampered by elevated inflation, rising interest rates, the Russia-Ukraine conflict, and China's lockdowns. Consequently, industries reliant on steel witnessed reduced activity, resulting in a more severe contraction in demand than anticipated.
Nonetheless, steel finds extensive application across diverse sectors, including construction, automotive, manufacturing, and electrical appliances. The escalating demands of industrialization and urbanization are anticipated to drive steel requirements, potentially offsetting the adverse effects stemming from macroeconomic headwinds.
Beyond practical applications, advancements in rolling and casting procedures are anticipated to bolster industry expansion. Additionally, the sector is projected to receive a boost from the increasing demand for flat product variants among automakers.
The Bipartisan Infrastructure Law is also poised to impact steel demand. The legislation has initiated more than 3,700 bridge repair and replacement projects nationwide, commencing the mending of over 69,000 miles of roadway. This is amplifying the need for steel products employed in road and bridge construction.
As per the American Iron and Steel Institute (AISI), in June 2023, U.S. steel mills saw a 0.6% rise in shipments, reaching 7,655,692 net tons from 7,606,332 net tons in June 2022. Furthermore, for the week concluding on August 5, 2023, domestic raw steel production amounted to 1,727,000 net tons, denoting a 0.4% increase year-over-year.
The World Steel Association predicts a 2.3% rebound in steel demand this year, reaching 1,822.3 Mt. Forecasts indicate a 1.7% growth in 2024, reaching 1,854.0 Mt, driven by manufacturing's recovery. That said, as per ReportLinker, the steel manufacturing market will grow by $369.6 billion by 2027, accelerating at a CAGR of 4%.
Considering the favorable industry outlook, investing in robust steel stocks MT, CMC, and ZEUS, which are attracting notable investor interest, appears wise.
ArcelorMittal S.A. (MT)
Headquartered in Luxembourg City, Luxembourg, MT serves as an integrated steel and mining enterprise. It provides semi-finished flat goods and mining products, catering to diverse clients in the automotive, appliances, engineering, construction, energy, and machinery sectors.
On June 14, MT and John Cockerill, a pioneering group in steel processing and electrolyzer development, unveiled plans for the first industrial-scale low-temperature iron electrolysis plant, named Volteron™. The plant is expected to produce 40,000 to 80,000 tonnes of iron plates annually in its initial phase, with production commencing in 2027.
Direct electrolysis stands as a transformative, paradigm-shifting technology. While its maturation is essential, it holds the potential to revolutionize steel production by completely eliminating carbon emissions. This trajectory could position MT as a pioneer in this groundbreaking process.
On March 9, MT completed the $2.2 billion acquisition of Brazil's Companhia Siderúrgica do Pecém (CSP). CSP is a world-class operation, producing high-quality slabs with a three million tonne blast furnace and proximity to the Port of Pecém, a significant deep-water port.
This move positions MT to capitalize on rising steel demand, augmenting top-notch, cost-effective slab capacity. Also, MT's long-term prospects include capacity expansion and finishing facilities, along with a route to decarbonize via renewable energy investments.
For the second quarter that ended June 30, 2023, MT’s sales marginally increased quarter-over-quarter to $18.61 billion. Its operating income rose 61.5% from the prior quarter to $1.93 billion.
Also, net income attributable to equity holders of the parent grew 69.7% sequentially to $1.86 billion, while earnings per common share increased 73.2% from the previous period to $2.20.
Over the past three years, MT’s revenue grew at an 8% CAGR. Its EBITDA and total assets rose at CAGRs of 40.6% and 5.5%, respectively. Moreover, its levered cash flow increased at a CAGR of 2.2% during the same period.
Shares of MT have gained 9.4% over the past year to close the last trading session at $27.16.
MT’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
MT has a B grade for Sentiment and Value. It has ranked #9 in the A-rated 34-stock Steel industry.
In addition to the POWR Ratings I’ve just highlighted, you can see MT’s ratings for Growth, Momentum, Stability, and Quality here.
