Despite the ongoing growth of many developed economies, the US steel market share is likely to grow at a slower rate in 2019. The market had a somber start to the year, and US prices for almost all products fell as the year progressed. All major companies witnessed a 52-week low in May due to the escalation in the US-China trade war. However, the steel stocks saw a sharp rally in June, helping companies overcome some of their losses. Also, President Trump’s announcement to make significant investments in the infrastructure are likely to support steel consumption in the US. But such initiatives by the government are less likely to materialize, given the US tax bill passed in December 2017, which would result in 1.5 trillion decreases in the US budget’s revenue over the next decade.
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US Steel Industry Outlook
Section 232 tariffs
Section 232 tariffs imposed by President Trump during last year has led to some sort of rejuvenation for companies in the US steel market. Higher cash flows have allowed companies to try their hands at everything – from buybacks to greenfield growth projects. The US steel market also doubled down on its plan to modernize its aging plants and resumed some of the abandoned projects. However, the current market scenario doesn’t seem to favor the companies much as US steel prices have been trending downwards since the second half of 2018. The prices fell sharply this year and reached below the tariff-paid steel imports. This clearly predicts a tough terrain for companies as US steel buyers have went light in steel buying anticipating prices to fall further.
Apart from analyzing steel market price trends and tariffs, companies need to consider the domestic demand-supply environment as well. For instance, the construction sector is one of the largest end consumers of steel. The fall in new homes sales for May and June and the moderation of the nonresidential sector can impact the US steel market. Moreover, the automotive sector, another leading steel consumer, has also shown signs of moderation. So, it is recommended that US steel mills should lower output to maintain the demand-supply equation.
Inability to maintain the demand-supply equation can result in major losses for companies in the US steel market. Stay a step ahead by requesting a free demo of our procurement platform and gain exclusive insights regarding the US steel market.
US-China trade talks
The US-China trade talks are expected to bring some momentum to US steel prices. The infrastructure plans touted by the government in its campaign can lift the US steel market, that has shown some signs of moderation. Also, the massive investment by US steel companies into greenfield project may lift the shipment profile once they start coming online in the next decade. Thus, the US steel market can expect to realize significant cost advantages after 2020.
Considering the valuation multiples, steel stocks appear to be in line with the long-term multiples. However, the forward valuation multiples are ultimately a function of analysts’ earnings estimates and they base their estimates on steel prices forecast. As a result, valuation multiples of steel companies tend to spike near the bottom of the cycle and get subdued at cyclical highs. Still, we can expect some traction in US steel prices.