Credit Suisse Downgrades Steel Group, Shows Concern With Demand Side Fundamentals

With heightened supply-side concerns in the U.S. Steel Sector, there could be a steep decline in bulk material prices in H2 2017, while infrastructure stimulus is “unlikely to materially benefit US producers,” Credit Suisse’s Curt Woodworth said in a report. He downgraded the steel sector view to Market Weight, saying flat rolled prices could peak in Q1.

Rating Changes

Woodworth downgraded the rating on United States Steel Corporation X, Steel Dynamics, Inc. STLD and AK Steel Holding Corporation AKS from Outperform to Neutral. The price targets are at $30, $36 and $9.50, respectively.

Neutral ratings are maintained for Nucor Corporation NUE and Commercial Metals Company CMC, with price targets at $56 and $19. The analyst has an Underperform rating on Cliffs Natural Resources Inc CLF, with a price target of $6.

Increased Supply

Commenting on the supply side, Woodworth mentioned that Big River, US Steel Granite City and potentially Acero Junction would be ramping capacity by Q2 2017. Steel Dynamics and Novolipetsk Steel would also add to U.S. supply. There would also be higher higher production levels at Bedrock.

Demand Side Woes

“US steel fundamentals have been supported almost entirely by supply side benefits and cost push inflation in Asia during 2016,” the analyst noted. Despite some positives, US sheet volumes rose merely ~3 percent in 2016, while total US production declined 1 percent year-over-year, despite severe weakness in the back half of 2015.

US hot rolled coil apparent consumption has remained negative for the past five months and import penetration has continued to be high relative to historical standards. Also, the MSCI index has remained weak.

“We are concerned the Trump boost to equity valuations is overdone, as our analysis suggests limited benefits from infrastructure spending growth and the fact that the heavy lifting on U.S. steel trade policy has been largely finalized following changes to injury laws and successful trade case outcomes in 1H-16,” Woodworth added.