Why Steel Stocks Should Be Added To Your Portfolio

Over the past few years, the steel industry has reaped the benefits of accelerating growth in developing economies. This helped steel makers to offset the slowdown in the mature, developed nations of the world. Asia and in particular China remained the principal growth driver.

However, the current scenario is slightly concerning with the conventional growth engine, China, adding an element of uncertainty to the outlook. Nevertheless, there are plenty of reasons to be optimistic about the broader steel industry, both in the short and the long term. Below, we discuss some of the key reasons and what investors in the steel sector can look forward to in the coming months and years.

Rebound in Construction
 
The housing and construction sector is the largest consumer of steel today, accounting for almost half of total consumption. Last year was on the whole good for the housing market. In fact, it turned out to be the best since 2007, when the housing recession had set in. After a dull first quarter for U.S. housing, sales picked up in the ensuing months amid an improving economic environment and a better employment picture.
 
Going ahead, improved job numbers, a recovering economy and improving consumer confidence, moderating home price gains, affordable interest/mortgage rates, rising rentals, rapidly rising household formation and a limited supply of inventory all point to continued strong demand in 2016.
 
The US Architecture Billings Index (ABI), an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, remained over 50 in eight months of 2015. Any score above 50 indicates an increase in billings. 2015 ended on a positive note with a December ABI score of 50.9. The American Institute of Architects (AIA) anticipates spending in the non-residential building sector to rise 8.2% in 2016. Nucor Corporation (NUE – Analyst Report) and Commercial Metals Company (CMC – Snapshot Report) are the leading steel suppliers to the non-residential construction sector.
 
In the long term, as the urban population increases worldwide, so will the need for steel to build skyscrapers and public-transport infrastructure. Emerging economies will continue to be major demand drivers due to the huge amount of steel required for urbanization and industrialization. Hence, the demand for steel is expected to remain strong in the years to come.
 
Companies like United States Steel Corp. (X – Analyst Report), ArcelorMittal (MT – Analyst Report), Nucor Corporation and Steel Dynamics Inc. (STLD – Snapshot Report) will benefit from the momentum in construction.
 
Booming Automotive Sector
 
The automotive sector, which is the second-largest steel consumer, is showing significant promise despite threats from other materials. Sustained improvement in the labor market and low oil and gas prices have been driving up auto sales. Apart from giving a boost to already rising U.S. auto sales, cheap oil has also helped in the recovery of the European auto market.
 
U.S. light vehicle sales hit a record 17.5 million in 2015. The number, which rose 5.7% year over year, outperformed the previous record of 17.41 million attained in 2000. The rising trend in sales is expected to continue in 2016, driven by 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.