Why Jefferies Sees Weaker Conditions for Steel Giants the Rest of the Year

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One of the biggest metrics that economists look at when gauging the strength of any economy is the use of materials like steel, which is used in construction, infrastructure and a host of other areas. High use of the material is generally good for pricing, and while U.S. steel companies have enjoyed a decent run, and efforts have been made to halt the Chinese from dumping steel at lower prices, one top Wall Street firm thinks the top companies in the industry could be in for a rough latter half of 2016.

In a new Jefferies research report, top-notch analyst Seth Rosenfeld makes the case that while many of the companies in the firm’s coverage universe could guide higher quarter over quarter when they report third-quarter results next month, the overall trend in pricing is down. Plus, respondents to a recent survey were very negative, citing weaker demand.

The analyst notes that while pricing has already cracked, he does see a recovery for the big companies early next year as probable, and said this in the report:

We believe US steel prices will continue on a downward trajectory through year-end based on incremental weakness in raw material input costs as well as supply-side pressures from ramping capacity (ArcelorMittal’s BF restart & Big River ramp). Based on our revised analysis of the flat rolled market, we do see opportunity for producers to regain pricing power in the first half of 2017.

While lowering price targets on all the stocks in the firm’s universe except three, the analyst does remain very positive on two companies that he sees as defensive in nature, citing lower cost structures and less levered balance sheets.

Nucor

This top steel company could do very well if the economy sees a solid pickup next year. Nucor Corp. (NYSE: NUE) and its affiliates are manufacturers of steel products, with operating facilities primarily in the United States and Canada. The company also is North America’s largest recycler.

Nucor products produced include: carbon and alloy steel, in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh.

While the residential construction market could slow down some in 2017 after years of a very torrid pace, op Wall Street analysts remain positive on nonresidential commercial construction. Nucor always has kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond.

Nucor investors are paid a solid 3.3% dividend. The Jefferies price target for the stock is $55, while the Wall Street consensus price target is $54.46. The stock was trading Thursday morning at $45.72.