Morgan Stanley's Bullish Case For U.S. Steel

In a recent report, analysts at Morgan Stanley explored United States Steel Corporation X and laid out their bullish forecast for the domestic steel industry in 2015. Analysts see structural changes in the business and a continued focus on operational efficiency driving U.S. Steel in upcoming years.

Structural Changes

Analysts mention five major changes they see in the U.S. steel industry that will drive business and provide shelter from import pressures for U.S. producers:

1. Industry consolidation - The top five mills now control nearly 90 percent of the market, giving them a great deal of pricing power.
2. Capacity restraints - Analysts estimate that about 10 million tons of steel production capacity has been eliminated from the market since 2012. Only one steel mill is currently under construction, and it is expected to take at least two years to complete and generate only about 1.6 million tons of capacity.
3. Logistics constraints - The high cost of shipping steel imports inland from the coast allows Midwestern steel producers the ability to beat foreign competitors on price. In addition, imported steel faces throughput and storage limitations in U.S. ports.
4. Supportive trade policy - If importation competition were to get too severe, analysts believe that additional trade suits would be filed to continue to protect American producers.
5. Favorable underlying demand trends in the U.S.- Analysts project 2.9 percent U.S. GDP growth in 2015, and they believe that non-residential construction will start to pick up as well.

Projections

Analysts believe that these five structural changes, along with the implementation of the “Carnegie Way” cost-cutting initiative at U.S. Steel will lead the company to exceed expectations in 2015. Morgan Stanley has a $60.00 price target set for U.S. Steel, a 144 percent upside from its current levels. The stock closed Monday at $23.38.