Axiom Research Bearish On US Steel, Sees Demand Problems Weighing On Inventory

Axiom Research sees risk ahead for US Steel X. The research firm has US Steel shares rated as Sell with a price target of $21.00. Citing demand and supply, Axiom says steel demand is up 5.6 percent YTD vs supply up 11.2 percent YTD. The driver for this could be the excess inventory buffer created as a response to supply scares in the first half of 2014.

Axiom is admitting in its Wednesday note that it has been wrong about US Steel so far in 2014 but after analyzing the company again in an effort to look “for a reason to become more constructive on the name – outside of the direction the stock is moving” Axiom remains negative.
Bulls may be missing the key points Axiom highlights:
“...when considering the inherent volatility in X’s earnings to shifts in U.S. HRC spot prices, elevated by a prodigious resiliency in U.S. HRC spot prices (down -1.2% YTD), despite the fall in both iron ore (down -35.4% YTD) & coking coal prices (down -21.1% YTD), as well as the data points overwhelmingly suggestive of an inventory buffer build in response to the threat of limited steel availability”.
The inventory buffer is not expected to be able to be sufficiently drained by increasing construction activity.

As for auto sales helping drive demand which in turn would be expected to drain steel supplies Axiom writes “we infer to mean auto sales, as a component to steel demand, are actually on the decline when compared to prior year growth rates”.
US Steel is facing a tough quarter and with an enlarged inventory demand isn’t expected to impact those levels materially.
Nearing the middle of the trading day on Wednesday US Steel shares traded up roughly 3 percent to $39.22