Steel prices are trading under pressure in 2024 with VanEck Steel ETF (NYSEARCA:SLX) down about 4% year-to-date. This has promoted commodity investors to draw 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.
Along these lines, here are the 3 stocks to avoid amid fears that steel prices may fall in 2024.
U.S. Steel (X)
U.S. Steel (NYSE:X) is a leading American steel producer with operations across the globe. It manufactures a wide range of steel products for various industries, including automotive, construction and infrastructure. As a major steel producer, 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 stock price could also head lower due to the 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, reaching a total enterprise value of $14.9 billion.
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.
ArcelorMittal SA (MT)
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.
Production plummeted by 57% year-on-year, reaching 390 thousand tons in the first half of 2023. Escalating war risks and logistical hurdles prevent the company from scaling up production, posing significant operational constraints. Hence, investors should better avoid MT stock until the visibility surrounding the war in East Europe improves.
Cleveland-Cliffs (CLF)
Cleveland-Cliffs (NYSE:CLF) is a leading steel producer in the United States. With a focus on steel making and iron ore mining, shares in the company rose in recent months amid optimism about the increased profitability in 2024.
The company reported fourth-quarter revenue totaling $5.11 billion, reflecting a marginal increase of 1.3% year-on-year. Loss per share from continuing operations stood at 31 cents, while adjusted EBITDA surged to $279 million, surpassing estimates. For the year ahead, the company anticipates significant reductions in steel unit costs, projecting further decreases of $30 per ton in 2024.
This strategic move is expected to yield substantial Adjusted EBITDA benefits, totaling approximately $500 million compared to 2023. Moreover, Cleveland-Cliffs forecasts capital expenditure ranging from $675 million to $725 million, indicating a proactive approach towards operational investments.
The company’s stock rating was recently lowered at Morgan Stanley on expectations that steel prices will fall from current levels. Analysts noted that CLF has the most significant exposure to the automotive sector among the covered North American steel companies. However, this sector is expected to lag this year after a robust performance in 2023. Hence, investors better avoid CLF stock over the coming months.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
