Massive China Production Cuts Are Huge for Steel Stocks: 5 to Buy for 2018

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For years politicians and investors moaned about China’s overcapacity and dumping of steel into the U.S. and world markets, and for years they got away with it with impunity. With a new administration that is much more attuned to bad trade deals and practices that hurt American business, it appears that the issues from China that hurt the industry here have been worked out to some degree. The amazing thing is that it is the Chinese themselves that are making the changes.

A new Deutsche Bank research report notes that China’s massive position in the industry dictates that any move to cut capacity and production is a huge positive for pricing.

The Deutsche Bank report said this:

Accounting for over half of world production in Steel and Aluminum, China’s recent “Supply Management” moves aimed at permanently closing large swaths of its overcapacity cannot be understated. We estimate China has closed ~19% of its Steel capacity over the past two years, equivalent to a 10% cut to Global capacity. As the Private Sector has borne a disproportionate amount of China’s Supply Management, the net effect of has been to raise China’s average production costs and reduce export-competitiveness in basic aluminum and steel commodities. On top of this, ongoing winter production cuts are expected to be further supportive to near-term commodity pricing.

The Deutsche Bank analysts adjusted the price targets on the stocks rated Buy in the firm’s sector coverage. Five of them now make good sense for long-term growth portfolios.

Commercial Metals

Shares of this lesser known company provides solid value for investors at current trading levels. Commercial Metals Co. (NYSE: CMC) manufactures, recycles and markets steel and metal products, and related materials and services in the United States and internationally. It operates through five segments: Americas Recycling, Americas Mills, Americas Fabrication, International Mill, and International Marketing and Distribution.

As one of the leading suppliers to the nonresidential construction sector, Commercial Metals has revived as that area of the market has picked up. The U.S. Architecture Billings Index (ABI), an economic indicator that provides 9-to-12-month growth forecast of nonresidential construction spending activity, which has shown very consistent growth.

Shareholders receive a 2.2% dividend. The Deutsche Bank price target for the stock is $25, while the consensus target is $21.38. The shares traded early Friday at $22.10 apiece.

Nucor

This top steel company could do very well if the economy continues to pick up and the administration’s infrastructure push comes back to the forefront. Nucor Corp. (NYSE: NUE) is one of North America’s largest steel producers, with almost 27 million tons of finished steel capacity at 23 mini mills throughout the United States. The company’s downstream steel products business includes rebar fabrication, steel joists/deck, cold finished bars, fasteners, building systems and wire mesh. Nucor also has 5 million tons of scrap processing capacity.

Nucor has always kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially if a huge infrastructure build-out becomes a reality. Some think that demand from the rebuilding of large parts of Houston after Hurricane Harvey could also be a positive.

Nucor investors are paid a 2.6% dividend. Deutsche Bank has a $70 price target, while the consensus target is $64. The stock traded Friday at $58.70.