Darker Days For Steel? Cowen Downgrades U.S. Steel And ArcelorMittal

Cowen’s Anthony B. Rizzuto downgraded the ratings for United States Steel Corporation X and ArcelorMittal SA (ADR) MT to Market Perform, saying that these integrated producers are likely to be more challenged given their inferior cost structure compared to EAF producers like Steel Dynamics, Inc. STLD [Rated: Outperform, PT: $25]

The price targets for US Steel and Arcelor Mittal are at $8 and $4, respectively. Analyst Anthony Rizzuto mentioned that following the recent increase in US flat-rolled carbon steel prices, there is little chance of further upside from the current levels.

“Following the bottoming of U.S. HRC prices at $365/st in late 2015, we were hopeful that steady demand, falling imports, production curtailments, and positive trade case determinations could enable prices to rally to $450-500/st, enabling integrated producers to return to profitability on spot tonnage sales,” Rizzuto wrote.

The analyst believes that while the prices have stabilized in the low $400/st range, the downturn is likely to continue. There is unlikely to be a significant rebound in energy steel demand in 2016, and the weakness in oil and gas products continues to have a negative impact on the US industrial economy.

“While we do not see any imminent liquidity issues for U.S. Steel, we have been increasingly concerned about balance sheet strength and cash burn,” the Cowen report stated.

Market checks reveal that OEMs are concerned about the long-term viability of their suppliers and are, thus, pursuing much shorter qualification period trials with EAF steelmakers. Rizzuto commented that the growing capabilities of companies like Steel Dynamics in automotive and appliance applications will result in increased market share for them.

The current challenging environment, companies with a high degree of variable cost, the ability to take market share, generate free cash flows, drive organic and acquisitive growth and having a desirable end-market mix with significant exposure to non-residential construction are poised to grow, Rizzuto added.