BofA Downgrades Ternium: Here's Why

In a report published Monday, Bank of America Merrill Lynch analyst Thiago Lofiego downgraded the rating on

from Buy to Neutral, while lowering the price target from $23 to $21. The stock has risen 16 percent since January, driven by the improving political scenario in Argentina and strong steel demand in Mexico. "However, although steel demand trends in Mexico remain solid, driven by buoyant auto production, we see margins compressing going forward. This is due to the rapid (and perhaps structural) decline in North American steel prices, which is more than offsetting lower raw material prices," Lofiego stated. The analyst expects the company's EBITDA to decline in Q2-Q3, although margins are expected to recover following that, driven by a decrease in the mismatch between steel prices and cost. According to the Bank of America report, "We think most of the US$200/t steel price correction in N. America since 3Q14, which references MX steel prices, is structural, due to the high steel import levels in the US. While raw materials (slabs, iron ore, coking coal, natural gas) have also trended down, the move should not be enough to offset the steel price correction." On a more positive note, there has been strong demand for steel in Mexico, driven primarily by increased auto production. On the other hand, the analyst highlighted that "Argentina's macro policies are highly unstable" with "limited access to markets, a ballooning fiscal deficit, high inflation and an overvalued currency among others."