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

October 20, 2017 by 247lee

Source: Thinkstock
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.

U.S. Steel

This venerable steel producer remains a favorite at Deutsche Bank. United States Steel Corp. (NYSE: X) produces and sells flat-rolled and tubular steel products in North America and Europe. It operates through three segments. Its Flat-Rolled Products segment offers slabs, rounds, strip mill plates, sheets and tin mill products. This segment serves customers in the automotive, consumer and the combined industrial, service center and mining commercial markets.

The Tubular Products segment offers seamless and electric resistance welded steel casing and tubing, as well as standard and line pipe and mechanical tubing products primarily to customers in the oil, gas and petrochemical markets. The company also provides railroad services and owns, develops and manages various real estate assets.

And its U. S. Steel Europe segment provides slabs, sheets, strip mill plates, tin mill products and spiral welded pipes, as well as heating radiators and refractory ceramic materials. This segment serves customers in the construction, service center, conversion, container, transportation, appliance and electrical, oil, gas and petrochemical markets.

Shareholders are paid just a 0.75% dividend. The $32 Deutsche Bank price target was lifted to $36. The consensus target is $28.27, and shares were last seen at $28.55.

Ryerson

This is a top small cap play that could make sense for more aggressive accounts. Ryerson Holdings Inc. (NYSE: RYI) offers a line of stainless steel, aluminum, carbon steel and alloy steels, as well as nickel and red metals in various shapes and forms, including coils, sheets, rounds, hexagons, square and flat bars, plates, structurals and tubings.

The company also provides value-added processing and fabrication services, such as sawing, slitting, blanking, cutting to length, leveling, flame cutting, laser cutting, edge trimming, edge rolling, roll forming, tube manufacturing, polishing, shearing, forming, stamping, punching, rolling shell plate to radius, and processing materials to a specified thickness, length, width, shape and surface quality pursuant to specific customer orders.

Deutsche Bank lowered its price target to $15 from $18. The consensus target is $12.69. The stock was trading at $8.95 a share.

Constellium

This is another smaller cap, under-the-radar play that has big upside potential. Constellium N.V. (NYSE: CSTM) is a Netherlands-based company engaged in developing aluminum products for a range of markets and applications, including aerospace, automotive and packaging. Its manufacturing facilities are located in the United States, Europe and China.

The company’s products include can body stock, can end stock, auto body sheet, heat exchangers, specialty reflective sheet, aerospace plates and sheets, aerospace wing skins, plates for general engineering, sheets for transportation applications, soft alloys, hard alloys, large profiles and automotive structures.

The $15 Deutsche Bank price target is up from a prior $10, and compares with the consensus target of $11.14. The stock was last seen trading at $10.80.

The weak dollar has been very helpful to the industry for much of this year, and while the dollar won’t stay weak forever, you can bet that the administration would like to see it stay weak for the time being. With pricing firm, and export potential and demand at home still strong, these stocks make sense for growth investors of the rest of 2017 and into 2018.