With 2019 nearing its end, it has been an underwhelming year for stocks in the steel space. In particular, U.S. steel stocks had been out of favor for most of this year. The American steel industry reeled under the effects of weaker steel prices, demand slowdown across major markets and damaging impacts of trade war.

The Trump administration’s imposition of 25% steel tariffs provided a shot in the arm to American steel makers last year and drove their earnings. However, after an initial tariff-induced rally, U.S. steel prices had been on a downswing and were down for much of this year. Lower prices have hurt the bottom lines of domestic steel companies through the first three quarters of 2019.

Shares of U.S. steel companies gained some ground recently on some recovery in steel prices, optimism surrounding the U.S.-China trade deal and the news of revival of tariffs on steel imports from Brazil and Argentina. The Trump administration had earlier exempted these two countries from the tariffs last year. The revival of tariffs is a positive development as Brazil is a major exporter of steel to the United States.

However, shares of major American steel makers such as United States Steel Corp. X, Nucor Corporation NUE and Steel Dynamics, Inc. STLD have underperformed the broader market thus far in 2019. Notably, U.S. Steel’s shares have cratered roughly 28% year to date.

While shares of Nucor, the biggest U.S. steel maker, are in the positive territory this year, its stock performance is nothing worth writing home about. The company’s shares took a beating last week after it issued downbeat earnings view for the fourth quarter. Steel Dynamics’ stock performance has also been less than impressive.

However, AK Steel Holding Corp. AKS has bucked the trend and outperformed the S&P 500 so far this year. AK Steel’s shares surged earlier this month after leading iron ore miner Cleveland-Cliffs Inc. CLF announced the acquisition of the former in an all-stock deal worth $1.1 billion.

Nucor currently carries a Zacks Rank #2 (Buy), while U.S. Steel, Steel Dynamics and AK Steel currently have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What Hurt Steel Stocks in 2019?

The slump in domestic steel prices has been the major headwind faced by U.S. steel makers in 2019. The benchmark hot-rolled coil steel (HRC) prices felt gravity’s pull this year after rallying to multi-year highs on the back of steel tariffs during 2018.

U.S. steel prices marched higher during the first half of 2018, courtesy of steel tariffs. However, after the initial euphoria fizzled out, prices tracked downward in the back half of the year and dropped through the first three quarters of 2019. In fact, U.S. steel prices have fallen back to the pre-tariff levels this year. Prices are still well below their peak level of roughly $920 per short ton (st) reached in July 2018.

Higher domestic supply resulting from a ramp up in production has contributed to the sharp decline in U.S. steel prices this year. Driven by the tariff impetus, U.S. steel mills rushed to bring back capacity and drive production las year, leading to oversupply in the market. The global economic downturn and waning steel demand are other key factors for the decline in prices.

American steel producers are contending with slowing steel demand, especially in automotive. The Trump administration’s protectionist policies and bitter tariff war with China have largely contributed to the slowdown in the world economy. A slowdown in global manufacturing activity, partly due to trade war, is hurting demand for steel. Softness across major end-use markets such as automotive, construction and energy has led to demand weakness.

Although U.S. steel makers hailed the tariffs, their imposition has dealt a sledgehammer blow to major industries including automotive that are key consumers of steel. The steel tariffs have driven up manufacturing costs across these industries. The automotive industry, which consumes a big chunk of steel, is among the industries that has been hit the hardest.

Moreover, a slowing Chinese economy amid prolonged trade tensions with the United States has triggered a slowdown in steel demand in China, the world’s top consumer of the commodity. Sluggish automotive and construction sectors are also hurting steel demand in Europe, while demand in the United States is mostly hit by weakness in automotive.

Will 2020 be Any Better?

After a freefall, U.S. steel prices appear have bottomed out and are gaining some traction of late. Major U.S. steel mills have been raising prices over the past several weeks in a bid to reverse the downswing in domestic steel prices. Moreover, some of the U.S. steelmakers have recently taken steps to reduce excess capacity, partly through idling of plants, in the wake of falling prices. Capacity cuts have contributed to the recent decline in U.S. steel production.

Driven by the consecutive price hike actions by flat-rolled and plate mills and lower production, HRC prices turned upward in November from the three-year low level reached in October. Prices have also gained some upward momentum this month. Tighter domestic supply coupled with steel mills’ continued push for price hikes are expected to lend support to U.S. steel prices going into 2020.

The recent uptick in scrap prices, which had been down for much of this year, could also drive up domestic finished steel prices. Although a meaningful recovery is not expected to materialize over the near term, it is needless to say that higher prices would still provide a respite to domestic steel makers next year.

However, the demand side of the equation doesn’t look promising going into 2020. The World Steel Association (“WSA”) – the international trade body for the iron and steel industry – expects global steel demand growth to slow on a year over year basis in 2020.

The WSA envisions demand growth to decelerate to 1.7% in 2020 from a projected 3.9% rise this year. The projection takes into account an expected slowdown in demand in China amid a faltering domestic economy.  Demand growth in China is projected to slow to 1% next year from an expected 7.8% growth in 2019, per the WSA.

While strength in the country’s real estate sector bodes well for steel demand, a slumping manufacturing sector due to a cooling Chinese economy would be a deterrent. China’s automobile sales dropped year over year in November for the 17th straight month amid a slowing economy and tariff war with the United States. Overall vehicle sales slipped 3.6% year over year for the month, per the China Association of Automobile Manufacturers (“CAAM”). The world’s largest automobile market looks to be on track for contraction for the second year.

The demand scenario in the United States is also uninspiring. The WSA envisions U.S. steel demand growth to slow to 1% in 2019 from 2.1% last year and further decelerate to a paltry 0.4% growth in 2020. A weakening manufacturing sector is expected to limit demand growth.

Nevertheless, the de-escalation in U.S.-China trade tensions, at least for now, due to the announcement of the phase one trade deal would instil confidence in the reeling U.S. steel industry.

Although the demand environment is not expected to get better given the global slowdown, a recovery in steel prices and easing trade tensions would nevertheless bode well for American steel companies heading into the new year.

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Cleveland-Cliffs Inc. (CLF) : Free Stock Analysis Report
 
Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
 
AK Steel Holding Corporation (AKS) : Free Stock Analysis Report
 
Nucor Corporation (NUE) : Free Stock Analysis Report
 
United States Steel Corporation (X) : Free Stock Analysis Report
 
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