More Bad News For U.S. Steel? Analyst Sees Signs Of Price Risk

It looks like United States Steel Corporation X shares may not stage a near-term recovery from the wounds inflicted by a post-election retreat and subsequently a lackluster first-quarter earnings report.

Source: Y Charts

The bleak prognostication comes amid the release of a note by Longbow Research in which analyst Chris Olin has broached the possibility of price risk.

Hot-Rolled Coil Prices To Cool Off

Olin lowered his 2017 pricing assumptions on carbon flat-rolled sheet products, going by recent distributor/trader conversations, which revealed downward pressure to the May spot hot-rolled coil, HRC, quote of $625 per ton.

The conversations, according to the analyst, also unearthed other issues such as slowing downstream order trends, cautious inventory planning, a modest uptick in attractively-priced foreign import offers, and new domestic capacity introductions.

Citing buyer plans, the analyst said HRC prices could fall below $600 per ton over the next few months, with industry contacts suggesting that they have adjusted their procurement strategies to reflect a potential price risk to $560–570 per ton during late-second-quarter of 2017.

Quoting one of the contacts, the analyst said, "The Chinese steel market seems to be crashing. It is only a matter of time before Asian steel hits other countries, and that material comes to me at a discount. I do not want to add inventory until I am confident prices will not crash. We think HR has downside to $570."

A Fall But Not Collapse

Looking at the brighter side, Longbow said there was underlying confidence visible throughout the channel. Managers do not expect spot prices to collapse, but not weaken, the firm said.

End-User Issues

The firm noted that North American automotive sector, which is the largest end-user, accounting for 20–25 percent of the steel consumption, could be in for major production cuts, especially in the smaller car market. Offering evidence, the firm noted that the North American automotive OEMs are overproducing and have elevated inventory levels than the normal, while sales rate has also been down. The firm believes the steel sector is yet to absorb the development.

Lowering Estimates

The firm lowered its 2017 earnings per share forecast for U.S. Steel to $0.76 from $0.44, assuming domestic steel segment EBIT of $29 per ton. Additionally, the 2018 earnings per share forecast goes to $1.85 from $1.48, premised on domestic steel segment EBIT of $29 per ton. The firm expects the Tubular Segment to generate a profit by the first quarter of 2018.

Neutral On U.S. Steel

The firm remains at Neutral on the shares of U.S. Steel, premised on the logic that the company would be hurt the most if spot HRC prices fall below an emotional $600 per ton level.

"Future steel import data is likely to evoke investor concerns about foreign mill market share," the firm added.

At the time of writing, U.S. steel shares were down 1.13 percent at $21.08.

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