It took eight months for U.S. steel prices to plunge 16% last year -- dropping to $382 a ton in December for hot-rolled band steel, down from $457 in April 2015.
The other shoe dropped the following month, when IBD's Steel-Producers and Steel-Specialty Alloys groups fell to their lowest levels since March 2009.
But that was then, and this is now. The resilient material made by forging iron ore with various alloys began rebounding early this year and is currently priced at about $616 a ton, a 61% increase from the December low, according to SteelBenchmarker.
China is now a tailwind for the U.S. steel industry, or at least it is no longer such a heavy headwind. Meanwhile, aerospace industry demand for steel, especially specialty products, is rising, and auto production remains at high levels. Construction is strong in both residential and commercial real estate.
"Global steel prices will remain subdued due to a persistent steel oversupply over the coming quarters," the market tracker said in a July 1 report. "From 2017 onward, steel prices will gradually edge higher as the global surplus will narrow due to Chinese supply cutbacks."
Still, there are a number of companies worth watching. Steel Dynamics (STLD), the top-rated U.S.-based steel maker in the 17-company IBD Steel Producers group, and specialty steel makers such as Allegheny Technologies (ATI) and Carpenter Technology (CRS) are forging a rally this year.
Mainstream companies like Steel Dynamics sell standard steel in a variety of forms. Specialty firms combine iron with alloys to make specific varieties such as stainless steel, titanium steel and other variants.
Steel makers have cut costs. Employment in the broader metals industry has fallen from a near-term peak of 402,600 in January 2015 to 375,500 in July 2016, Bureau of Labor Statistics data show.
As steel prices continue to rise, companies will likely begin rehiring, but that may not happen until next year, according to a BMI Research report.
China
China buys the lion's share of the world's metals to make the appliances and electronics it ships globally, as well as for its own infrastructure build-out. As its economy has decelerated and begun to shift from manufacturing to consumers and services, China is buying fewer commodities, driving prices down.
"The Chinese subsidized their steel industry" to keep prices low, said Greenfield. "Stainless steel business, for example, has been really bad because of an unprecedented amount of imports from China in 2015 that took the base price way down."
China's government has called for cutting capacity at state-owned steel giants, but with little apparent success.
"China's economic planning agency said the country should quicken the pace of capacity reductions in steel," the Aug. 16 Reuters Oil Report said, adding, "China's steel capacity cuts in the first seven months of the year are behind schedule," amounting to just 47% of the target for 2016.
China's companies have sold their excess output on the world market at low prices. The U.S. government -- and domestic steel industry -- says China is illegally dumping. In March, the Commerce Department issued preliminary duties of 265.79% on imports of cold-rolled steel from China. A final ruling is expected by end of this year.
"Since the start of the year, China data have been stronger than expected. They have had some stimulus that helped propel the demand side, and that's helped push metals prices along," Deutsche Bank analyst Chris Terry told IBD.
Steel Stocks Double
Stocks of Steel Dynamics and others in IBD's Steel Producers group collectively saw a powerful 119% gain from a Jan. 20 low to a July 18 high when they began consolidating. The group is ranked a lofty 9 on IBD's list of 197 industries, up from a dismal 139 rank six months ago.
Last quarter, its sales grew after shrinking four quarters in a row. The turnaround in earnings has been even more profound: After reporting year-over-year declines in earnings per share of 29%, 34% and 75% in the respective last three quarters of 2015, Steel Dynamics reported a 53% surge in first-quarter earnings, followed by a 164% bump up in the second quarter. Consensus is for a 184% pop this quarter.
Chief Executive Mark Millett told analysts on Steel Dynamics' second-quarter earnings call on July 19 that the macroeconomic environment has improved.
"Reduced imports, idling of domestic capacity and relatively higher global pricing, along with steady demand and rebalanced supply chain inventory, have created a positive pricing and volume environment for flat-roll (steel) products," Millett said.
S&P Capital IQ analyst Matthew Miller has a "strong buy" rating on Steel Dynamics with a 31 target, citing favorable end-market demand from construction, as well as from the automotive industry, which produced a record 17.47 million vehicles last year. Shares ended trading Monday up 1.1% to 24.89 in the stock market today.
Gains In Specialty Group
Allegheny Technologies and Carpenter are the highest-rated U.S. companies in the eight-company Steel-Specialty Alloys group, ranked 37th on IBD's industries list. Stocks in that group have collectively risen 72% since Jan. 20.
S&P Capital's Miller prefers steel makers that are specializing.
"We have favored those companies that have had a strategy to get away from commodity prices, turning to high-value products tied to the aerospace and auto markets," Miller told IBD. "We expect 2016 to begin a long period of secular growth" for specialty metals.
Allegheny's recovery is in sight. Although it's expected to report a seventh straight period of lower earnings this quarter, Wall Street projects a 4 cent profit in the fourth quarter, reversing from a 56 cent loss the same quarter last year.
"Aerospace looks like a pretty solid market for Allegheny, based on the (jetliner) build rate scheduled to the end of this decade," said Allegheny's Greenfield.
Miller has a buy rating on Allegheny with a 20 price target.
Close To Entry Point
Allegheny is forming a cup-with-handle base with an 18.77 buy point and got close to it Monday. Shares broke out more than 11% to reach 18.50, up more than 160% from the 7.08 low reached on Jan. 20.
Carpenter Technology makes specialty metals including titanium alloys, stainless steels and alloy steels for the aerospace, transportation, medical and energy markets among others. The smallest of the trio with $1.81 billion annual revenue, Carpenter is seeking support just below a 38.26 conventional entry point.
The Reading, Pa.-based company has only posted one quarter of profit growth in the last three years, and that was a year ago. That's about to change. Consensus is for earnings to grow 8% a share this quarter, accelerating to 25% and then a 62% jump. Shares were up nearly 4% to 37.88 on Monday.
IBD'S TAKE: Steel makers weathered a very rough period in 2015 and early this year. They are emerging amid improved global and U.S. macroeconomic factors, putting companies like Steel Dynamics in the Stock Spotlight.
Other notable industry players include Europe's Arcelor Mittal (MT) -- the world's biggest steel company, with $57.7 billion in yearly revenue -- and No. 1 U.S. steel maker Nucor (NUE) with $15.6 billion annual sales. Arcelor Mittal shares are consolidating at 10-month highs. Nucor has retreated significantly from its mid-July peak, falling below its 50-day moving average.
Top-rated Steel-Producers stock is Luxembourg-based Ternium (TX), with $7.1 billion a year revenue. Ternium has a 91 IBD Composite Rating, meaning it's outperformed 91% of all stocks on key metrics such as sales and profit growth. Ternium shares are pulling back toward their 50-day line after hitting a near-two-year high on Aug. 9.
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