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Trade Actions Help US Steel Industry Capacity Break Above 80%

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American steel mills operated above 80% of their capacity last week, according to the latest weekly report from the American Iron and Steel Institute (AISI), an association of North American steel makers.

Capacity utilization rate – a key metric in the steel industry – reached 80.2% for the week ending Sep 8, up from 73.4% a year ago, according to data released by the AISI.

The feat appears to reflect the impact of broad-based tariffs which the Trump administration imposed on imported steel under Section 232 of the Trade Expansion Act of 1962.

The tariffs are boosting production capacity of domestic steel makers amid lower imports. The U.S. Department of Commerce earlier said that the trade actions are aimed at increasing domestic steel production to approximately an operating rate of 80% – the minimum rate required for the long-term viability of the industry. U.S. capacity utilization rate was estimated at 72% in 2017, well below the 80% level. An influx of subsidized imports led to the tepid utilization last year.

Per the AISI, U.S. raw steel production was 1,879,000 net tons for the reported week, up 0.5% from production of 1,870,000 net tons for the week ending Sep 1. The reported weekly production also represents a 9.8% year over year jump. The gains came on the back of improved capacity utilization.

Adjusted year-to-date production through Sep 8 was 64,876,000 net tons, up 4.1% from 62,292,000 net tons recorded in the same period a year ago.

Trump Trade Actions Bearing Fruit

The 25% tariffs on steel imports, which the Trump administration levied in March, have injected a new lease of life for the U.S. steel industry. The tariffs have provided the much-needed protection to American steel producers and instilled optimism in the domestic steel industry which had long been reeling under the onslaught of cheap imports.

The tariffs are leading to lower imports into the United States. According to the AISI, based on preliminary U.S. Census Bureau data, total and finished domestic steel imports are down 10.1% and 10% year over year, respectively, year to date (through the first seven months of 2018) to 20.86 million net tons and 16.19 million net tons, respectively.

Finished steel import market share was estimated at 25% year to date. For 2018, annualized total and finished steel imports are expected to decline 6.2% and 6.1% year over year respectively, per the AISI.

While there are still uncertainties surrounding the tariffs, their impact on imports are likely to be felt more deeply in the second half of 2018.

The tariffs have also provided a boost to U.S. steel prices, giving American steel makers more pricing power. U.S. steel prices are on an uptrend following the trade tariff announcement, reflected by a spike in hot-rolled steel prices. Higher prices provided a boost to margins of U.S. steel players in the second quarter and the momentum is likely to continue in the third.

Steel Stocks Worth a Wager Now

A few stocks worth considering in the steel space are ArcelorMittal MT, Universal Stainless & Alloy Products, Inc. USAP, Steel Dynamics, Inc. STLD and Nucor Corporation NUE. While ArcelorMittal sport a Zacks Rank #1 (Strong Buy), Universal Stainless, Steel Dynamics and Nucor carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcelorMittal has an expected earnings growth of 4.7% for 2018. Earnings estimates for the current year have been revised 11.4% upward over the last 60 days. The stock has an expected long-term earnings per share growth rate of 4.8%.

Universal Stainless has gained around 65% over the past year. Earnings estimates for the current year have been revised 29.7% upward over the last 60 days.

Steel Dynamics has an expected earnings growth of 108.3% for 2018. Earnings estimates for the current year have been revised 6.2% upward over the last 60 days. The stock has also rallied roughly 39% over the past year.

Nucor has an expected earnings growth of 123.4% for 2018. Earnings estimates for the current year have been revised 17.7% upward over the last 60 days. The stock has also gained roughly 17% over a year.

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