Any investors in the American steel industry who were celebrating Trump’s tariffs jumped the gun a bit. If you follow this scenario through to its logical conclusion, there’s no happy ending—only the threat of oversupply.
That threat led Deutsche Bank to downgrade U.S. Steel earlier this month to ‘Hold’ from ‘Buy’, slicing its price target from $47 to $35. And then Monday, Credit Suisse followed suit, saying it expected steel prices to fall due to oversupply thanks to tariffs on Chinese imports.
It was a good ride while it lasted, with U.S. steel prices and production hitting multi-year highs.
Both tariffs and economic growth helped, but it’s destined to be a short ride with an abrupt ending.
Reuters quoted Credit Suisse on Monday as saying it cut its rating for the sector to “market weight” from “overweight”. It also said that capital spending by firms has “disappointed” investors.
Credit Suisse downgraded U.S. Steel, Nucor Corp., Steel Dynamics and Cleveland Cliffs. All now have a “neutral” rating.
Credit Suisse analyst Curt Woodworth now has a price target on U.S. Steel (NYSE:X) of $40, down from $48. Nucor (NYSE:NUE) was downgraded from ‘Outperform’ to ‘Neutral’, with a price target downgrade from $77 to $74, while Steel Dynamics (NYSE:STLD) was given the same downgrade, with a new price target of $51, down from $55. AK Steel Holding Corporation (NYSE:AKS) saw its price target moved from $7 to $6 per share. Related: Saudi Business At Stake Over Journalist Murder Allegations
"We are downgrading our US steel sector weighting to Market Weight from Overweight owing to our concerns with new supply entering the sheet market as well as increased concerns on US demand as interest rates rise," Credit Suisse said in a note to clients.
Domestic steel production has already hit a four-year high, and new capacity is slated to come on line, while prices continue to slide, Woodworth noted.
Notably, US Steel is gearing up to restart its second blast furnace at Granite City, Illinois, later this month, which will put "the full 2.1 million mt of [hot-rolled coil]” on the market. Simultaneously, JSW is planning to restart its 1.5-million st/year electric-arc furnace next month.
At the same time, Credit Suisse does not expect the U.S. and Canada to reach a deal over steel tariffs in the near-term.
Canada is planning to impose new quotas on steel imports as it faces a barrage of imports due to efforts by foreign steelmakers to find new markets to replace American buyers.
Despite this, Credit Suisse still remains upbeat on both U.S. Steel and AK Steel because they foresee better contract pricing for next year, along with more attractive valuations relative to historical forward multiples, Benzinga quoted Woodworth as saying.
Even American labor unions are becoming critical of Trump’s tariffs because they aren’t necessarily seeing the benefits from a 30-percent price increase and a jump in company profits. Instead, Voice of America says that U.S. steel companies “may be slow to increase worker wages because business leaders see tariffs as measures that will one day be cancelled”.
U.S. Steel has already been grappling with United Steelworkers Union (USW) negotiations for month, along with the threat of work stoppage. On Monday, the two sides reached a tentative four-year labor contract agreement. Negotiations over demands for higher wages have been ongoing since July.
In the meantime, steel industry stocks are ones to watch, with new downgraded price targets still higher than the current reality:
(Click to enlarge)
(Click to enlarge)
(Click to enlarge)
By Tom Kool for Safehaven.com
More Top Reads From Safehaven.com: