Skip to Content
Stock Strategist Industry Reports

The Finest Steel Must Endure the Hottest Fire

Short-term headwinds portend an ugly 2015 for U.S. steelmakers, but stock prices imply overly bearish long-term expectations.

Mentioned: , , , , , ,

With U.S. GDP, construction spending, and industrial activity all on the upswing, one might surmise that 2015 is shaping up to be a banner year for the steel sector. But with weak crude prices undercutting demand from the energy sector and a wave of imports washing ashore, that's unlikely to be the case. We expect 2015 to mark a cyclical trough as spot prices fall and capacity utilization remains unfavorable. Thereafter, we expect a proliferation of strong, broad-based end-market demand to drive improved utilization and margin expansion as headwinds abate. On the basis of U.S. steelmakers' current valuations, the market assumes no such recovery, and we assert that U.S. steel stocks have been unjustly punished in recent months. We see attractive valuations across the space for long-term-oriented investors. Low-cost, lightly leveraged  Nucor (NUE) offers the best risk-adjusted return potential, as the company should have no problem navigating lower free cash flow in the near term as its direct-reduced iron project takes hold.

Elevated Import Volumes Unlikely to Moderate
We expect import volumes to rise further due to a historically high spread between U.S. steel prices and international steel prices and the impact of a strong U.S. dollar, which makes steel produced abroad more attractive on a relative cost basis. Monthly steel import volumes moved above 3 million metric tons last April and picked up as the relative value of the U.S. dollar picked up steam over the second half of 2014. Import volumes even briefly eclipsed the 4 megatonne mark in October, marking an all-time high. In 2014, monthly steel import volumes averaged 3.349 Mt, a 38% increase relative to the 2013 monthly average of 2.430 Mt.

Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.