Steel prices are trading under pressure in 2024 with VanEck Steel ETF (NYSEARCA:SLX) down about 4% year-to-date. This has prompted commodity investors to draw up a list of stocks to avoid in this space.
The latest data shows that China’s crude steel output remained unchanged in 2023 compared to the previous year, marking a stabilization after consecutive years of decline. Official data revealed that the world’s largest steel manufacturer produced approximately 1.02 billion metric tons of the ferrous metal during the year.
Unlike 2021 and 2022, when Beijing imposed caps on crude steel output to reduce carbon emissions, there were no such restrictions in 2023. Instead, the focus was on supporting the economy and reviving the struggling property sector.
While the total output for 2023 aligned with forecasts from the state-backed China Iron and Steel Association, it fell short of some analysts’ expectations. Robust demand from sectors like shipbuilding, solar photovoltaic, and automotive partially offset the decline in demand from the property sector.
Morgan Stanley’s bottom-up analysis forecasts a modest 2.1% growth in steel demand for 2024. However, this growth, when coupled with increasing capacity, is expected to result in falling steel prices.
Given the potential for a slump in steel prices, certain stocks in the industry appear less appealing for investors. Here are the unfavorable stocks amidst fears that steel prices may fall in 2024.
The Pitfall of U.S. Steel (X)
Source: Shutterstock
U.S. Steel (NYSE:X) is an American steel producer with global operations. It manufactures various steel products for industries such as automotive, construction, and infrastructure. The company’s stock performance is influenced by factors like steel demand, raw material costs, and global trade dynamics.
In addition to steel prices being under pressure, U.S. Steel’s stock price could also plummet due to M&A volatility. In December, Nippon Steel (OTCMKTS:NPSCY) and U.S. Steel entered a definitive agreement for the former to acquire the latter in an all-cash transaction at $55 per share, totaling an equity value of about $14.1 billion plus debt assumption.
This acquisition, representing a 40% premium to U. S. Steel’s closing stock price on December 15, 2023, has received unanimous approval from both companies’ boards of directors. However, U.S. Presidential Candidate Donald Trump said he will block Nippon Steel’s planned purchase of U.S. Steel if he retakes the White House. In this case, shares in X would plunge as the M&A upside is extracted from the stock price.
The Rough Patch of ArcelorMittal SA (MT)
Source: Massimo Todaro / Shutterstock
ArcelorMittal SA (NYSE:MT) is a global steel giant and one of the largest producers in the world. However, the company faces challenges from overcapacity and geopolitical tensions, notably worsened by the conflict in Ukraine.
With significant operations in Europe, ArcelorMittal grapples with macroeconomic issues, rising production costs, and subdued demand, reflecting a tough operating environment for the steel industry at large. Challenges such as macroeconomic issues, escalating production costs, and subdued demand have persistently impacted the company’s European division for nearly two years.
Moreover, the company witnessed production disruptions and constraints across various facilities in Europe, Africa, and Brazil, exacerbated by the closure of a plant in Kazakhstan. ArcelorMittal’s Ukrainian unit faces severe operational challenges amid conflict, operating at only 30% capacity. This severe setback prevents the company from scaling up production, posing significant operational constraints.
