Commodities & Metals

Why Deutsche Bank Sees More Pain Coming for Major Steel Stocks

There is more pain coming for the steel industry. At least that is the take from Deutsche Bank. If investors were only looking at the price of steel stocks, they would think that the United States is already in a recession. Deutsche Bank’s Chris Terry downgraded several large steel stocks on Thursday, and the cuts came after deep losses already have been felt in many of the companies.

It was just a few weeks ago that steel stocks appeared to be on the verge of a rerating to the upside, but then came the surprise that China had backed down from some key commitments and President Trump then imposed tariffs on $200 billion worth of goods coming into the United States.

The tariffs on imported steel and other raw materials were supposed to help steel companies with their pricing power, but capacity for more steel production is overflowing globally enough that the prices have slid and pricing power has been quite weak.

As noted in a recent analyst call elsewhere, stagnant demand has helped hot-rolled coil steel prices fall close to 20% so far in 2019. Also hurting steel producers has been that many steel-consuming clients apparently have decided to refrain from buying steel to keep inventories higher, which ironically may end up helping steel demand in the months or quarters ahead.

Nucor Corp. (NYSE: NUE) was downgraded to Hold from Buy with a $53 price target. Its shares were last seen trading down 0.5% at $50.50 on Thursday, in a 52-week range of $49.79 to $68.84. Its market cap is still north of $15 billion.

Steel Dynamics Inc. (NASDAQ: STLD) was downgraded to Hold from Buy and the price target was lowered to $30 from $44 (versus a $26.72 prior close). Its shares were trading down another 1.5% at $26.32, and the 52-week range is now $26.27 to $51.69.

United States Steel Corp. (NYSE: X) was downgraded to Sell from an already cautious Hold rating at Deutsche Bank, and the prior $20 target price was slashed to $11. Shares of U.S. Steel were down almost 3% at $12.50, with a 52-week range of $12.26 to $39.23. Unfortunately, that 52-week low was seen Thursday morning, and this stock is trading at three-year lows. Credit Suisse issued its own Sell rating back in early April, but that was when the stock was trading closer to $20.

While most of the call was negative for steel producers in general, Deutsche Bank did upgrade Reliance Steel & Aluminum Co. (NYSE: RS) to Buy from Hold with a $102 price target. This one is more of a metals service center company, so it is less exposed to raw commodity market prices than other steel-related companies. That said, if demand for processing services weakens with the economy, then there likely will be less business for it to chase as well. Shares of Reliance Steel & Aluminum traded up 0.9% at $85.56, in a 52-week range of $68.62 to $97.41.

This year has not been an easy one for steel stocks in general. Nucor is down just 2% so far in 2019, but that is still down 20% from a year ago. Steel Dynamics was last seen down over 11% since the start of the year, as well as down almost 50% from a year ago. U.S. Steel was down almost 30% so far this year alone and down over 60% from this time a year ago. Reliance Steel & Aluminum was up almost 20% so far in 2019, but even it is down almost 10% from this time a year earlier.

Perhaps the only silver lining to weaker steel is that the companies do have to exist for any major global economy, and that means that the stronger companies may decide to be aggressive and acquire the weaker ones if the overall climate for steel looks as though it may continue to be weak for a long time.