Zacks Industry Outlook Highlights: Ford and General Motors
CHICAGO, Oct. 28, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Steel (part 3), including Ford (NYSE:F-Free Report) and General Motors (NYSE:GM-Free Report)
Industry: Steel (part 3)
Link: http://www.zacks.com/commentary/35030/trouble-ahead-for-steel-industry-stocks
For the steel industry, demand in the U.S has been solid and markets like India continue to display great growth prospects. Still, there are plenty of reasons to be careful in the steel industry stock space in the near term. Below, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.
Slowdown in China
Demand in China, that alone accounts for almost half of the total steel consumption has slowed down due to the country's tepid property market and weaker infrastructure investment growth. China's growth rate was in the double digits until 2008 and even during the global financial crisis steel consumption in the country increased, mainly due to infrastructure expansion. Subsidies from the Chinese government also provided a boost to the steel industry.
However, for 2014, the World Steel Association's has projected 1% growth in steel usage in China. This would be the second time in a decade that Chinese steel consumption grew at a slower rate than rest of the world.
Excess Capacity: Perennial Problem
The biggest obstacle in persistent growth and profitability of the steel industry is its excess capacity. The industry remains highly fragmented compared to other global businesses and the restructuring and consolidation needed to eliminate overcapacity is progressing at a slow pace.
Rise in Cheap Imports in the US
Even though steel demand has slowed, steel production is still increasing in China. The surplus enters the international markets. This was partly a result of the subsidies that the Chinese government provides to its steel industry as well as the devalued Chinese currency, which makes steel imports cheaper from the country. In September, China's steel exports have hit record levels at 7.14 million metric tons. These cheap imports hurt the margins of US steel players.
Low Crude Steel Capacity Utilization
The crude steel capacity utilization ratio in the Jan–Aug 2014 timeframe has remained stubbornly below 80%. In fact, the capacity utilization rate in August was the lowest so far this year at 74.2%. Even though, steel production is on the rise, the capacity utilization rate has gone downhill. Excess steel capacity has been a perennial problem for the steel industry and steel prices generally move in tandem with capacity utilization rates. To remain competitive, some major steel companies have idled steel plants in a bid to rationalize operations.
Increasing Use of Aluminum in Auto Industry Poses Threat
Currently, steel is the major raw material used by the auto industry, the second largest steel consumer. The major automakers like Ford (NYSE:F-Free Report), General Motors (NYSE:GM-Free Report) and others in specific and the industry as a whole is also becoming increasingly aluminum-intensive, given the metal's recyclability and light-weight properties. The global push to improve fuel efficiency in vehicles is expected to more than double the demand for aluminum in the auto industry by 2025. In order to remain competitive, steel companies have to come up with improved and lighter varieties of steel.
Slowdown in Europe
In terms of consumption, the European Union holds the second spot after China. The Euro-zone economy stalled in the second quarter, indicating that the region's much hoped recovery has lost momentum. Europe's growth engine, Germany, shrank for the first time in more than a year. The steel industry was counting on a recovery in the European Union. However, the slower-than-expected GDP growth rate was a negative for it.
Falling Iron Prices
This year, iron ore prices have been plummeting, losing more than 40% and tumbling to a 5-year low in September, due to continued slowdown in China, combined with a surge in supply. In the next few years, a wave of new supply of iron ore is slated to hit the market as the major iron ore producers are going gung ho with their expansion plans to augment production capacity. Brazil and India will also step up their exports. A combination of weak demand and oversupply will continue to pressure iron prices in the near term.
Bottom Line
As you can see, there are plenty of reasons to be pessimistic about the steel industry. But what about investing in the space right now, are there opportunities for short term investors?
Check out our latest Steel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.
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