Top 5 Steel Stocks of 2019

The steel sub-sector which falls under the broader basic material sector. Steel represents a significant amount of materials trading done on the stock market, but as is the case with other sectors, individual companies perform better than others—for a number of reasons.

Despite the widespread use and global demand, the benchmark index that tracks the steel sector, the NYSE Arca Steel Index, declined by more than 21 percent in 2018. Starting the year at a value of 1,285, the steel index ended the year at a value of 1,013. Annual returns from individual stocks varied from losses that exceeded 51 percent to modest gains that were in low single digits.

It comprises steel stocks that have a market cap of at least $1 billion, are trading on leading American stock exchanges, and have performed better than the benchmark steel index in terms of annual returns.

The World Steel Association estimated in late 2018 that the demand for steel was expected to remain positive in 2019, growing at 1.4 percent globally. Due to the positive outlook for steel, these companies should be considered in any steel investor's portfolio. The performance of individual stocks is compared against that of the NYSE Arca Steel Index, or STEEL.

The companies are presented in the descending order of the top performing stocks based on the percentage gains realized between January 2, 2018, and December 31, 2018, vs. STEEL. Market caps were updated April 21, 2019.

• Market Cap: $70.38 billion
• Performance vs. STEEL: 3.3% annual return

Brazil-based Vale SA started operations in 1943 and is a global producer of key raw material used for steel making. It additionally produces other metals, like nickel which is used to produce stainless steel, and other metal alloys, copper, manganese ore, ferroalloys, platinum group metals, gold, silver, cobalt, potash, phosphates, and other fertilizer nutrients. Most of these other products are a byproduct of its mining efforts. Iron ore, which is used to make steel, accounts for nearly 70 percent of Vale’s revenue and around 80 percent of its earnings.

Among the steel stocks with high market cap value, Vale remains the only one which generated positive returns of a little over 3 percent in 2018. Since China accounts for nearly 40 percent of Vale’s sales, the uncertainty around trade tariffs and economic slowdown in the Asian powerhouse resulted in high volatility in stock price.

Despite hitting high of around 25 percent YTD return in mid-October of 2018, the gains vanished in the remainder of the year owing to depleted prices and limited demand for iron ore in the global markets.

Vale started 2019 on a negative note, as an incident of dam collapse in Brazil has forced the company to suspend dividends, and there are concerns that associated charges and lawsuits may damper stock prices.

• Market Cap: $6.028 billion
• Performance vs. STEEL: -4.57% annual return

Another leading manufacturer of steel in North and South America, the Brazil-based Gerdau was founded in 1961. It has a global presence with steel mills located across Argentina, Brazil, Canada, Chile, Colombia, Spain, the U.S., Guatemala, India, Mexico, Peru, the Dominican Republic, Uruguay, and Venezuela. It is primarily in the production and sale of steel products.

Backed by improved economic conditions in the local Brazil market, the company started 2018 on a positive note with better-than-expected first quarter results. The strategic decisions to sell off lower-margin assets and initiatives to lower operational cost also helped the stock during the last quarter.

With steel demand in Brazil expected to increase by 6 percent over the next year compared to the global average of 1.4 percent, Gerdau is well positioned to benefit if the overall Brazilian economy improves.

• Market Cap: $66.813 billion
• Performance vs. STEEL: -11.45% annual return

The NYSE-listed Rio Tinto is an Anglo-Australian multinational and ranks among one of the world's largest metals and mining corporations. Its primary business involves iron ore production which accounts for more than 45 percent of its total revenue and is the key ingredient for steel. The company also produces other minerals and ores like aluminum, copper, uranium, and diamonds. Its operations span across six continents which are administered by several subsidiary companies.

The stock price of Rio Tinto has had its ups and downs during 2018, primarily due to concerns around limited global steel demand, changes to China's policy of government-funded infrastructure growth, and hopes of a possible change to China’s policy toward fiscal loosening which partially boosted the stock price in September.

Amid uncertain market conditions, the company efficiently utilized the cash generated from operations to handsomely pay back shareholders via dividends and via a share repurchase program that helped support the stock price.

• Market Cap: $3.244 billion
• Performance vs. STEEL: -15.03% annual return

The Pennsylvania-based Allegheny Technologies was established in the year 1999 and is a manufacturer of specialty materials and complex components like a variety of stainless steels, nickel- and titanium-based alloys, specialty alloys, and superalloys. It is particularly known for vacuum-melted maraging steels, a kind of specialty steel-based alloy, which finds use in the production of aircraft landing gear, structural parts, and jet engine components.

Its products are mainly used in aerospace and defense products. The company’s strategy of shifting the focus on high performance, high-margin products and reducing low-margin products and production facilities has shown positive results during 2018. Despite a lackluster year, the expected rise in demand from the next generation jet engine market is expected to bolster the prospects of Allegheny.

The strategic acquisition of aerospace and defense additive metal alloy manufacturer Addaero in July is expected to give Allegheny a significant advantage in the defense and aerospace sector, as well as help it move ahead in 3-D printing technology, which uses nickel-based alloy and titanium-based alloy powders.

• Market Cap: $5.263 billion
• Performance vs. STEEL: -17.07% annual return

NYSE-listed Ternium was established in 2004 and is a producer of steel products. Operating through two segments, Steel and Mining, which include the sales of steel products and iron ore products, respectively.

Despite expected financial results in the previous quarters, the stock gave up all the YTD gains around August amid heightened uncertainties around NAFTA and Mexico's trade status as a low-cost vehicle assembly partner for the American market. The bulk of Ternium’s steel production facility is located in Mexico.

The company has a good level of dependency on the Mexican economy, along with other South American economies of Argentina and Brazil. Rival Steel Dynamics Inc.’s (STLD) planned export-oriented capacity expansion is seen as a potential disruption for Ternium in the region, while uncertain recovery of Brazilian economy may remain a cause of concerns in near future.

The other major steel and iron ore stocks did not fare well in comparison to that of the above-mentioned stocks. United States Steel Corp (X) lost 51.26 percent, Arcelor Mittal (MT) declined by 41 percent, POSCO (PKX) lost 35 percent, Tenaris SA (TS) shed 32.35 percent, Steel Dynamics lost 32.2 percent, and Nucor Corp. (NUE) shed 22.11 percent during 2018.

The emergence of clarity around taxation, monetary, and trade policies in the U.S., EU, and China will define the developments for the steel industry going forward. Major consumers of steel, India and China, are facing growth issues. While India continues to recover from the twin shocks of de-monetization and the implementation of goods and services tax (GST), the slowdown in China may continue to negatively impact steel demand and prices.