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With a trade war with China, and with an infrastructure package now looking dead, the steel industry has a lot to deal with, though the tariff issues have been worked out with Canada and Mexico. While a recent report from Jefferies was cautious near term but very optimistic long term for three steel names, Credit Suisse sees some serious concerns brewing. The firm downgraded some of its top names, citing lower prices for hot-rolled coil steel (HRC).

Credit Suisse noted that HRC prices continue to go down, and the firm’s channel checks indicate large size orders at $560 per ton and industry average prices of nearly $590 per ton. Another issue in the supply chain is that an additional domestic capacity of HRC steel has pushed the U.S. market into a surplus, despite Section 232 support and strong demand.

Credit Suisse also noted that the removal of Canada tariffs is bearish for steel prices and will allow Stelco and others to become much more aggressive in targeting the U.S. market. Also noted as a risk is that the U.S. auto contract market is now more at risk for 2020 as Canada and Mexico become more aggressive.

AK Steel Holding Corp. (NYSE: AKS) was downgraded to Underperform from Neutral at Credit Suisse, after falling 3.5% to $2.22 on Wednesday. Its consensus target price was $2.77, and the shares have a 52-week range of $2.05 to $5.40.

Steel Dynamics Inc. (NASDAQ: STLD) was downgraded to Neutral from Outperform and the price target was slashed to $29 from $38. Credit Suisse noted lower HRC steel prices being realized and lower free cash flows looking likely. The stock closed down 4.2% at $29.05 on Wednesday and was down more than 5% more to $27.52 early Thursday. Its consensus target price was $40.58 ahead of the call.

Nucor Corp. (NYSE: NUE) saw its price target lowered to $62 from $70 as part of the Credit Suisse call. Nucor closed down 1.5% at $52.88 on Wednesday, and its shares were indicated down another 3% or so to $51.20 Thursday morning. Nucor’s 52-week range is $49.79 to $68.84, and its prior consensus target price was $68.54.

United States Steel Corp. (NYSE: X) saw its price target slashed to $9 from $11. Shares closed down over 4.3% at $14.25 ahead of the call, and the stock traded down another 6% at $13.38 not long after the opening bell. Its consensus target price was $19.43.

Credit Suisse’s Curt Woodworth does see at least one potential way out of this mess with more industry consolidation:

Consolidation has been a key trend viewed as critical to a highly fragmented global industry, plagued with overcapacity. We view consolidation and when warranted rationalization as significantly more value accretive relative to large scale capex driving greater fragmentation and overcapacity.

This is almost 180 degrees from the Jefferies view, picking three long-term winners in steel and aluminum.