Zacks Industry Outlook Highlights: ArcelorMittal, United States Steel, Nucor, AK Steel and Nippon Steel & Sumitomo Metal

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Feb 15, 2013, 09:30 ET

CHICAGO, Feb. 15, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Metals & Mining, including ArcelorMittal (NYSE:MT), United States Steel (NYSE:X), Nucor (NYSE:NUE), AK Steel (NYSE:AKS) and Nippon Steel & Sumitomo Metal Corporation (OTC:NSSMY).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at

Link: http://www.zacks.com/commentary/25884/metals-amp-mining-stock-outlook-feb-2013

The automotive and construction markets have historically been the largest consumers of steel. The automotive sector has been promising in recent times. Auto sales in the U.S. surged 13% to 14.5 million vehicles in Dec 2012, the highest volume attained in the last five years. The seasonally adjusted annual rate (SAAR) in December was 15.4 million vehicles, the second straight month of above 15 million SAAR in 2012. This performance will likely generate solid momentum going into 2013.

The robust growth rate in the sector has been fueled by strong pent-up demand, cheap financing, launch of several redesigned and fuel-efficient vehicles and rebound in consumer confidence thanks to a growing belief that the housing market is recovering.

Another major market, the construction sector, has so far been a drag on the steel companies' earnings. However, in 2012, the sector finally started picking up began signaling a recovery evidenced by solid growth in the major indicators.

The architecture billing index (ABI), an economic indicator that provides an approximate nine- to twelve-month glimpse into the future of non-residential construction spending activity, climbed back into the positive territory with a score of 50.2 in August after languishing in the negative territory for five consecutive months. Any score above 50 indicates an increase in billings and the score has remained stable till December.

The ABI readings in the fourth quarter of 2012, in fact, exhibited the strongest growth since the downturn in early 2008. This momentum is expected to persist and conditions are expected improve, albeit at a slow and steady rate.

The American Institute of Architects projects a 5% increase in spending in 2013 for non-residential construction projects, on the back of higher construction of commercial facilities, particularly for hotels followed by industrial construction spending. The spending is expected to shore up to 7.2% in 2014.

Meanwhile, the residential housing sector is also showing signs of positive growth with figures at highest levels in more than four years. In 2012, housing starts totaled 780,000, surging 28% from 2011 and housing permits (an indicator of future demand) escalated 30% to 813,000. Both attained their respective highest level since 2008. Housing completions rose 11% to 651,000 in 2012, the highest level since 2010.

According to the most recent most issued data, in December housing starts spiked 37% year over year to a seasonally adjusted annual rate of 954,000. Building permits were at a seasonally adjusted annual rate of 903,000, 29% higher than the year-ago figure.

In a nutshell, record-low mortgage rates, rising rents and reduced prices of properties are luring buyers. These figures reinforce the belief that U.S. residential construction is finally stabilizing and is on the road to a much awaited recovery.

Analyzing the fourth quarter results of the major steel companies in our coverage -- ArcelorMittal (NYSE:MT), United States Steel (NYSE:X), Nucor (NYSE:NUE) and AK Steel (NYSE:AKS) -- we see revenues were marred by the drop in average steel prices. This does not come as a surprise as oversupply in the U.S. steel industry and increased steel imports in the domestic market affected steel prices, which in turn hurt margins and profits of the steel players. Furthermore, the gloomy macroeconomic condition in Europe is another area of concern as it is the largest market for total U.S. exports.

Given the scenario in Europe, ArcelorMittal, the world's largest steelmaker in terms of volume and Europe's largest steelmaker, recently announced its plans to permanently close its plant in Liege, Belgium owing to the slack demand and weakening European economy. The company also announced the idling of its liquid phase in Oct 2011 due to structural over-capacity in Northern Europe. The production halt at the Liege plant was done to better focus on the company's downstream activities, operating five core lines and seven flexible lines.

However, economic conditions worsened since then and demand for steel in Europe declined another 8%-9% in 2012 and is currently 29% below the pre-crisis levels. The Leige business is heavily dependent on the automotive sector, which faced a major downturn in 2012. Consequently, tepid demand also had a hand in idling of the facility and ArcelorMittal further stated that it will close six production lines at Liege that manufacture finished steel products for the auto industry. It is also closing a coke plant, which produces fuel for blast furnaces.

Going into 2013, steelmakers expect profits to be affected by continued increase in steel imports, volatility in steel pricing along with macroeconomic uncertainty stemming from the recessionary conditions in Europe and sluggish growth in the emerging markets.

However, the sector will benefit from the strong momentum in the automotive markets. The outlook for other key markets -- transportation, energy, industrial and agricultural sectors also remains favorable. The turnaround in the so-far faltering construction sector will definitely provide a much-needed impetus to the sector.

Steelmakers are increasing their consolidation efforts, particularly in China and India, to derive economies of scale and other synergies to remain competitive. A major development in this sector was the recent merger of Japan's largest and the world's sixth-largest steel maker Nippon Steel Corporation with Sumitomo Metal Industries to form the world's second biggest steel firm -- Nippon Steel & Sumitomo Metal Corporation (OTC:NSSMY). With a combined capacity of 46.1 million tons, it has replaced China's Hebei Group in the second position, with production of 44.4 million tons. The merger is targeted to generate savings in the face of increasingly intense global competition.

China's recent attempt to bolster its economy by approving 60 infrastructure projects worth more than $150 billion will help bolster the steel sector. Prices could potentially stabilize on the back of a rebound in construction activity in the developing countries, in particular China, India and South Korea. Furthermore, the sector will reap the benefits of the Federal Reserve's move to boost the U.S economy. However, the European debt crisis and its potential global impact remain headwinds for the industry.

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