Commercial Metals Company (CMC)
CMC processes and markets ferrous and nonferrous scrap metals. It also supplies fabricated steel items for concrete reinforcement. Moreover, the company manufactures rebars, merchant bars, and wire rods. In addition, it markets fabricated rebars, wire meshes, assembled rebar cages, and related products from fabricated rebar.
On July 13, CMC acquired EDSCO Fasteners LLC from MiddleGround Capital, a leading provider of anchoring solutions for the electrical transmission sector. EDSCO is a concrete reinforcement anchor cage provider acclaimed for reliability and customer service excellence.
The acquisition is expected to enhance CMC's dominant stance in construction reinforcement while expanding its capabilities into burgeoning and novel applications.
Moreover, on May 1, the company announced the acquisition of a geosynthetics manufacturing facility from BOSTD - America. The Blackwell, Oklahoma-based site currently produces Tensar Geogrid's product lines under a contract arrangement. This move is expected to enhance CMC's supply chain flexibility and set the stage for cost-effective capacity expansion in the future.
During the third quarter that ended May 31, 2023, CMC’s North America segment’s adjusted EBITDA increased 6% year-over-year to $402.18 million. Its cash inflow from operating activities rose 286.6% from the year-ago value to $934.68 million.
In addition, as of May 31, 2023, the company’s total assets stood at $6.52 billion, compared to $6.24 billion as of August 31, 2022. Moreover, its total liabilities came in at $2.50 billion, down from $2.95 billion as of August 31, 2022.
CMC’s revenue grew at a 17.1% CAGR over the past three years. Its EBITDA and net income increased at CAGRs of 32.6% and 47.9%, respectively. Also, its total assets and levered cash flow rose at CAGRs of 18.1% and 8%, respectively, during the same time frame.
The stock has gained 37% over the past year, closing the last trading session at $56.18.
CMC’s positive prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
CMC has a B grade for Quality. It is ranked #13 in the 34-stock Steel industry.
Click here to access the additional CMC ratings (Growth, Value, Momentum, Stability, and Sentiment).
Olympic Steel, Inc. (ZEUS)
ZEUS is engaged in the processing, distribution, and storage of metal products. The company operates through three segments, Carbon Flat Products; Specialty Metals Flat Products; and Tubular and Pipe Products. It caters to metal-consuming sectors through a direct sales force.
On January 3, ZEUS announced the completion of its acquisition of Metal-Fab, Inc. Boasting over six decades of industry experience, Metal-Fab specializes in crafting venting and filtration solutions for residential, commercial, and industrial purposes which consist of coated carbon and stainless steel materials.
Metal-Fab's recession-resistant earnings model aligns seamlessly with ZEUS' strategic vision. Its manufacturing proficiency and product range harmonize effectively with ZEUS' expanding collection of metal-reliant end-use items. The synergy should bolster ZEUS' position through diversified products and increased manufacturing capabilities.
For the six months that ended June 30, 2023, ZEUS’ cash inflow from operating activities increased 66.1% year-over-year to $79.20 million. Its cash inflow from financing activities came in at $68.25 million, compared to a cash outflow of $42.32 million in the prior year’s period.
Moreover, as of June 30, 2023, the company’s cash and cash equivalents stood at $15.17 million, compared to $12.19 million as of December 31, 2022. Also, its total assets came in at $1.01 billion, compared to $891.63 million as of August 31, 2022.
Over the past three years, ZEUS’ revenue increased at a 20.7% CAGR. Its EBITDA and total assets grew at CAGRs of 92.5% and 16.4%, respectively. Furthermore, its levered cash flow rose at a CAGR of 35.6% during the same period.
Over the past year, the stock has gained 63.2%, closing the last trading session at $50.53.
ZEUS’ robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
ZEUS has a B grade for Quality and Value. It is ranked #12 out of 34 stocks within the same industry.
Click here to access additional ZEUS ratings for Growth, Stability, Momentum, and Sentiment.
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MT shares were trading at $27.04 per share on Wednesday afternoon, down $0.12 (-0.44%). Year-to-date, MT has gained 3.85%, versus a 17.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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