Morgan Stanley Sees Positive Momentum In Steel Heading Into Q4; Negative On Coal Names

• Morgan Stanley’s Evan L Kurt mentioned that positive steel market commentary could drive certain heavily shorted names; conversely negative coal commentary may limit upside to some stocks.
• While 4Q should reflect positive momentum in US steel prices, the coal market conditions have deteriorated, Kurt stated.

Positive Momentum In US Steel Prices

The easing of imports and inventory headwinds combined with some mill outages have resulted in US steel prices rising from below $360/t to about $400/t in recent weeks. This positive momentum could be dampened to some extent by soft underlying demand as well as weak global pricing, analyst Evan Kurt said.

He expects prices to continue to rise and average $445/t in 2016, which may result in downward revisions to Street estimates for United States Steel Corporation X [Rating: Equal-Weight, PT: $19], AK Steel Holding Corporation AKS [Rating: Equal-Weight, PT: $5] and Nucor Corporation NUE [Rating: Equal-Weight, PT: reduced from $62 to $59].

Kurt commented that Steel Dynamics, Inc. STLD is “the safest way to play a modest steel market recovery,” while adding, “That said, heavily shorted names such as X and AKS could squeeze into results, but we would sell the news.” The rating for Steel Dynamics is maintained at Overweight, while the price target has been reduced from $28 to $27.

The analyst also mentioned that Cliffs Natural Resources Inc CLF was a “high cost producer in an oversupplied iron ore market.” He has an Underweight rating for the company and a price target of $2.

Negative On Coal Names

“No need to own coal names into the quarter,” Kurt wrote. He explained that coal market conditions had deteriorated in recent months, with a warmer-than-normal winter leading to large build-ups of coal inventories. “We think producer commentary will take on a negative tone, which will keep longs on the sidelines and bolster conviction in shorts,” the Morgan Stanley report stated.

Kurt downgraded the ratings for CONSOL Energy Inc. CNX and Foresight Energy LP FELP from Overweight to Equal-Weight, while maintaining price targets of $29 and $12, respectively. He said that the changed ratings reflected an adjustment “for our reduced coal coverage footprint.”