Buy Steel Into Trump Presidency: Morgan Stanley

President-elect Donald Trump's plans for increased infrastructure spending and trade protection could boost demand for steel on the one hand and curb import supply on the other, thereby resulting in significant undersupply in the U.S. steel market, Morgan Stanley’s Evan L Kurtz said in a report. Given this backdrop, the analyst upgraded the higher beta names.

Following a decade of weakness, Trump's $550 billion stimulus plan could boost steel demand by 20 percent per annum for five years, Kurtz mentioned, noting that the estimate was conservative. Trump's victory also means continued efforts on the steel trade protection front, and the mid-cycle price estimate has been raised from $175 per ton to $225 per ton.

Rating Upgrades

Kurtz upgraded the rating on United States Steel Corporation X and AK Steel Holding Corporation AKS from Equal Weight to Overweight, while raising the price targets from $19 to $46 and from $5 to $11, respectively.

“We see the most upside to mid-cycle value at X and AKS [...] While they have less direct sales to construction end markets, about 20 percent of flat-rolled products go into construction, which should push up pricing across the entire flat-rolled product family regardless of the end market, and the higher fixed costs at X and AKS offer more leverage to an infrastructure cycle,” the Morgan Stanley report stated.

The analyst also upgraded the rating on Cliffs Natural Resources Inc CLF from Underweight to Equal Weight, while raising the price target from $3 to $9. He mentioned that the company had leverage to HRC [hot rolled coil] steel prices through its U.S. price contracts. Moreover, higher blast furnace operating rates could boost Cliffs Natural’s volumes.