Are There Still More Gains For Steel Stocks Ahead?

By Aaron Levitt | September 02, 2014 AAA

After being decimated during the Great Recession, steel has managed to claw its way back to the top of hill. As industrial activity has finally begun to rise, demand and prices for the back-bone of modern society have steadily climbed over the last six months. Today, steel now sit highs not seen in well over a year.

Likewise, stocks within the global steel sector have surged to reflect that new reality. That’s prompted some analysts to begin questioning just whether or not the rally can continue.

However, with industrial output just really getting started and rising demand from new sectors, along with old standbys, higher steel prices could still be on the horizon. For investors, the industrial metal could be one of the best plays for 2014 and beyond.

Still Rising Demand  

Steel has had an impressive run as of late. After being left for dead due to overcapacity concerns and faltering demand, prices for steel have surged. The same could said for steel producers like U.S. Steel (NYSE:X) –which has surged by 50% in a short six-months. Those impressive gains have prompted analysts from Citigroup (NYSE:C) and Nomura (NYSE:NMR) to question whether or not steel stocks still have more fuel in their tanks.

If future demand is any indication, the answer is yes.

 Despite steel’s recent torrid run, higher prices could still be on the table as demand continues to pick up for the metal. According to a new report by The World Steel Association (WSA), global steel use is expected to rise by 3.3% in 2014 to reach 1.52 billion tons. That’s on the back of 2013’s 3.1% increase and 2012’s 2% rise in steel demand. 

The key for the WSA’s forecasts is that the group expects to see continued recovery in developed economies. Manufacturing and industrial output continues to rise in variety of nations. From the United States to Germany, key pieces of manufacturing data seem to support higher demand for steel as the metal is used in everything from washing machines to cars.

At the same time, huge infrastructure projects continue to be developed across the world. In the U.S., the oil & gas boom is requiring miles and miles of new pipelines and gathering systems, while the recovery in residential and commercial construction is adding to steel demand. Globally, many new infrastructure projects remain on track. China, alone, is still forecasted to grow its steel demand by an annual pace of 3% to 4% through 2020. Those forecasts are based on its continued need for infrastructure improvements. 

All in all, the bullish demand picture for steel this year has sent prices for the metal up to $680 a ton and prompted venerable investment Goldman Sachs (NYSE:GS) to upgrade the sector. That’s one of the first upgrades for the sector is quite a while.    

Betting On I-Beams  

With the fundamentals for steel moving in the right direction, stocks within the sector could be ripe for more gains. Now may be the time to add the steel sector to a portfolio. The popular and broad SPDR S&P Metals & Mining ETF (NYSE:XME) does include some steel exposure, however, a more direct play could be the smaller Market Vectors Steel ETF (NYSE:SLX).

With nearly $136 million in assets, SLX tracks 28 different steel producers- including Reliance Steel & Aluminum (NYSE:RS) and Ternium S.A. (NYSE:TX). The fund has rebounded from its lows and has rallied about 13% over the last 3 months. However, it still sits about $30 below its all-time high. Expenses for SLX run a cheap 0.55% and the fund yields a hefty 2.26%. 

On an individual basis AK Steel (NYSE:AKS) could be an interesting buy. Several bullish tailwinds in the automotive and construction industries will directly benefit AKS’s bottom line. The firm expects that construction demand for its steel will finally surpass pre-recession amounts and that it will ship nearly 16 million units to auto customers during the new year. That bullishness should help the firm become profitable and move the share price forward. 

Some of the deepest values could be had in the emerging market producers of steel. The Brazilian duo of Companhia Siderurgica Nacional (NYSE:SID) and Gerdau S.A. (NYSE:GGB), along with Russia's Mechel OAO (NYSE:MTL) have suffer twice as hard as investors have fled emerging markets. Yet, all trade single digit forward P/E’s.

The Bottom Line   

The steel sector has rebounded quite nicely over the last few months as investors have looked for value. Given the longer term demand picture, the value is still there and more gains could still be in store. There’s still time to add a dose of steel stocks to a portfolio. The previous picks- along with industry leader Nucor (NYSE:NUE) –make ideal selections to play the trend.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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