Commodities & Metals
Why Credit Suisse Sees More Upside in Top Steel Stocks
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Looking at the global steel market in 2016, it is quickly rebalancing following the fallout in 2015 from the energy market, significant destocking and distressed exports from China. In the past several weeks, global hot rolled coil (HRC) prices have recovered to roughly $370 per tonne, with global cold rolled coil (CRC) prices approaching $500 per tonne. Turkish scrap and Chinese billet prices are also continuing to move higher, providing cost support.
As a result, one key analyst decided to update its view on U.S. steel companies and where these companies stand to go from here. Credit Suisse increased its U.S. steel price deck to account for rising global price levels as well as increased U.S. spreads to global. The brokerage firm also increased forecasts and target prices for its calls. The top picks remain United States Steel Corp. (NYSE: X) and Steel Dynamics Inc. (NASDAQ: STLD), with revised price targets of $22 and $27, respectively.
Credit Suisse believes U.S. HRC/CRC prices are likely to reach $480/$640 ton by end of the second quarter before trending lower in the second half of the year as the supply chain normalizes. The firm estimates restocking, import share gains and end demand growth should drive sharply higher domestic flat rolled volumes in 2016. With import liquidity significantly restricted from trade cases and domestic blast furnaces idled unlikely to be restarted, the sheet market is forecast to remain in deficit until the fourth quarter.
The brokerage firm views the current dynamic as a normal rebalancing following a recessionary climate in 2015. The real test will be in the second half of the year in China, if infrastructure and property fixed asset income can shift to a cyclical tailwind, versus a current headwind.
As mentioned, the top picks remain U.S. Steel and Steel Dynamics, due to highest flat rolled leverage. Note that every 5% volume and $50 per ton average selling price move on U.S. Steel’s spot tonnage is about $600 million in EBITDA. Nucor Corp. (NYSE: NUE) and Commercial Metals Co. (NYSE: CMC) are rated Neutral due to rich valuation and spread compression in long products. The price target on AK Steel Holding Corp. (NYSE: AKS) goes to $3.50 but the firm stays Underperform due to balance sheet concerns.
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