The war in Ukraine has shocked the outlook for European steel companies more than most sectors, both by driving up raw material prices and increasing production costs.
The question for investors is whether the balance of these opposing forces will work in favor of companies. Analysts, meanwhile, have price targets well above current market prices for three stocks:
Steel, essential for the manufacture of cars and the construction of buildings, is closely linked to economic prospects. Steel prices, which jumped 50% following Russia’s invasion of Ukraine, are expected to weaken somewhat in the coming months. Inflation, rising interest rates and geopolitical unrest increase the risk of recession.
Yet commodity prices are still supported by supply concerns, with production in Ukraine and Russian exports under threat. So far, rising prices have more than covered rising production costs. These strong gains are one reason analysts see plenty of room for shares of all three companies to rise.
“At the end of the day, demand is the biggest concern for investors right now,” says Andrew Jones, steel research analyst at UBS in London. “The prices are fantastic. Margins are excellent. It’s just that people don’t believe it’s sustainable.
ThyssenKrupp and Salzgitter trace their origins to Germany’s rapid emergence as an industrial power in the 19th century. Arcelor was the fusion of the corporate ambitions of Luxembourg, Spain and France – it merged with India’s Mittal in 2006 to become the largest steel company in the world.
ArcelorMittal, based in Luxembourg, is also engaged in mining activities and has operations in North America, Brazil and Africa. The shares have slipped 7.4% this year to 26.05 euros ($27.02). But the average price target among 14 analysts is €43.41. The company’s first-quarter profits and sales rose on higher steel prices.
ArcelorMittal lowered its profit forecast for this year, based on a weaker outlook for Europe. But in a statement, CEO Aditya Mittal said “it is clear that the longer-term fundamental outlook for steel is positive.” The stock is cheap, earning 2.9 times earnings. It is rated at 10% off compared to its peers.
In addition to steel, ThyssenKrupp, based in Essen, Germany, sells component technology and industrial engineering. The stock is down 21% this year at €7.89. Deutsche Bank analyst Bastian Synagowitz has a price target of €17 for the stock. The company recoups 4.7 times projected earnings this year and is valued at a 10% premium to its peers.
ThyssenKrupp beat its quarterly profit expectations on May 11 and raised its full-year profit projections to 2 billion euros from a previous estimate of 1.8 billion euros. “We have demonstrated resilience and improved our earnings significantly,” ThyssenKrupp CEO Martina Merz said in a statement, adding that the company was considering “how geopolitical shifts could alter supply and value chains. in the medium and long term”.
Salzgitter, based in the northern German town of the same name, has gained 8.3% this year to €36.04. Jefferies analyst Alan Spence has a price target of €55. Salzgitter said its first-quarter pretax profit of 465.3 million euros was a record quarterly operating result for the company. The company is fetching 3.4 times its expected earnings this year and is valued at 20% off its peers.
Last month it raised its profit forecast for the year, saying it expects raw material and energy costs and steel prices to remain “at current levels”. .