Gordon Johnson On Steel: 'We Think There Is A Big Risk'

Waning automotive production could dent the demand for steel in 2017 and crush market performance for industry players. Axiom steel expert Gordon Johnson first issued this theory on Tuesday, triggering a plunge in shares for both AK Steel Holding Corporation AKS and United States Steel Corp X.

Expert Commentary

“Look, we think there is a big risk in the U.S. steel market in the form of declining automotive production,” Johnson told Benzinga on Friday. “A lot of people look at sales, but we don’t think that’s the right metric to look at. We think you should be looking at production. And clearly Ford F), Chrysler FCAU) and GM GM) have all said they’re going to cut production this year.”

According to the International Trade Administration, about 13 percent of global steel ends up in automobiles such as those produced by Ford, GM And Fiat Chrysler. The relationship may strain the supplier.

Production And Trump

“With inventory at near-record levels, delinquency at near-record levels and production starting to slow — production has slowed in each of the past three years — we think that the risk to the steel sector is not imports but rather declining domestic demand,” Johnson said. “If that’s the case, no matter how many tariffs we put on imported steel, you’re still going to have a weak steel market.”

Johnson said steel plants Big River and Acero Junction will continue to supply the market despite the lessening demand, and the plants might attempt to pull off price inflation.

“We’ve seen these cycles where the steel mills hike prices due to things that aren’t demand related: Trump enthusiasm, before that tariffs earlier in 2016, before that it was the Great Lakes freezing over and the idea they couldn’t get iron ore across the Great Lakes,” he said. “None of these things were fundamental catalysts. They were all sentiment catalysts. What happens is their customers stock up on inventory, the demand’s not there, and then you have a collapse in prices.”

The present drop in scrap prices and rise in hot rolled coil steel prices are indicative of this industry dynamic, Johnson said.

AK Steel shares rocketed through 2016 and neared a five-year high. After strong performance in November and December, values tapered off in January from $11.11 to a present rate of $8.13.

U.S. Steel saw a similar trend. Shares now rest at $33.15.