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Steel Industry on the Mend: Good Time to Buy Stocks.
by Zacks Equity Research Published on January 17, 2017
Steel is used in every important industry ranging from energy, construction, automotive and transportation, infrastructure, packaging and machinery. Expectations of increased infrastructure-related spending in the U.S. has pushed steel company stocks to new highs, particularly following the November election.
While some people are legitimately concerned about the industry’s steel industry’s performance lately, there are plenty of reasons to be optimistic about the broader steel industry, both in the short and long term. Here, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.
Construction Sector Remains a Pillar of Strength.
Amid a volatile U.S. stock market, aftermath of Brexit and volatile oil prices, the homebuilding market remains a pillar of strength for the economy along with the steel industry. The housing and construction sector is the largest consumer of steel, accounting for almost half of the total consumption. Positives like an improving economy, modest wage growth, low unemployment levels, low interest rates, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance.
The US Architecture Billings Index (ABI), an economic indicator that provides an approximately 9 to 12 month glimpse into the future of non-residential construction spending activity, has been at 50 or better for 20 of the last 24 months indicating reliable, manageable, sustainable growth in architectural activity. The American Institute of Architects (AIA) anticipates spending in the non-residential building sector to climb around 6% in 2017. Nucor Corporation (NUE - Research Report) and Commercial Metals Company (CMC - Research Report) are the leading steel suppliers to the non-residential construction sector.
The Dodge Momentum Index grew 2.9% in December to 136.7 from its revised November reading of 132.8. It is a monthly measure of the first report for non-residential building projects in planning, which have been shown to lead construction spending for non-residential buildings by a full year. The Index is currently at an eight-year high after its steady 2016 climb.
Over the long haul, as the urban population increases worldwide, the need for steel to build skyscrapers and public transport infrastructure should see an uptrend as well. Emerging economies will continue to be major demand drivers owing to the huge amount of steel required for urbanization and industrialization. Hence, demand for steel is expected to remain strong in the years to come. Companies like United States Steel Corp. (X - Research Report) , ArcelorMittal (MT - Research Report) , Nucor Corporation and Steel Dynamics Inc. (STLD - Research Report) would benefit from the momentum in construction.
Automotive Sector in Top Gear.
The automotive sector, which is the second-largest steel consumer, is showing significant promise despite threats from other materials. Besides giving a boost to the already rising U.S. auto sales, cheap oil has backed a recovery in the European auto market. The rising sales trend is anticipated to persist on the back of falling fuel prices, low interest rates, enhanced job security, rising wages and household wealth, improving consumer confidence, residual pent-up demand, attractive deals and vehicle launches.
Moreover, the high average age of light vehicles on U.S. roads is resulting in large replacement demand for cars as well as car parts. The average age is estimated to rise to 11.5 years by 2017 and 11.7 years by 2019 from 11.4 years at the end of 2013, according to forecasts by IHS Automotive. This will benefit auto parts manufacturers and retailers.
The auto industry in Asian countries, particularly China and India, are also projected to flourish over the next five to seven years. China is the biggest and fastest growing auto market in the world in terms of number of vehicles sold. With automakers cashing in on strong demand, steel is expected to get a proportional boost in the years to come. ArcelorMittal and AK Steel Holding Corporation (AKS - Research Report) generate a large portion of their revenues from auto companies.