Analyst Surveys Suggest Steel Stocks Will Soon Suffer

Recent analyst surveys brought to light the brittle nature of steel stocks, leading Longbow Research to downgrade Nucor Corporation NUE and Steel Dynamics, Inc. STLD. Meanwhile, the firm maintained its ratings on AK Steel Holding Corporation AKS and United States Steel Corporation X.

Rating/Price Target

• Nucor: Downgraded to Neutral/Price target lowered from $62 to $56–$58.
• Steel Dynamics: Downgraded to Neutral/PT lowered from $40 to $35–$36.
• AK Steel: Maintained at Neutral.
• United States Steel: Maintained at Neutral.

Demand, Pricing Weakness

Analyst Chris Olin said he is cutting his fourth-quarter and 2018 earnings per share estimates for the entire steel coverage group, attributing the action to the incremental demand weakness evident in its latest carbon steel channel checks. The analyst noted that order activity slowed notably since the summer months, and industry contacts recently lowered the near-term pricing expectations on Hot Rolled Coil despite limited import availability.

Accordingly, the firm noted that the year-end pricing forecast for HRC is down at $580–$590 per ton after holding in the $640 range for most of the summer months.

See also: Did Hurricanes Bend Steel Stocks' Strength This September?

Dissecting The Demand Weakness

Giving anecdotes of demand weakness, Longbow Research said downstream volume growth fell 1–2 percent year over year, a reversal from the 2–3-percent positive comps performance in the second quarter. Additionally, the firm said 11 of the 15 individually-tracked end-markets are showing unfavorable comps versus the last quarter.

The firm also noted that service inventories are balanced on the long product side but sheet distributors are aiming to cut holdings. Finally, the firm said speculation that hedge-buying created 2 million–3 million tons of excess invisible inventory is abounding, with about 20 percent of companies saying third-quarter volumes were coming in below plan.

Supply-Side Dynamics

On the supply-side, the firm noted there are very few lower prices imports, with 65 percent of sheet buyers seeing a pullback in foreign availability. The surveys also showed that 45 percent of contacts are sourcing imports, down from the normal 60-70 percent acceptance rate, the firm said. Also, the firm projects import market share loss over the next three to four months.

Pricing

Longbow Research noted that distributors have started to cut the near-term spot price expectations, which is down $40–$50 per ton from the estimate in late summer. The firm expects the excess scrap supply to pressure raw material prices in October/November.

While noting that the past mill price increase attempts did not stick, the firm said the current quote for HRC is $610–$620 per ton, down $10–$20 per ton from the August level.

Quoting the survey, the firm said, "I think most people have gotten over their fears of supply drying up and that is why pricing has started to fall. All of the distributors we talk to really have no major concerns about the looming 232. Demand has definitely slowed."

Fully Neutral

The firm said it is now Fully Neutral on its steel coverage group, with 2017 and 2018 estimates at or below consensus estimates. The firm noted that downstream steel volumes are coming in below plan and most distributors are looking to liquidate inventories.

"While there has been investor speculation about potential benefits [associated] with cutbacks in global supply (and focus on Chinese reform), this impact is not evident within channel check data or distributor sentiment," the firm said.