This Analyst Says Sell Shares Of US Steel

After China devalued its currency, some United States Steel Corporation X investors are left more confused than ever. Will U.S. government protectionist measures (and cost-cutting initiatives) be enough to fight back against deflationary pressures from China?

Gordon Johnson of Axiom Capital initiated coverage of US Steel on Friday with a Sell rating and $11 price target. According to the analyst, any help from the U.S. government (through protectionist measures) and recent cost-cutting initiatives will not be enough to "stem the tide" of deflationary pressures from China.

Johnson said US Steel's service center inventory days are "significantly" above the typical seasonality while its rig counts are below the levels seen during the Financial Crisis. In addition, a global oversupply of steel represents a "kryptonite" for U.S. mills as hot-rolled-coil is produced in more than 77 countries worldwide and U.S. prices sit at an $86-$171/s.ton premium to global prices.

With that said, Johnson suggested that hot-rolled-coil prices are at risk for U.S. mills and implies "acute downside" to US Steel's 2015 EBITDA guidance. The analyst further noted that checks with a partner at a global trade law firm, a large U.S. steel distribution center executive, and a large U.S. steel service center executive all confirmed his thesis that U.S. steel market trends won't be see "unprecedented growth" – a view that US Steel implied in its back half of 2015 guidance.

Finally, Johnson stated that China's devaluation of its currency marks a "nail in the coffin" as the country has adopted a strategy of using its weaker currency to fuel growth at the expense of lower credit availability which acts as the "life blood" of its real estate sector. As such, China's real estate sector, the "key driver of global steel demand," is now "structurally impaired."

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