Wells Fargo is Cautious on Steel Sector, Downgrades Nucor and U.S. Steel
Wells Fargo downgraded U.S. Steel from Market Perform to Underperform. "We believe shares are being rewarded prematurely on cost cutting measures," Dubinsky noted. Nucor was downgraded from Outperform to Market Perform as the stock is valued appropiately.
Dubinsky also commented on how steel stocks have performed better due to a big uptick in spot HRC pricing, which is currently close to $680 per ton and up. Pricing has recovered due to supply distribution, as numerous mills had unexpected outages and raw material cost inflation. In addition, ASPs trended higher due to lean channel inventories and a pick-up in end demand.
The analyst noted mills are "also taking a more aggressive stance on annual contract negotiations for 2014 following several years of offering discounts based on the CRU index."
Wells Fargo, he says, is cautious on the steel sector -- as "we believe mills are setting themselves up for weaker pricing in 2014 due to import competition. We note that while U.S. sheet pricing is currently up over $20+ per ton versus average quarter-to-date levels, international prices are flat to down as much as $15 per ton (weaker in Europe, more stable in Asia regions). We estimate the sheet import price spread using a basket of Geographies is at $165-215 per ton, which is the highest level we have seen since tracking the data (back to late 2010)."
Dubinsky estimates sheet pricing could conservatively fall $30-$50 per ton. Wells Fargo valuation range for Nucor is between $50-$55 and $17-$21 for U.S. Steel.
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